Oil climbed above $106 a barrel in New York on March 24 as allied warplanes continued strikes against Muammar Qaddafi's ground forces in Libya. In Japan, manufacturers started production at idled plants even as authorities struggled to seal radiation leaks caused by the March 11 earthquake and tsunami. European leaders met in Brussels after Portugal's parliament rejected budget cuts and two officials with direct knowledge of the matter said the country may require a 70 billion euro ($98 billion) bailout.
Rewarding Shareholders
Companies including Limited Brands Inc., owner of the Victoria's Secret chain, are relying on debt to reward shareholders. The drop in borrowing costs to a three-year low has given executives the incentive to sell bonds and use the proceeds to repurchase stock and pay dividends.
The extra yield investors demand to own investment-grade corporate debt instead of Treasuries reached 148 basis points on Feb. 17, the lowest since October 2007, according to Bank of America Merrill Lynch index data.
At least nine borrowers had their credit ratings cut this quarter because they favored shareholders over bondholders, the most since the fourth quarter of 2007, according to Moody's Corp. S&P reduced its outlook for Limited Brands to "negative" after the Columbus, Ohio-based company sold $1 billion of bonds last week to help fund its stock buyback.
'Be Careful'
"You've got to be careful going down that road," said Brian Barish, president of Cambiar Investors LLC, which manages about $5.6 billion in Denver. "Companies can do some long-term damage to themselves by levering up to buy back stock just because they're bullish on their stock when the market isn't. Sometimes the market has it right and companies have it wrong."
Companies increased cash balances in part by cutting capital expenditures 26% in 2009, the biggest drop since records began in 1998, according to data compiled by Bloomberg. Cash levels may start falling as analysts' estimates show S&P 500 companies will boost spending on plants, property and equipment about 22% this year, the most ever.
"As the markets have recovered and access to credit has become readily available, issuers are increasingly looking to return capital to shareholders," Greg Hall, a managing director in debt capital markets at Barclays Plc in New York, said in an e-mail. "As the economy continues to improve and corporations feel more confident in the future, we expect to see even more activity."
S&P 500 Valuation