Stock Buybacks Are a Sign of a Strong Company – Stocks That Will Rebound First

by Hank Coleman

Even in today’s stock market turmoil, there are companies who are repurchasing their common stock.  Of course, there are far fewer of them nowadays.  The companies currently buying back their stocks like Microsoft, Nike, Hewlett-Packard, etc. are some of the strongest firms who have the most cash flow and have remained strong during the stock market’s current roller coaster ride.

Stocks used to receive quite a pop when firms announce their intent to buyback shares.  For example, Home Depot’s shares rose almost 5% in June 2007 the day they made the announcement, and the same was true when ConocoPhillips bought back their shares that same year. 

Repurchasing shares was all the rage during the bull market that we had for the past few years.  Between 2003 and 2007, the companies in the S&P 500 increased their share buying from $135 billion to $390 billion.  Now, they have slowed down considerably of course as companies shore up their balance sheets.  Now, companies do not see the stock market responding as well during this bear market as they did in the past to repurchases.  Companies like Microsoft, Nike, H-P, and Exelon have actually seen their share prices drop between 1% to 3% despite buying back their shares.

The lack of respect for stock buybacks in today’s troubling financial times could mean excellent returns for investors over the next few years.  Wall Street’s sour response to the buybacks is only temporary.  It is just another example of the market’s short term views of stocks that it has had lately.  Share repurchases change the fundamental intrinsic values of these companies for the better, and investors will be rewarded for their long term outlook.  Buying back shares of common stock changes metrics such as earnings per share (EPS) and the price to earnings ratio (P/E Ratio).  Companies buy their own stock when they feel that the market has undervalued the shares.  It is a great signal to investors about the underlying value of the stocks.

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{ 1 comment }

Crude Oil Trader September 11, 2009 at 8:37 am

Stock buy backs actually shy me away from owning equities in the company. Having run businesses all my life I have little confidence in the managements ability to grow a company that doesn’t use or know how to use capitol to grow a company.

Great post!

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