Stock buybacks have been the craze over the past couple of years. Ever since the Fed has flushed the economy with cheap money, corporations have been using the funds to invest in their businesses to grow, spend on mergers and acquisitions, raising or issuing special dividends, and of course, the buyback annoyance – buying back its own company stock. While a majority of the investors and traders see that as a good thing, I see it mostly as an annoyance that does not achieve much more than some financial engineering.
The Buyback Annoyance
For the readers who are unfamiliar, buybacks – also called share repurchase, is where a company decides to purchase its own shares from the marketplace, thus reducing the number of outstanding shares. The reduced number of shares in the market is good for the key-stats in annual reports as it shows an increasing earnings-per-share (EPS) value and increases the value of the remaining shares in the market. Don’t get me wrong…there is a place for buybacks in the marketplace. Without any buybacks, shareholders would see their stock value depreciate as companies routinely issue more shares thus making the value of each share just a little bit less valuable. But my annoyance has been with the degree with which we see the buybacks occurring.