What Do You Think Of The Surge In Stock Buybacks?

Discussion in 'Stock Market Forum' started by Rainman, Nov 24, 2015.

  1. Rainman

    Rainman Senior Investor

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    This year alone, I've heard news of lots of companies buying back shares. Nike becomes the latest company to approve share buybacks worth billions of dollars. Is there some ulterior motives or do they have some other reasons for buying back their shares?
     
  2. baudwalk

    baudwalk Senior Investor

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    When a company has mediocre earnings, share buybacks reduce the number of shares oitstanding and the earnings per share number increases. Those who don't pay attention to such statistical manipulation say "oh goody, looky" and get played. Accounting 101. Nothing magic. End of story.
     
  3. petesede

    petesede Guest

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    It is because companies are owned by shareholders. There are times when, for the benefit of current shareholders, the most effective use of free cash is to simply buy back shares. It adds value to the existing shares owned by shareholders. Free cash is generally wasteful for companies ( see the good steward story in the Bible). If a company is sitting on a ton of free cash, that is the least positive thing they can do with it. They could either use it to expand their company from within ( buy a factory, more trucks etc), they could use it to make acquisitions of other companies, or they can reduce the number of shares outstanding.

    In most cases when a company buys back shares, it is them just saying that they could not find any acquisitions or expansion opportunities that would give more value to shareholders than the buyback. Companies like Apple hold onto their cash, and basically are saying ´we are going to buy something´ that will give you more value than a buy back. Companies like NIKE, really don´t have much opportunity to expand anymore, and wasting the money on a risky expansion would probably not benefit shareholders as much as the buyback.

    TLDR - we have too much cash and really have nothing to spend it on that looks very attractive.
     
  4. crimsonghost747

    crimsonghost747 Senior Investor

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    Stock buybacks have been around for a long time but now I think a lot of the companies are afraid to invest a lot because the world economy is in a questionable state. That and the interest rates are so low that it's not even that smart to pay back their debt... well the money has to go somewhere. So yeah, no other smart places for the cash -> buy back your own stock.
     
  5. Onionman

    Onionman Senior Investor

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    It reflects the investment climate with live in. Loads of companies have too much cash on their books and know that they can't get easy returns on their investment elsewhere - i.e. throwing money at an emerging market and expecting big sales simply isn't happening in this environment.

    At the end of the day it's all about shareholders. They want returns and companies see buybacks as the most efficient way to do it at the moment. I'd prefer they give money back in the way of dividends, but that's just me.
     
  6. turt

    turt Guest

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    I think we will see it reduce a lot once the interest rates start to go up. Cash is way too easy to come across now.
     
  7. crimsonghost747

    crimsonghost747 Senior Investor

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    Well that is the thing, most companies are very much against issuing extra dividends. Especially in the USA. I guess they prefer share buybacks mainly because it pushes up the EPS of the following years as well as keeps people from seeing the dilution that executive bonuses cause. And it's also an effective way to return value to shareholders because buybacks aren't taxed whereas dividends are except inside special accounts.

    I quite enjoy both. I love to see those dividends coming to my account but I also don't mind companies using extra cash to repurchase their own shares. What I would like to see is more of that cash used to pay back debt. But yeah, a mix of the 3 above is a good solution with every company of course needing to evaluate their own specific situation.
     
  8. JR Ewing

    JR Ewing Super Moderator Staff Member

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    Not a big fan of buybacks.

    I understand the point to issuing a dividend, and that certainly has its place in an investor's portfolio - particularly among retired and more conservative investors.

    Personally, at this point in my investing career, I gravitate more towards companies that reinvest that extra cash in things like R&D, acquisitions, expansions, etc.
     
  9. crimsonghost747

    crimsonghost747 Senior Investor

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    One thing to add, while I do enjoy the buybacks I can't help but feel that often they are done at the wrong time. Companies tend to buy when they have the cash, not when the price is right.
     
  10. Onionman

    Onionman Senior Investor

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    I think that's it - they have to be seen to be doing something with the cash otherwise shareholders will be kicking up a fuss about an inefficient use of their funds. I guess there's only so much time a company can get away with waiting for the right time.
     

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