Published Mon, 25 Feb 2019 12:42:10 -0500 on Seeking Alpha
Stock buybacks have become popular in the past two decades, but historically tend to happen the most at cyclical tops when stocks are expensive:
Chart Source: Yardeni Research
Despite a lot of controversy recently, there's nothing wrong in principle with stock buybacks, especially when boards of cheap stocks are the ones doing the buybacks. Stock buybacks are a more flexible and tax-efficient way to return cash to shareholders than dividends, and compliment dividends very well as part of a stock's overall shareholder yield.
Imagine if ten people start a private business and each own 1/10th of it, and after years of profitable operation, one of them wants out. The other nine people could agree to use their shared company funds to buy out that person, so that the rest of them now own 1/9th of it, and thus are entitled to a bigger share of the profits. Then suppose a few years later that another person wants out, so they buy out that person and now the rest each own 1/8th. Nobody would find this objectionable.
And yet, when there are millions of shares involved, and a public company starts buying them back to reduce the share count and increase the ownership stake of each remaining share, which allows for more EPS growth and dividend growth, it often gets called price manipulation.
The problem is that the critics of buybacks are unfortunately on to something. Although stock buybacks are fine in principle, in practice they are often poorly executed:
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|Stock name||Last trade||P/E||Earnings/Share||Dividend/Share||Dividend yield|
|SPDR S&P 500 ETF||301.29||0.0||0.00||5.42||1.82|
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