Disbursement of corporate cash through dividends and stock buybacks totaled $1,073.5 billion in Q1 2006 (annualized quarterly data), compared to net corporate profits after tax of only $509.5 (also, annualized quarterly data), according to the Federal Reserve flow of funds accounts for Nonfarm Nonfinancial Corporate Business.

This massive distribution of corporate cash that exceeded net profits after tax, was financed by borrowing with credit instruments (mainly bonds and mortgages) and by drawing down reserves for depreciation. Increased borrowing through credit instruments for the quarter (annualized) amounted to $232.1 billion.

The low point in cash dividends seen in Q3 2005 ($179.3 billion) was dramatically reversed in Q1 2006, with dividends reaching $486.7 billion (quarterly, annualized).

It seems unlikely that corporations will be able to continue to simultaneously increase dividends, buybacks, and borrowings at a rate faster than net profits after taxes for much longer.

The use of borrowed funds to buy back corporate stock and thereby boost prices and give value to stock options would seem the height of executive profligacy, imprudent management, and fiduciary failure, but never mind … fiddle-de-dee … tommorrow is another day.

This entry was posted on Friday, June 16th, 2006 at 8:27 am and is filed under Corporate Bonds, Equities, Corporate Managers. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.

|