After faltering for a couple of months, buyback announcements from many major US companies shot up to a three month high recently, putting 2014 on track to be one of the biggest years ever for buybacks. Companies from 21st Century Fox Inc. to several airlines and many other businesses continue to buy back shares of their own stocks, even though they’re being criticized by many analysts for doing so. Here are 3 reasons why buybacks have become so popular in the last decade or so.
First of all, this is what they call “financial engineering”. When a company has earnings that aren’t doing so well, they can actually maintain and even boost their earnings per share by repurchasing those shares. What this does is shrink the denominator/shares outstanding, and many businesses have realized that it’s an excellent way for them to bolster their per-share earnings and sustain any momentum that their stock might have.
Second, businesses have realized that buybacks are a great way to return money to shareholders. While some are quick to criticize companies for buying back their shares instead of investing in things like new equipment or hiring better people, that criticism is a akin to criticizing them for paying dividend payments. The fact is, buybacks are just another way to distribute corporate profits to shareholders and, since it avoids double-taxation, it’s seen as a better way to do it as well.
Finally, many businesses have realized that buybacks are an excellent way to offset employees who cash in. While there is certainly criticism of companies that ramp up buybacks after their stocks have climbed, what most of these critics simply don’t understand is the need for these companies to “buy high” in order to offset employees cashing in. The fact is, when stock prices go higher, employees begin exercising their in-the-money stock options and, when they drop, the same employees hold back from exercising these options.
So far in 2013 businesses have announced about $300 billion worth of buybacks, and July saw $55 billion, the highest amount since April. What this means is that, even though buybacks are still extremely popular, it’s unlikely that they’re going to top the $669 billion total of 2013 or the all-time record that was reached in 2007.
Nevertheless, buybacks are more and more an option that companies are using in order to maintain their earnings, pay shareholders and offset employee cash-ins. Whether or not analysts like them, they certainly will continue to happen into the future.