News Column

Companies may want to hold back on buybacks

June 18, 2014

A: When companies are buying back their own stock, it's supposed to be good news. Too bad that companies, like investors, tend to buy high.

Investors often push share prices up when a company announces a buyback or an increase in the number of shares it plans to buy.

Stock buybacks are supposed to be good news for two reasons. After a buyback, a company has fewer shares outstanding than it would have had without the buyback. That means the company is cut into fewer slices, so investors theoretically get a bigger claim to the company's earnings. Some investors see buybacks as a positive because they signal the company sees its shares as being overvalued.

But companies have had a terrible track record when it comes to buying back their shares.

Companies spent a record $172 billion buying stocks in the third quarter of 2007, just before the market peaked in October, S&P Dow Jones Indices says. And here's where things get scary. Companies boosted their buybacks 59.2% in the first quarter of 2014 to $159.3 billion. That means buybacks are at the highest level since just before the last time the market peaked.

Let's hope history doesn't repeat.

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Source: USA Today

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