A few years, President Trump gave corporate America large tax cuts and in reality many of the dollars saved by public corporations went into buying back their stock. There were positive affects of buying back stock, the number of shares decline which means the same income with automatically have a higher earnings per share outstanding which reflects in a higher multiple on the shares or higher prices for stocks.
Billions of dollars went into buying back shares and one of the reasons it is good to look through the financial press is did you know there is a index fund which tracks companies which buy back their shares? In an article by Ian McGugan, he discusses the S&P 500 Buyback Index. Since 2009 or for the past 10 years, if you had bought a regular index fund, you should be up 13% on an annualized basis; the S&P 500 Buy Back Index is up 15.7%. For 2%, I not positive if that is a great reason to switch but it is worth noticing.
When examining any fund, it is important to look at what the critics are saying. For example many US drug makers spend more money on stock buybacks than research and development of new drugs. (given the government gives 21 year patents, which mean higher drug prices is this good government policy?) The critics also suggest with good reason, if a company is buying back shares, then by definition they are not investing in back into the growth of the company. The management of the firm has determined the best use of excess capital is to buy back shares.
Those that defend the use of buybacks, suggest buying back shares when they are undervalued is a very good thing to do, because the shares could be out of favor with Wall Street; for example since interest rates are low, it makes good economic sense to borrow money. If a company has low debt, they may not be taking advantage of the low rates to grow the company. Buybacks are also a terrific thing to do if management determines the best use of spare cash is to buyback shares rather than the other alternatives – grow or buy competition.
The question the author asks, is it a good time to consider buying the S&P 500 Buyback Index? maybe not because the best years are when the majority do not notice or few people are paying attention to the idea. Sometimes the best flavor is vanilla, the S&P 500 Index has done well.
Linking to dividend paying stocks, we often think companies which consistently make profits and can afford to pay dividends is the easiest method to invest in. These companies have choices after they pay the dividends – grow the business or make the balance sheet even stronger with less debt or buy shares. Companies have choices, as investors while we love to receive dividends, we also love growth. If the company consistently increases the dividend while maintaining profitability you gain the best of both worlds and ensure discipline remains in management.
There are more questions than answers, till the next time – to raising questions.