True. But in many cases I think paying back debt would be a better choice than buybacks at a high valuation. The reduction in interest paid due to lower debt and the lower future interest rates because of better financial stability would probably have an similar positive effect as the buybacks have. But as an added "bonus" the company can take on more debt in the future (for acquisitions etc) without shareholders having to worry about the company carrying too much debt. And a special dividend isn't a bad choice either, though the tax man getting his fingers in the pie doesn't please me too much.
Given that their debt is usually less than inflation, there is no reason not to leverage buying power. Dividends are more dangerous because shareholders get scared when the dividend gets cut which can lead to a sell off and less people holding shares.
Quite a few of the companies that I'm following are having their debt in the 3% range. That beats inflation AND starts to be in the range where I think it's smart to pay it off *IF* there is extra cash that the management can't invest in a smart way.
Special dividends are a thing of the past, unless the company is already one that mainly pays out dividends to begin with. The tax implications are just too much, in almost any situation a buyback is much better for shareholders. The thing is, interest rates are very low, and will remain low for at least a couple years. There is no reason to hoard money. The other side benefit of buybacks is that it mainly rewards long-term investors over traders. The EPS benefits are going to come in the years to come. A special dividend could end up resulting in volatility of the stock price over the next 6 months, buybacks provide value to shareholders for years to come and encourage hold strategies.
Like shorting, it's a legitimate practice that gets demonized by some. Some just see it as creative accounting meant to boost EPS, which it can be. Sometimes companies feel the best use of extra funds at a particular time is buybacks, since they do at the end of the day have a legal obligation to increase shareholder value. It can signal different things for different companies too, there is no one scenario where buybacks are used. Also consider it can be used reduce dilution of shares if too many are being issued (employee stock programs are 1 cause for example.) Now I had not heard of a surge in buybacks so I went digging. http://www.factset.com/websitefiles/PDFs/buyback/buyback_9.21.15 Never heard of "factset" before, have you guys? But anyways found that pdf (skimmed, saved for tonight's reading) and it doesn't really show a surge, but levels are certainly increasing. Looks like Q1/2 last year had a surge though.
Yes I've heard of factset. I rarely run into their stuff but from the few times I've been to their website it looks like a decent place. And yeah I guess a "surge" is the wrong word but they have certainly increased recently. It's just the way things are now... economy is a bit dodgy and interest rates are low so buybacks seem like a good place to stick cash to. Then again most of the companies are also trading close to all time highs so... as I said they have a tendency to buy more when it's expensive.
