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US Companies Restock

0710_Buybacks

Image source: Joseph Sohm / Shutterstock.com

What's going on?

US companies are buying back record levels of stock – but it’s not boosting their share prices as much as they were hoping…

What does this mean?

Companies in the S&P 500 – a chunky list of American stocks that investors can buy and sell as a group (a.k.a. an index) – are set to buy back record levels of stock this year. Stock buybacks usually create more demand for a company’s shares (since there are fewer of them floating around) and can indicate that a company’s pretty confident in its future growth prospects (it probably wouldn’t buy its shares if it didn’t believe their value would rise in the future). So, when buybacks are announced, stock prices typically rise. But of the companies that have bought back stock so far this year, almost 60% have seen their stocks perform worse than the index overall.

Why should I care?

For markets: Investors aren’t necessarily sold on the idea.

The stock market’s been going strong for nine years and shares are currently pretty expensive. That’s why some investors think that companies are paying a hefty price for their own shares and that the money could be better spent on “capital investment” (when a company spends money on improving its business by buying things like machinery and warehouse space). This kind of spending boosts growth for companies going forward (because they usually buy things that’ll help them to be successful in the future), whereas share buybacks usually just boost share prices.



For you, personally: Buybacks and dividends galore – but which is better?

Aside from buybacks, dividends are another way that companies return money to their shareholders. Dividends paid by S&P 500 companies have been rising, too, thanks to tax reform and profit growth (meaning there’s more cash available to be paid out). Companies usually prefer buybacks over dividends due to the positive effect they (typically) have on share prices. Investors usually also prefer buybacks as they tend to command lower taxes.

Originally posted as part of the Finimize daily email.

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