One of the many methods to evaluate whether you should buy a stock is the PE multiple of the Earnings per Share. The price of the share is divided by the earnings per share. If a company does well the earnings can go higher and then keeping the same PE multiple means the stock trades higher. Companies can buyback shares which reduces the number of shares which also means keeping the same PE multiple the stocks trades at a higher price. Most people focus on the earnings, which is done quarterly, will the company meet or beat the estimates for the earnings?
In an article by Thyagaraju Adinarayan and Sujata Rao of Reuters, trillions of dollars in corporate bank accounts are starting to flow to shareholders largely through stock buybacks.
According to JPMorgan strategist Nikolas Panigirtzoglou noted about $360 billion in buybacks were announced in the first 4 months of 2021 compared to $190 billion in the 2020. If you project it to a year, that would be $900 billion which is what happened in 2019. (former President Trump cut corporate tax rates and companies bought stock).
Analysts attribute the buyback rebound to corporate cash that stem from last’s years record borrowing and cuts to shareholder rewards. According to data from Refinitiv cash and cash equivalents rose by roughly $3 trillion at S&P 500 and STOXX 600 companies.
Linking to dividend paying stocks, every company buy back stock, every CFO has an good idea of what the range the stock should be worth and when they are fortunate to generate extra cash, the money has two choices. Reinvest in the business or give back to the shareholders either in dividends or buybacks. Treasurers tend to like buybacks because the number can be adjust each year, while if dividends are raised (which is good), Wall Street punishes the company if they decreased them the following year. Buybacks are part of corporate strategy, you can ask what does your investments do?
There are more questions than answers, till the next time – to raising questions.