3 Myths About How Share Buybacks Affect Stock Performance
UPDATED: March 2022
3 Myths About How Share Buybacks Affect Stock Performance - For the past few years, companies in the United States have been on a share repurchase spree. This has raised concerns that the current high levels of the stock market are being driven by the appetite of businesses for their stocks. A share buyback-driven stock market may seem vulnerable, but companies have good reasons to buy back their shares. That's because share buybacks offer companies a suitable way for returning profits to shareholders.
3 Myths About How Share Buybacks Affect Stock Performance
They also manage to boost share prices as demand outnumbers supply and reduces the total number of outstanding shares. The profits are then divided, which increases earnings per share (EPS) and makes the company more attractive for investors. Like other characteristics of stocks, share buybacks can be a major factor for exploiting the stock market to beat long-term returns.
Many investors have concerns about the high numbers of stock repurchases, which have resulted in a lot of misinformation being shared. We will look at 3 of the most concerning myths that have risen and debunk them here for you.
1. Myths About Share Buybacks - Share Buybacks ONLY Represent Short-Term Thinking
The critics of share buybacks claim that companies who buy back their stock are only thinking about short-term gains. That's mainly down to the fact that they use the cash that's meant for investment and innovation. Even though share buybacks are high, a recent report from JP Morgan has shown that at 2% market capitalization of the S&P 500, they meet the average for the past 15 years.
The volume of share buybacks has risen, but that's mainly because companies are making more money, which has raised market capitalization and stock prices. Businesses have also been using cash repatriated after-tax to repurchase stock.
2. Myths About Share Buybacks - Companies Are Never Making the Best Use of Capital
The truth is, even though share prices of stock that are repurchased are higher than their average historically, they are still cheaper than the prices in the market. You won't get better returns if you are buying cheaply because, after the financial crisis of 2008, companies who bought shares back at discounted prices were lagging behind those who repurchased at higher prices.
Valuations are set by the investors, and deciding to buy back stock is mainly down to the company thinking that their stock offers better value than any investment opportunity at that stage.
3. Myths About Share Buybacks - Companies Always Raise their Debt to Buy Back Shares
This is another myth that stems from the fact that companies borrow funds for share buybacks and capital spending. This trend is expected to catch on, but investors aren't concerned about this right now. That's because companies who raise their debt to buy back stock aren't punished, and they generate similar returns to companies with lower debts.
Conclusion to 3 Myths About How Share Buybacks Affect Stock Performance
Companies that have weak balance sheets have been outperforming those who have debts, and it's mainly because investors have faith that the company will pay off their debts when their share prices improve after buybacks.
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About the Author & How YOU Can Profit: This article is the copyrighted product of the team at BuybackAnalytics.com .
Buyback Analytics is a Top Tier Investing Platform to help investors find, analyze, and profit from investing opportunities not found through traditional investment tools. We specialize in this simple concept: Follow the trades of Insiders - CONSISTENTLY PROFITABLE Traders, Investors, and Institutions because THEY get Inside Information that YOU don't:
LEGAL Insider Trading / Inside Traders (CEOs, CFOs, Corporation's Accountants & Attorneys, Politicians, etc.)
Stock Buybacks (Share Repurchases) by Public Corporations (ie. Apple, Tesla, Netflix, Meta (Facebook), Microsoft, etc.)
Market Moving Institutions (Examples: Market Makers, Investment Banks, Stock Brokerages, Hedge Funds, etc.)
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