By: Steve Smith
As we wind our way through earnings season and companies go through their quarterly confessions, one thing they aren’t allowed to do or talk about is share buy backs. Today’s market news suggests that that’s about to change in a big way.
The three weeks prior earnings reports are considered a “quiet period” in which corporations are not only restricted from what information they can disclose but also must halt their share repurchase programs.
I’ve written recently how some studies show buybacks are usually an efficient use of capital and often don’t improve a stock’s performance over the long term, but there is no denying the activity can prop up shares price in the short term.
Not only do buyback programs kick in once earnings are reported, but the summer seems to historically be the seasonal high point for share repurchases.
Meaning we are about to see some massive buying from the corporations themselves. This comes on top of what has already been two consecutive years of record buybacks with 2018 set to surpass over $650 billion buybacks.
I think it’s clear that, thanks to the tax cut, 2018 is going to be a year to remember. Here’s the post-crisis history of buybacks on a 4-week rolling average.
The most active buyers are big tech companies, which until recently have also been the best performers.
While the criticism is valid that buybacks are evidence a company lacks new ideas or the willingness to invest in its future through capital investments, research or even acquisitions there is no denying they can increase the perceived value of a company’s shares.
What buybacks do are help boost earnings per share results, since the profits are spread out over a lower denominator (shares), making the EPS look a lot bigger. Repurchased shares get retired, basically locked in the corporate vault, and are not included in calculating EPS.
As such buybacks represent a tailwind to share prices, that just might send stocks sailing to new highs in coming weeks.