As Technology companies prepare to report earnings we expect that a number of companies will curb share repurchase programs given the cost of debt has increased since the Q1 earnings reports of April and May. This will provide less downside protection for Technology names.
- Treasury yields for the 2-year, the 5-year and the 10-year are approximately 3.15%, 3.06% and 2.06% respectively, up from 2.47%, 2.79% and 2.83% on April 14th of this year.
- This inverted yield curve speaks to a looming recession (we believe we are in a recession today).
Perhaps the upside will be that Technology CEOs will increasingly focus on innovation and operational execution to drive the equity component of their compensation packages as opposed to using share repurchase programs as the primary lever for driving the value of options packages higher.
- We have zero issue with “pay for performance” CEO compensation plans.
- We take issue when management teams issue debt in order to use the proceeds to execute stock repurchase programs created only to goose the equity component of compensation packages. That is cheating in our view. We prefer that Technology companies deploy cash to drive innovation and extend competitive advantages rather than engaging in financial machinations designed to drive compensation higher.