Financial engineering continues in 2022

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Those who have, continue to do so.

In the case of corporate financial management, those with cash or positive cash flow continue to increase dividends.

Hannah Miao writes in the The Wall Street Journal,

“Dividend payments set a new record high in the second quarter, a reassuring sign for investors who have flocked to stable, income-generating stocks during the market downturn this year.”

“S&P 500 companies paid a record $140.6 billion in dividends in the last quarter…”

“That’s up from $137.6 billion in the first three months of the year and $123.4 billion in the same quarter last year.”

“Annual dividend payouts have hit new highs every year for a decade except for a slight dip in 2020.”

Expectation: New records will be set in the third and fourth quarters of 2022 and a new all-time high will be reached for the year.

Share buybacks continue to rise

Ms. Miao writes that second-quarter redemptions will hit a new high of $286.4 billion.

There could be more variation in share buybacks in the near future as companies are reluctant to withdraw dividends once they have been increased, so the most popular way to vary cash benefits companies for shareholders is to circumvent share buybacks.

Ms. Miao writes that the ratio of redemptions to dividends is currently above the historical average.

In all likelihood, this ratio should fall back to the historical average over the next few quarters.

Thus, with the Federal Reserve tightening monetary policy and the possibility of an economic recession occurring in the near future, share buybacks should decline and dividend growth should moderate.

Conclusion

For now, however, companies will continue to use financial engineering to keep signals to investors as positive as possible.

If companies are increasing dividends and companies are buying back their common stock, the signal is that companies are doing well and generating enough cash to share a good chunk of it with their shareholders.

If corporate cash flows start to suffer, companies will forgo their securities purchases. These companies will resist the dividend cut for as long as they can.

“Dividends are the last thing you cut.”

“You don’t want to tell the world you have a cash flow problem.”

It’s the modern age.

Corporate finance is central to modern business management, and financial engineering is the process used by management to maximize stock prices.

What are we told?

This, for me, carries a message.

The message is that businesses are still remarkably optimistic.

We are told that the corporate world has enough liquidity and cash flow to weather any recession that looms on the horizon and that the recession will be weak enough and short enough for these companies to come out on the other side of the disruption, generating enough cash to continue where they currently are.

In other words, to me, these companies are signaling that any recession on the horizon should be relatively short-lived and relatively minor in depth.

These expectations appear to be consistent with many other signals being produced in financial markets today.

I just touched on this point in another post.

In this article, I pointed out that current market expectations in many areas appear to be consistent with forecasts. now used by the Federal Reserve system.

That is, the Federal Open Market Committee, the governing body of the Federal Reserve, appears to be working on a forecast that any economic downturn in the future will be modest and not very deep at all.

So right now that seems to be where a lot of investors are, and that world picture dominates why the markets are behaving the way they are.

Uncertainty

However, there is still a lot of uncertainty in the world. This uncertainty is the underlying cause of why there is so much volatility in financial markets these days.

I have gone so far as to say that we really are in a period of radical uncertainty, a situation in which we cannot truly identify all the possible paths the future might take.

And, if we can’t identify all the possible paths the economy may take, we are forced to step back and work with vague narratives of what the future might be.

But, such a condition means that we have to err on the side of caution and we have to keep a close eye on what is happening in the markets and in the economy. In practice, this means that we tend to stick to “modest” projections of the future with the idea that we will adjust our portfolios “gradually” as new information comes to us.

This is one reason why investors might stick with projections like those produced by the Federal Reserve rather than jumping too drastically into other possible narratives of the future.

However, it is a reason for the argument that the Federal Reserve’s projections will be wrong and we need to be prepared for what might be in store for us.

Corporate Financial Engineering

So, for the time being, companies will continue their financial engineering. This will help maintain the confidence of the investment community, even in the face of the “not so good” news that is coming.

If the Fed’s projections turn out to be correct, companies will be hailed for maintaining their corporate buyouts, maintaining their higher dividend payouts and weathering the economic disruption. .

If the Fed’s projections don’t turn out to be correct, well, companies will just have to move on and reduce the amount of stock buybacks they make and keep dividends at current levels. .

These companies will then work from a new narrative.

This is what financial engineering is for.

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