Alexander Green has done a deep dive on stock buybacks, and he’s sitting down with Bill O’Reilly on June 9 to discuss all the details in his America’s Financial Independence Day event.
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Stock Buybacks – What Is All About?
The term refers to companies using cash they have on hand to repurchase – or “buy back” – their own shares on the open market.
Such purchases boost demand for a company’s stock and reduce the number of outstanding shares. Both can push the share price up. And with fewer shares on the market, earnings per share – a key metric that investors use to value a stock – go up. That too can boost the share price.
In short, a stock buyback is a good way to return value to shareholders.
So why are buybacks the new boogeyman?
Political Foes and Buyback Woes
Some politicians claim that buybacks are greedy and nefarious.
In fact, several have been riding this hobby horse for a few years now.
Back in 2019, Senate Majority Leader Chuck Schumer and Sen. Bernie Sanders wrote an op-ed in The New York Times in which they portrayed buybacks as “corporate self-indulgence” and “an enormous problem for workers.”
Shortly thereafter, the two Democrats introduced legislation that would limit companies’ ability to repurchase shares.
Under the legislation, companies would have to prove they first boosted employees’ pay, pensions and benefits. Only then could they use cash for buybacks. (Because we all want Congress to dictate exactly how companies use their cash, right?)
While those seem like worthy things to spend money on, one study of the bill found that only a handful of U.S. companies could meet the Schumer-Sanders criteria for a buyback.
Thus, no buybacks.
And so it seems this legislation is really designed to eliminate buybacks, not improve employee pay and benefits.
And research by the staff of the Harvard Business Review found that stock buybacks don’t deprive companies of cash they would otherwise invest in employees and new equipment.
“Employees of S&P 500 firms are unlikely to be systematically hurt by either dividends or buybacks,” says the Harvard Business Review article. And “there is little evidence that buybacks and dividends by the S&P 500 are hurting the economy by depriving firms of capital they would otherwise use for investment and paying workers.”
Let me note that the Harvard Business Review is hardly a bastion of right-wing propaganda. In fact, it’s considered to be politically left of center.
Fortunately, the Schumer-Sanders bill has gone nowhere.
That could change, however. Or at least we’re likely to see some new momentum for it, because buybacks are hitting new records. U.S. companies announced a record $300 billion of repurchases in the first quarter alone.
Goldman Sachs estimates that S&P 500 companies will spend $1 trillion on buybacks this year, another new record.
But that’s not an indication of corporate greed or self-dealing. Instead, it tells us that companies are flush with cash, they have strong balance sheets and they’re optimistic about the future.
And you know who really loves buybacks?
You guessed it, the Oracle of Omaha, Berkshire Hathaway (NYSE: BRK-A) Chairman and CEO Warren Buffett.
He’s called buybacks “the best use of a company’s capital” when the stock is priced below its true value.
Buffett is a big fan of companies – such as Apple (Nasdaq: AAPL) – that routinely repurchase their own shares. In fact, Berkshire Hathaway recently purchased another $600 million worth of Apple shares, making it the company’s largest shareholder, with a 5.4% stake.
“Anytime you can buy stock for less than it’s worth, it’s advantageous to the continuing shareholders,” he told shareholders at Berkshire’s 2016 annual meeting.
Buffett has also employed buybacks to return cash to his own shareholders.
The Oracle of Omaha has used this type of investing strategy for over 50 years, but it’s the details that remain murky.
America’s Financial Independence Day With Bill O’Reilly and Alexander Green
Chief Investment Strategist Alexander Green has done a deep dive on this, and he’s sitting down with Bill O’Reilly on June 9 to discuss all the details in his America’s Financial Independence Day event.
So as companies continue to buy back shares this year, watch closely. They could be telling you something very important.