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Wall Street’s Stock Buyback Boom Continues

For the record, I think stock buybacks are almost categorically a poor use of corporate cash.

Historically, most companies buy their own stock at market tops, the latest being Apple (NASDAQ:AAPL) with its $10 billion stock buyback plan beginning in October right after shares peaked. Furthermore, dividends return cash to shareholders in a direct way while many companies like Microsoft (NASDAQ:MSFT) and Walmart (NYSE:WMT) regularly spend billions each year on buybacks even though share prices stay flat and investors never really see any material gains.

Then, of course, there’s the earnings shell game where stock buybacks reduce the amount of shares outstanding and naturally juice earnings per share despite a lack of growth. It’s simple math where you reduce the denominator (shares) even if the numerator (profits) isn’t growing a lick, but many investors simply see the 5% or 10% EPS bump and assume that means good things.

Still, if I’ve learned anything about stocks, it’s that my opinion matters very little. Wall Street doesn’t care what I think and is going to value things the way it is going to value things.

And like it or lump it, many folks see stock buybacks as a bullish sign.

I recently quoted growth guru Louis Navellier saying, “If Wall Street does not price a company properly, then they have the right to buy their stock back (or even) go private. These buybacks are truly a big story right now.”

It seems that story has continued, most recently with these recent headlines:

That’s just some of the more recent repurchase announcements, and ones that are in the billion-dollar range. As of last week, the Street was putting up its third-best February since 1999 for stock buybacks, with $69 billion worth of repurchases announced so far in the month.

I remain skeptical of the power of buybacks. But many investors like them, since they at least nominally “return capital to shareholders.” And in this sentiment- and psychology-driven market, don’t discount the power of giving investors a warm, fuzzy feeling about a certain stock.

Furthermore, if buybacks are coupled with insider buying — that is, human managers putting their own money on the line via their company stock instead of just using corporate coffers to play accounting tricks — there is a meaningful case to be made that repurchases can be a bullish sign.

Also, data suggests that, in part, 2012’s big run had something to do with big repurchase plans that topped $300 billion on the year.

We’ll see if the buyback binge continues, and only time will tell whether it helps fuel another leg to the market.

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Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.

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Comments
  • divinvestor

    Doesn’t make sense to me. In these overvalued markets, companies would be better served to sell more shares rather than buy back. A buy back by a company should be for the same motivation as an insider buying. Both should buy because they consider shares to be undervalued. Company does this for the shareholders; insiders do it for themselves.