Share buybacks will drive the market higher ?
We've been told over and over again that companies have "record amounts of cash on the balance sheet," and that this should be great for stockholders.
After all, they are going to return that cash to investors by buying back shares. And that should raise the stock price by reducing the amount of shares in issue.
So much for that. S&P 500 companies spent a massive $103 billion buying back their stock in the second quarter, on top of a thumping $85 billion in the first quarter.
And the results so far haven't been that impressive. InsiderScore reports that the second quarter figure was the highest amount spent on share buybacks "since the first quarter of 2008." Hmm. How'd that work out?
Turns out this logic was flawed in about three different ways. First, the "record cash on the balance sheets" is matched by record debts.
Second, if a company spends $100 million buying back stock, it should, rationally, make no real difference to the share price: The market value should fall by $100 million.
Third, "buybacks" are largely a fiction: While the company spends stockholders' money buying in stock, the compensation committee quietly hands out new stock to executives.
Net result: You're actually going backwards. Standard & Poor's reports that from 2000 through 2010, S&P 500 members spent a massive $2.7 trillion buying in stock.
Yet at the end of the decade, they actually had more shares and options outstanding than they did at the beginning.
Source: WSJ