Newspaper article The Evening Standard (London, England)

Weaning Ourselves off Sugar Hit of Buybacks Will Pay in Long Term

Newspaper article The Evening Standard (London, England)

Weaning Ourselves off Sugar Hit of Buybacks Will Pay in Long Term

Article excerpt

Byline: Anthony Hilton city comment

THE US stock market tested new highs last week but it didn't really. A better way of understanding what is going on is that tech stocks, and particularly the big five of Alphabet (Google,) Apple, Amazon, Facebook and Netflix, continued their astonishing run. The rest of the market only looked good because it was dragged along in the slipstream.

It is an indication of how the stock market, and by extension the US economy, is being transformed in a way and at a pace which is little short of astonishing. In 2006, the world's four largest companies by market capitalisation were, in order of size, Exxon, General Electric, Microsoft and Citigroup of the US, with Russia's Gazprom at number five. Ten years on, the top five are Apple, Alphabet, Microsoft, Berkshire Hathaway and Exxon.

Similarly with the top 10. Five of the 2006 top 10 were non-American Gazprom, plus PetroChina, ICBC, Toyota and Royal Dutch Shell. Today's list has Amazon and Facebook at six and seven and while the last three slots of the top 10 in one version of the list go to Johnson & Johnson, JPMorgan and General Electric, in another they go to Johnson & Johnson, and China's tech giants Tencent and Alibaba.

Thus only two of the world's top 10 companies of a decade ago, Exxon and Microsoft, are still in the Premier League and most of those companies which have displaced the others barely existed 10 years ago.

As an aside, one consequence of this freak performance is to give a reprieve to active fund managers. The genre as a whole continues to be upstaged by passive funds which track the market with or without a bit of deliberate added bias and are attracting massive inflows.

But at least the boom in tech has given the world's stock-pickers something to get their teeth into. Specialist funds in this sector, up by more than a quarter since the beginning of the year, are feeling rather pleased with themselves, and advertising like mad to suck in more money while they are still hot.

But you have to question whether the rest of the US market is such a good place to be in at these prices, particularly when so much of the demand for shares comes from companies buying their own stock rather than from outside investors convinced about their prospects.

The growth in such activity has gone largely unappreciated but it is again phenomenal. In 2009, 60% of earnings of companies in the main US share index, the S&P 500, was spent on dividends and share buybacks. That ratio passed 100% in 2015 and rose to 131% in the first quarter of 2016. It is probably even higher this year. On that basis corporate America is shrinking.

Similarly in the UK, the dividend payout ratio has climbed from below 40% in 2011 to over 70% in 2016. …

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