I look at it this way: There are exactly two sources of funding for companies, equity and debt. As debt gets cheaper (interest rates going down), debt funding becomes more attractive relative to equity. So naturally, companies will shift more of their funding towards debt. It's not inherently a bad thing, but there are two issues:
One is that a new equilibrium will eventually be reached. At that point, buybacks will stop and it will hit EPS growth. I wonder if people are aware of what a huge chunk of EPS growth has been coming from buybacks in recent years. I fear the stock market may be in for a rude awakening when the buyback music stops.
The second issue is that debt has an expiry date whereas equity does not. Theoretically, the risk of not being able to roll over debt in a downturn should be reflected in the coupon a company has to pay on its debt.
We'll see whether corporate debt hasn't become too cheap already. We could once again be facing a situation where the effect of everyone having to do the same thing at the same time is not adequately priced in.
This sounds similar to the housing bubble. That is, the psychology is "It'll be fine. Everyone is doing it." But few are looking at the next possible what ifs.
One is that a new equilibrium will eventually be reached. At that point, buybacks will stop and it will hit EPS growth. I wonder if people are aware of what a huge chunk of EPS growth has been coming from buybacks in recent years. I fear the stock market may be in for a rude awakening when the buyback music stops.
The second issue is that debt has an expiry date whereas equity does not. Theoretically, the risk of not being able to roll over debt in a downturn should be reflected in the coupon a company has to pay on its debt.
We'll see whether corporate debt hasn't become too cheap already. We could once again be facing a situation where the effect of everyone having to do the same thing at the same time is not adequately priced in.