Are Stock Buybacks Going to Boost the Market?

NASDAQ: AAPL | Apple Inc. News, Ratings, and Charts

AAPL – This article debates whether buybacks are going to boost the stock market. Continue reading for a thorough analysis on the topic.

As the 2020 elections approach and the political rhetoric surrounding income inequality heats up, one of the obvious-and-easy targets are corporations.  Among the regulatory arrows being fired are proposals for restrictions, or outright bans on stock buybacks.   

But, you know who’s not talking about buybacks? The companies themselves. That’s because prior earnings reports are considered a “quiet period” in which corporations are not only restricted from what information they can disclose, but also must halt their share repurchase programs.  Now, as we cross half-way through “earnings season,” companies are revealing their buyback plans. 

And they are set to hit a new record as zero interest rates allow for borrowing at no cost to finance buybacks and uncertainty over trade tariffs and regulation leave them reluctant to increase cap-ex spending.  

I’ve written recently about some studies showing that buybacks aren’t an efficient use of capital and often don’t improve a stock’s performance over the long term. But, there is no denying that the activity can prop up share prices in the short term. 

Not only do buyback programs kick in once earnings are reported, but the summer seems to historically be the seasonal high point for share repurchases. 

buybacks weekly 2019

Meaning, we are about to see some massive buying from the corporations themselves.   This comes on top of what has already been two consecutive years of record buybacks with 2019 set to surpass over $850 billion buybacks. 

I think it’s clear that, thanks to the tax cut, 2019 is going to be a year to remember. Here’s the post-crisis history of buybacks on a 4-week rolling average.

corporate client buybacks 2019

The most active buyers are big tech companies, which until recently, have already been the best performers.  

Biggest buyback spenders in q1

While the criticism is valid that buybacks are evidence a company lacks new ideas or the willingness to invest in its future through capital investments, research or even acquisitions, there is no denying that they can increase the perceived value of a company’s shares. 

When a company buys back stock, it is often positioned as “returning cash to shareholders,” but it really isn’ — at least in the same way a dividend does. What buybacks do are help boost earnings per share results, since the profits are spread out over a lower denominator (shares), making the EPS look a lot bigger. Repurchased shares get retired, basically locked in the corporate vault, and are not included in calculating EPS. As such, buybacks represent a tailwind to share prices.  It is estimated that the number of total shares outstanding for S&P 500 companies have declined by 31% over the past five years.  Basically, the stock market has been shrinking.  

This may seem like nothing more than some unproductive, sleight of hand accounting where no one gets hurt but buybacks actually do have a significant downside; the repurchased stock is dead and the cash is in the hands of the seller. Where there was once a liquid stock and cash, there is now just cash. So half the previously existing economic value has been eliminated, the outstanding share count has gone down — which is fine until you remember EPS isn’t a measure of financial health. Net income is. 

What the company retains are debt load and interest payments. Companies very, very seldom flip from buying back stock to doing secondaries. Doing so would absolutely kill their shares. That means liquidity is restricted even beyond interest.  Financial commentator Jeff Macke describes buybacks thusly: “A buyback is financially tantamount to buying shares and lighting them on fire then paying an annual fine for pollution. If you’re lucky, the interest rate paid on buyback loans is roughly equal to the dividend payments saved.” 

It also means companies are not investing in research, capital equipment, or other items on which to build future growth.  Goldman Sachs estimated that 27% of the cash that companies spend in 2019 will be used for stock buybacks. 

What buybacks do are help boost earnings per share results, since the profits are spread out over a lower denominator (shares), making the EPS look a lot bigger. Repurchased shares get retired, basically locked in the corporate vault, and are not included in calculating EPS. 

As such buybacks represent a tailwind to share prices that just might send stocks sailing to new highs in coming weeks.

AAPL shares were trading at $209.99 per share on Tuesday afternoon, up $0.31 (+0.15%). Year-to-date, AAPL has gained 34.21%, versus a 21.61% rise in the benchmark S&P 500 index during the same period.

This article is brought to you courtesy of Stock News.

About the Author: Option Sensei

Steve has more than 30 years of investment experience with an expertise in options trading. He’s written for, Minyanville and currently for Option Sensei. Learn more about Steve’s background, along with links to his most recent articles. More...

More Resources for the Stocks in this Article

TickerPOWR RatingIndustry RankRank in Industry
AAPLGet RatingGet RatingGet Rating

Most Popular Stories on

3 Stocks Bringing AI to the Masses

Like it or not, large companies with a combination of cash and massive databases do have an advantage in the new AI world. These three companies are wielding that advantage to get a leg up in the rapidly changing AI landscape. Keep a close eye on how these companies, Meta (META), Alphabet (GOOGL) and Yelp (YELP) continue to take advantage of their respective incumbencies to shape the consumer’s interaction with AI.

How Low Will Stocks Go?

The Fed threw some gasoline on the stock sell off fire last week. With that stocks are exploring new lows with the 200 day moving average in play at 4,195 for the S&P 500 (SPY). Is it time to buy stocks...or run for cover? 43 year investment veteran Steve Reitmeister shares his latest insights including how low he expects stocks to go. Plus information on his top 11 picks for today’s volatile market. Read on below for more...

With Oil Soaring, My Under $10 Stock of the Week

The number of oil rigs in the U.S. and Canada has decreased by 170 over the past year. International oil suppliers are cutting output. This opens the door to small oil and gas exploration and development companies like Baytex Energy (BTE).

Income Stock of the Week: Manhattan Bridge Capital (LOAN)

In the current high mortgage rate environment, and with financial instability growing in the commercial real estate market, you want to be extra diligent when investing in mortgage lenders. This lender has a sterling track record of providing short term loans to those needing some quick extra cash. And Manhattan Bridge Capital (LOAN) is rewarding investors with a hefty dividend.

Stock Alert: Just Another BUY THE DIP Opportunity

Traders threw a tantrum after the Fed shared details on their rate hike plans. This has the S&P 500 (SPY) hitting the lowest level in quite a while. Gladly, things are not as dire as they seem. That is why Steve Reitmeister shares his latest insights to explain why a bull market is still in place...and how to target the best stocks and ETFs for the days ahead. Read on for the full story below...

Read More Stories

More Apple Inc. (AAPL) News View All

Event/Date Symbol News Detail Start Price End Price Change POWR Rating
Loading, please wait...
View All AAPL News