Saturday, December 29, 2012

Stock Buybacks: Separating Fact From Fiction

Do you love share buybacks?
Are they signals for you to rush in and buy the stocks? The following article is eye-opening...

"Why Would a Public Company Buy Its Own Shares?

It's not as silly a question as it may seem. Being public means selling a portion of the company to raise cash; usually for the purposes of cashing out insiders and investing in corporate opportunities. Selling shares to the public then buying them back sounds dangerously close to trading your own shares.

Milano says there are two basic reasons for buybacks. First, the company may not have anything better to do with its cash and they view this as having a better potential return than an investment in its own shares. In other words, the board of directors simply thinks a stock is too cheap.

The second reason is to increase earnings per share. Fewer shares mean EPS reports look more impressive than they really are.

Do Buybacks Lead to Higher Stock Prices?

Milano says yes in the short term. After that, not so much.
"Over time the companies that buy back more stock tend to produce worse shareholder returns,"he says. Earnings per share may have the appearance of growth, but Wall Street sees through the illusion.

"If you're growing EPS in a way that's really just financial engineering, the market doesn't think much of that," Milano states. Investors want real growth, not a shuffling of assets.

Add it up and buybacks are a lot of sizzle without much steak. They may give a short term pop to a stock, but once the excitement fades the shares tend to give back the gains, even with the company buying alongside regular investors"

...By Jeff Macke | Breakout [ read full story]

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