The Spot Price Of A Non-Dividend-Paying Stock Is 40 The Last Market Pillar Collapses

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The Last Market Pillar Collapses

When I look for new stocks for investment returns, I always pay attention to one thing: the company’s ability to return capital to shareholders.

This is one of the most important pieces of information to consider when looking for stable dividend stocks. Essentially, I want to know if the company has the means to pass cash flow back to shareholders, thereby increasing our wealth in the process.

Companies can achieve this in several ways, the most direct way being by paying dividends.

One common method of returning shareholder value – share buybacks – may be discontinued. While it may seem innocuous enough, a decline in stock buybacks could be a sign that we could be entering the next stock market recession any day now.

Share buybacks are attractive to investors for several reasons.

On the one hand, buybacks increase shareholder value in a tax-efficient way. Instead of paying a taxable dividend, the company can buy back its stock, thereby increasing earnings per share, increasing the value of the stock, and adding to your portfolio’s returns. Therefore, the share buyback is a good characteristic for the company.

Buybacks have fueled a stock market rally in recent years as companies have turned to ultra-low-rate debt markets as a means of financing buyback programs and boosting stock performance. Since 2009, companies have bought back trillions of dollars worth of stock. In fact, share buybacks in the past 12 months have topped $5 billion, a record set in 2007.

With hedge funds, mutual funds and exchange-traded funds (ETFs) pulling $40 billion out of the market since January, many analysts and economists believe share buybacks are the only pillar holding the market up right now. So any sign that corporate buybacks are winding down could herald another crash.

Let me explain…

Buyback

Share buybacks fell in the fourth quarter, which could be the tipping point for a bigger decline. Even more disconcerting is the recent behavior of FactSet’s redemption-to-net income ratio. FactSet, a multinational financial research firm, uses this ratio to help gauge the health of foreclosures in the U.S.

Recently, this ratio has begun to decline in a direction not seen since the Great Recession.

Net income for S&P 500 companies has declined since the fourth quarter of 2014, a development I discussed in more detail last week. At the same time, foreclosures related to net income continued to rise, as they did in 2007/2008, just before the Great Recession. This tells me that we should expect share buybacks to slow in the coming quarters.

Add to that the fact that the US economy is currently growing at a paltry 0.3%, according to the Atlanta Federal Reserve’s GDPNow forecast, and the US economy is teetering on the brink of a possible collapse.

Patience and time

Incoming economic data and stock market research continue to show that the seven-year US bull market is on its last leg. Last time I recommended adding protection against the inevitable S&P 500 decline.

This week I will be preaching patience.

Now is not the time to run and buy stocks. Instead, you should withdraw some of the profits, take losses for tax season, and preserve your capital.

There are still a few opportunities, and the bull market may limp along for a few more months, but it’s looking more and more likely that 2016 will be the year of the stock market’s next big payoff. And you’ll want to have cash on hand to take advantage of cheap stock prices once the dust settles.

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