Corporate America Adds Fuel to the Stock Market Flame

With trade deals lighting a fire under the stock market, corporate America is also bringing out some more fuel for the flames.

Corporate buybacks are on the rise – to all-time highs. In the past three months alone, companies have announced hundreds of billions of dollars in commitments to buy their own shares.

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Companies have plenty of options for what they do with their cash. By engaging in share buybacks, they’re effectively saying their own shares are the best game in town.

In reality, that’s rarely the case. A wise company would only buy back shares when they’re an extreme value.

As Andrew notes:

Today, share buybacks usually do two things. They increase earnings per share by reducing the total number of shares – not increasing earnings. And they usually help to offset the shares granted to executives. Neither of those is real growth in the underlying business.

Given this shell game, it’s clear that most companies buying back shares are signaling that they don’t know how to employ their cash better.

Can investors get good returns with companies buying back shares? Absolutely. But if it’s hollowing out the balance sheet, it’s creating riskier conditions as share prices rise higher.

Until that crisis hits, traders see buybacks as bullish.

-Addison

With trade deals lighting a fire under the stock market, corporate America is also bringing out some more fuel for the flames.

Corporate buybacks are on the rise – to all-time highs. In the past three months alone, companies have announced hundreds of billions of dollars in commitments to buy their own shares.

Turn Your Images On

Companies have plenty of options for what they do with their cash. By engaging in share buybacks, they’re effectively saying their own shares are the best game in town.

In reality, that’s rarely the case. A wise company would only buy back shares when they’re an extreme value.

As Andrew notes:

Today, share buybacks usually do two things. They increase earnings per share by reducing the total number of shares – not increasing earnings. And they usually help to offset the shares granted to executives. Neither of those is real growth in the underlying business.

Given this shell game, it’s clear that most companies buying back shares are signaling that they don’t know how to employ their cash better.

Can investors get good returns with companies buying back shares? Absolutely. But if it’s hollowing out the balance sheet, it’s creating riskier conditions as share prices rise higher.

Until that crisis hits, traders see buybacks as bullish.

-Addison

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