Stock Buybacks. Should You Buy These Companies?

At their worst, stock buybacks can be a form of corporate cannibalism. Often the unspoken motive is to use extra cash to boost earnings per share by reducing the number of shares among which the company's profits are divided. But that can be a slippery slope says Kevin Beech, an Analyst at Behind The Numbers.  "If they don't keep repurchasing stock, their earnings will take a hit. So it can turn into a sort of an addiction."

Another question is how prudent will they be in their repurchase?  Will they do so at a high p/e (flashback to NFLX Reed Hastings buying back @ $300/share in 2011) or will they do so on weakness and during dips? 

Still others actually target names with a share repurchase as short candidates for a variety of (very possibly prudent) reasons.  (Hat tip to veteran member GT)

Lastly you must ask yourself do companies with stock buybacks perform as well, better or worse than the S&P?  Talking heads would have you believe a stock repurchase drives prices higher.........really?

I truly encourage you to check the data for yourselves in this Factset PDF as it does not appear to that to be the case.  In fact, they underperform the broader market.  Clearly buybacks are not all sweetness and light as you would be lead to believe and news television never got the memo as they are continually hyping companies with stock buybacks.  Go figure!  They have to keep those sponsors happy now, don't they. 

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  • Admin

    SPX_vs_EPS.png?width=267If you consider the falling EPS market wide (see left), then the large level of current buybacks makes perfect sense......being done in order to boost EPS.  That being said,  THEN you have to consider the data in the blog article regarding stocks with buybacks under perform the general market.  Things such as this make me go hmmmmmmm.

    Click the chart to be taken to the Factset article on falling EPS.

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