Firms can't get enough of their own shares - Buybacks can reflect corporate confidence, but critics see dangers
U.S. corporations are slurping up their own shares like it's feeding time on a pig farm.
Companies in the S&P 500 spent $349 billion repurchasing their shares last year, compared with $197 billion in 2004, and that figure is expected to move even higher this year.
Amid the stock market's meanderings, those buybacks have provided a source of optimism. Anytime big investors are buying _ even if it's companies repurchasing their own shares _ that's good news for the market.
But some analysts question whether stock buybacks are good for the companies that undertake them, particularly in the long run. For example, the companies may be tempted to use the shares for acquisitions, and companies that go on corporate shopping sprees often wind up with buyer's remorse.
What's not in dispute is that the volume of buybacks continues to set records.
"The number of buybacks is just going bananas," said Howard Silverblatt, senior analyst at Standard & Poor's. "It's been going on for seven consecutive quarters, and we don't see it slowing down."
Companies typically buy back shares only when they believe their stock is going up, said Jeff Ryan, senior research analyst at the Schwab Center for Investment Research in Chicago. Conversely, companies will issue more shares when they believe their stocks are overpriced, he said.
"When you see a significant buyback of 2 percent to 3 percent of the outstanding shares, that is a good indication that management believes the company is undervalued," Ryan said.
Another benefit for investors is that buybacks dramatically affect companies' earnings. That's because, as the number of shares is reduced, the earnings per share ratio rises.
Among the S&P 500, "when companies say they had a 12 percent earnings per share gain, well, 4 percent of that came from the reduction in shares," Silverblatt said.
