Stock Buybacks

November 6, 2018 6:59 am Published by Leave your thoughts

Stock buybacks. You hear about them all the time, but why do companies maintain these programs? There are a few potential benefits a company can attain from repurchasing their stock. If after analyzing the market, executives conclude that currently traded price of their stock is low, they can buy back shares to lift the market value of their shares. A stock buyback can also empower a company interested in a merger or acquisition of another company with buying power, liability free capital.  Stocks can be retired permanently, or a company can increase dividends or frequency of payments to its shareholders. Lastly, any successful execution stock buyback will always award the executives at the top. One intangible benefit is perception. Perception in the market that top managers have a high level of confidence in the company’s long-term profitability and ability to best competitors in the market.

Not all observers believe that buying back stock is the best use of company cash. Yesterday, MarketWatch published an article stating that over the past four years biotech firms washed $100 billion worth of stock repurchases down the drain. That’s figurative, of course. However, the repurchases have not resulted in higher traded stock in 4 of 6 buyback cases. MarketWatch In fact, most have not broken even. Talk about a poor ROI! If the goal is to lift current shareholder equity, then nothing was accomplished. What a drain! If stock prices appreciate, then profiting from a sale or holding unrealized returns if of considerable value.

In conclusion, when looking at stock picks, find out what companies have a stock buyback program and which ones have a history of generating positive returns on their reinvestments. Good luck!

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This post was written by Daniel Jones

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