Here are a few articles examining the effects of buybacks on the value of a company's stock.
Buyback Burst Seen as Salvation From Goldman’s S&P 500 Decline
By David Wilson at The Big Picture
Buyback Burst Seen as Salvation From Goldman’s S&P 500 Decline
- November is S&P 500 companies’ busiest month for repurchases
- Kostin: `Single largest source of demand for U.S. equities’
(Bloomberg) — Stock repurchases may accelerate enough toward the end of the year to salvage an annual gain for the Standard & Poor’s 500 Index, according to David Kostin, Goldman Sachs Group Inc.’s chief U.S. equity strategist.
November is the busiest month of the year for buybacks among S&P 500 companies, as shown in the chart below. Thirteen percent of annual spending occurs during the month, according to figures that Kostin presented in a report two days ago. The data is based on averages for 2007 and 2009-2014.
The share buyback mirage
By Buttonwood at The Economist
Robbing Peter to pay the CEO
WHY don't equity investors get the full benefits of economic growth? Or to put it another way, why don't dividends grow as fast as GDP? We tend to assume that, over the course of the cycle, profits will grow in line with the economy. But research by Elroy Dimson, Paul Marsh and Mike Staunton of the London Business School, shows that real dividends in 21 countries fell by an average of 0.12% a year between 1900 and 2014; in the US, they grew by 1.7% but still below the GDP growth rate.
A plausible-sounding explanation is that, over time, the dividend payout ratio has fallen; companies are reinvesting more of their cash. Some companies, of course, don't pay dividends at all and paying high dividends is associated with mature, slow-growing companies; utilities, for example. But this reasoning does not really work at the aggregate level. If companies have been profitably reinvesting all their free cash, surely that would have showed up in higher dividends by now; the data cover more than a century. And research by Robert Arnott and Cliff Asness shows that high payout ratios are followed by periods of high earnings growth, not low. Low payout ratios were followed by periods of slow earnings growth; companies, in short, are not great at reinvesting.
Stock Buybacks Reward Management More Than Stockholders
Here’s one more thing to worry about as earnings-reporting season approaches: Stock buybacks might be inflating earnings per share at a variety of companies. That suggests trouble for stocks when the buyback binge eventually ends.
In recent years, many U.S. companies have used their considerable cash holdings to repurchase their own shares, rather than invest in capital assets. The trend, which has accelerated in the past two years, means buyback programs are having a material impact on earnings per share, reports Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.
