The WSJ reports that U.S. companies are buying back record amounts of stock this year. S&P 500 companies are on track to repurchase as much as $800 billion in stock this year, a record that would eclipse 2007’s buyback bonanza. The Real Problem With Stock Buybacks is that they transfer wealth from investors to company executives.. Billions of dollars spent to buy back shares could have gone toward investment in new factories or technology that could lead to stronger profit and wage growth in the future.
The S&P 500 Buyback index, which tracks the share performance of the 100 biggest stock repurchasers, has gained just 1.3% this year, well under performing the S&P 500, so buying back stocks does not guarantee higher stock prices. The point of buybacks is simply to make a company’s stock seem more valuable. By mopping up shares, a company shrinks the stock pie, which boosts earnings per share. That, in turn, should push the share price higher.
The strategy is risky, if companies buy their own stock that eventually falls in price. In 2008, Exxon Mobil Corp. Microsoft Corp. MSFT 0.34% and International Business Machine Corp. paid more than $18 billion to repurchase stock at a peak, only to see their share prices slump a year later. These days Oracle has been one of the biggest buyers of its own stock in recent years and spent $11.8 billion on stock repurchases last year, when shares gained nearly 23%.
Why are corporations using their cash to buy back stocks? How do you spell “WINDFALL”? Courtesy of Goldman Sachs, we know where the Trump Tax Cut is really going. Surprise! It’s paying for stock repurchases by corporations, as Corporate America despairs of investing in much other than dividing the pie provided by near-record profitability into fewer and larger pieces. Buyback announcements were up 22% to $67 billion in just six weeks after the tax cut passed.