Companies Seem To Be Investing In Their Shares As Much As Themselves

Companies Seem To Be Investing In Their Shares As Much As Themselves
Stéphane Renevier, CFA

almost 2 years ago1 min

Mentioned in story

Share buybacks – when a company buys its own shares in view of reducing supply and pushing up the earnings per share of those left over – have been responsible for almost 40% of shareholder returns among S&P 500 companies since 2011. That ranks them right alongside earnings-per-share growth as the biggest money-spinner, and way ahead of rising valuations (14%) and dividend payouts (6%).

That’s worrying: buybacks don’t create real, long-lasting value for shareholders. After all, that’s money that could be invested in equipment, employees, R&D, or acquisitions that could drive a company’s profit going forward. And it has broader economic repercussions too: companies that spend less on real projects create fewer jobs and less opportunities for value creation.

And sure, “clean” earnings per share – that is, excluding the impact of buybacks – have rebounded strongly since economies reopened after the pandemic. But between inflation, the war, and interest rate hikes, there’s only so much higher they can go. That means companies are probably going to depend even more on buybacks to nudge shares higher, at a time when buyback activity is already at historic levels. Eventually, though, those buybacks might run out of steam. And at a time when the stock market is fragile enough, that’s not exactly reassuring…

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