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James Tisch's epic explanation for why he's reluctant to buy back stock or acquire companies
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Loading...The economic recovery since the financial crisis has been notable for its lackluster pace of growth.
Given the limited opportunities for growth, many companies have opted to deploy their excess cash by buying back stock, boosting dividends, or acquiring companies. Experts expect this rampant pace of share buybacks and M&A activity to continue throughout the year.
Loews Corporation CEO James Tisch, however, isn’t crazy about letting cash out the door this way.
“I’ve been around long enough to have lived through all sorts of markets. I’ve learned to respect markets, while at the same time being skeptical of conventional wisdom. I’ve lived through a bond bear market and a gargantuan bond bull market. I’ve seen bond yields above 15% and below 2%. I’ve seen inflationary spirals, I’ve seen deflationary threats, I’ve seen deregulation and reregulation. I’ve seen the S&P 500 trade as high as 30 times earnings and I’ve seen the S&P trade as low as 7 times earnings. With all this experience, that comes with age I might add, here is what I’m seeing in the markets today. In the credit markets, spreads on the high yield securities are approaching historically tight levels, while key credit metrics such as leverage and coverage ratios are showing signs of weakening. The leverage loan market has been overrun by such massive inflows of capital that you could probably get a loan to buy a fleet of zeppelins at this point in time. With respect to rates, the 10-year treasury note is currently trading at around 2.5%, up from its recent lows, but still well below historic norms. In my view, the mood of these markets is in stark contrast with the many unknown from our current economic and political landscape, both here and abroad. For me, it’s a major disconnect, and it concerns me…The S&P 500 is trading at roughly 19 times earnings, 3 turns higher than the 50-year average of 2016. These valuations make me uncomfortable, especially given the unknowns in taxation, foreign trade, regulation and more…To sum up, in my opinion, the markets are priced for perfection, and they have been that way for quite some time, complacency reign supreme. However, my experience has shown me that this state of affairs won’t go on indefinitely. So why am I sharing these thoughts with you? Because I know that some of you have wondered why we brought back relatively few Loews shares in 2016 or why Loews hasn’t made an acquisition…It’s a tough market in which to be a disciplined buyer.”
In brief, Tisch is saying that considering the elevated valuations and risks in the market, he can’t be sure if he’s getting a good deal by using company cash to buy back stock or acquire companies.
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