Stock Buybacks Boost Earnings
The term stock buybacks seems to be popular right now. Since our recent decline, companies have been stepping in to the market to by shares of their own stock. Consequently, we are seeing cable news and the print media highlighting key stock buyback programs on a more frequent basis.
Just to give you an example, on Wednesday morning CVS Caremark (CVS:NYSE) authorized a $4 billion stock buybacks program. Now when a CVS long sees an announcement like this, he obviously get excited. Mainly because many view these programs as a vote of confidence from management. Not only does the stock often see a short term pop after repurchase programs, but the number of outstanding shares are also reduced, which helps the company’s earnings.
But here is why the stock buybacks skeptics come in. Some traders feel that these programs are used to dress up future weak earnings. For instance, just look how many times Research in Motion (RIMM:NYSE) has bought back shares in the past few years, and more importantly look how far it’s share price has dropped.
Stock Buybacks Have Skeptics Worried
Now despite of the favorable interest environment that we are in, you have to ask yourself another question. Why are CEO’s and BOD’s deciding to buyback stock instead of paying down debt, increasing or issuing dividends, or expanding business operations ?
While I don’t agree with some of these conspiracy theorists, many feel that management often announces these programs to give their stock a booster shot to benefit their personal stock options.
The moral of the story is not to buy shares in a company solely on the basis of a stock buybacks program, look at the big picture too.
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