I’ve been reading a lot about stock buybacks recently. According to sources, the aggregate cash balance of the S&P 500 is approaching $2.0 trillion. Yet announced stock repurchase programs has barely scratched $150 billion year to date. Why is that?
The best explanation is uncertainty. In times of uncertainty cash is king. More consistent signs of sustained economic growth will lead to more investment by major corporations. The low buyback numbers tell me that the opportunities are out there and companies would rather wait it out than distribute to shareholders.
In theory, a company should buy back stock because they have limited investment opportunities and believe investors can make a higher return on their own. What company in their right mind would send that signal to shareholders?
For small public companies it is just a bad idea. Sooner or later you’ll need the cash again to invest and you are betting that the price of your shares will increase before your next raise and that the market will be receptive.
For S&P 500 companies that trade on a historical multiple of eps it is a much less risky move, particularly if cash flow is strong, but I still don’t like it. Cash is king in good times too.
Whenever you see talk of buybacks surface it is a signal that the economy isn’t working right. All the rhetoric aside, the market still remains pretty efficient in the allocation of capital.