If it seems like you have read a lot about companies buying back shares of their own company you are right. According to Bloomberg 2011 is on track to be the third largest year in corporate buy backs behind 2006 and 2007. While the Bloomberg article, in typical cheerleading fashion, points to buybacks being bullish none other than Kiplinger has recently made the correct warning that buybacks are not always good.
In the current environment buying back shares helps one item that is very important to how investors view a company. As a matter of fact it is the item most analysts focus on – earnings. So image if a company has 100 shares outstanding and earnings “x” amount that equates to $1 dollar per share. If the company buys back 50 shares and earns the same “x” amount the earnings per share then per share earnings would be $2. In a world where unemployment is high, borrowing tight and growth prospects muted what easier way to goose the numbers than share buybacks.
What really matters is stark contrast to what companies do with company money is what the executives of companies have been doing with their own money. Let’s have a look. Below is a chart from the Wall Street Journal Market Data center and shows what executives, that must report transactions in their own company stock, have been doing and plan to do.
So let’s get this right, with company money stock is being bought back to goose earnings (presumably) while the executives who are acting in their own self interest are selling with their hands and feet. Since the executives are interested in themselves and are selling then for the interest of the company, not share holders, they are buying back shares to keep the facade of corporate health intact while they sneak out the back door (selling in their own portfolios).
In hindsight we see that 2007 was where the cracks in the economy and financial world were starting to show up. So the question is that if in 2006 and 2007 we saw record buy backs and what followed was an implosion in stocks could it be that 2011’s buyback mania is foretelling companies having trouble with earnings?
