Investors are told to buy low and sell high; the corporations that offer those stocks take the same advice when deciding to do buybacks for their own companies. When stock prices are low, it behooves companies to buy back their own shares, particularly when the value remains strong. For example, the current market is experiencing the pains of uncertainty when it comes to two global situations such as the political situation in Ukraine and slowing growth in China. For many corporations, however, neither of those events have any impact on their own stock price, but often the market moves up or down as a unit based on investors’ fears.
Win-win for companies and investors
When prices are low, it’s a good time to buy stocks, both for investors and for companies with money to reinvest. There’s also a secondary benefit for companies buying back shares of their own stock. Not only do they get the stocks at a cheaper price, but they also boost the value of their share price by lessening the number of shares in the marketplace.
This is also a win-win for investors who own the stock. Without having to do anything, their own value is increased. Notes Barron’s magazine, “Investors who focused on share repurchases as a 2013 investment theme would have seen their US stock portfolios surge 54 percent during 2013, beating the…S&P 500…handily.”
Which companies are making stock buybacks?
Clearly, one of the major “investing themes” of recent years is corporate buybacks. Last year for the first time since the economic crisis of 2008, many corporations found that solid earnings made them flush with stockpiles of cash. A danger in returning all of that cash to investors via increased dividends is that no company wants to increase their dividend one year only to have to lower it the following year (when earnings aren’t as great). Thus, stock buybacks are a good way to offer value without pinning themselves to a corner.
Among those making major stock repurchases in 2013 was Apple Inc. (NASDAQ: AAPL). Apple Inc. has been sitting on a lot of cash, which in the past under former Founder and CEO Steve Jobs, it had used to invest in new products. Many investors wanted to see that cash come back in the form of hefty dividends, which the company did pay out. But it also saw value in buying back its own stock at a time when its share price had fallen significantly and began evening out.
Qualcomm Inc. (NASDAQ: QCOM) and Logitech (NASDAQ: LOGI ) are two other technology giants that have made significant buybacks in 2014. According to CNBC, these buybacks raised the value of each company’s stocks accordingly. Lest investors think that this is just a tech play, companies ranging from chemical giant Ashland Inc. (NYSE: ASH) to grocery chain Kroger (NYSE: KR) are also among the many participants in this continuing trend for 2014.
Not all buybacks are equal
Are there times when stock buybacks are a bad deal for investors? Surprisingly, yes. Like any tool, a company can use stock repurchasing to manipulate its share price upward, even when the underlying fundamentals aren’t good. As a result, things can appear better than they really are. That’s why it’s critical for investors to look at a company’s financials carefully and not just assume that a stock buyback is a positive development.
For example, a company’s Board of Directors may pressure its CEO to raise the price of its stock, and doing a buyback is often a quick and easy way to accomplish that. However, it’s a short-term solution, not a long-term value. If earnings are weak, it won’t hold up in the long run, and the stock will eventually find its true value again at a lower price.
As with any investment, wise investors know what they are buying and why, and follow the developments of the stocks in their portfolio carefully throughout the time they own them.