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Wednesday Was A Record Day For Corporate Buybacks

August 17, 2015

While it is not new information that companies are buying back shares this post from the Barron’s website is noteworthy. The stat at the end of the post from Avi Salzman regarding the poor timing historically should be a cause for concern.

Click here to visit the original posting over at the Barron’s website.

When stocks rallied back from sharp, China-induced declines on Wednesday, guess who was doing the buying?

Here’s a hint: It wasn’t mom and pop.

Rather, corporations were jumping over each other to repurchase their own shares. Bloomberg reports that Goldman Sachs’ specialized equity trading desk that handles buybacks experienced record trading volume on Wednesday. That seems to go a long way toward explaining why total composite trading volumes Wednesday were the highest in a month.

Lots of people, including BlackRock’s (BLK) CEO Larry Fink, have voiced concerns about the trend for corporations to buy back loads of their their own shares; the simple argument is that using cash this way is wasteful, and a prime support of the market rally may be masking real appetite for stocks. Avi Salzman noted in Barron’s a few months back corporations done an historically poor job of timing their purchases:

“Companies have shown terrible market timing when repurchasing shares. They spent 34% of their cash outlays on buybacks in 2007, just as the market topped, and only 13% in 2009, when stocks bottomed.

The high level of buybacks doesn’t appear to endanger company balance sheets in the near term. Excluding financials and other companies that must hold certain cash levels, S&P 500 companies have cash on their balance sheets equal to twice their net income, according to S&P Dow Jones Indices senior analyst Howard Silverblatt. “The rule of thumb is, if you’ve got a year’s worth you’ve got plenty,” he says.

But aggressive buybacks could make it harder for firms to grow in the future.”

Discussion
3 Comments
    CFS
    Aug 17, 2015 17:10 PM

    The bad timing is merely a symptom of the board of directors often being more interested in their options and bonuses than the good of their company.
    However, for many companies, we are in a time of zero interest rates (so cash earns a pittance) and at a time when there is overcapacity in their industry (so investment in more capacity would be stupid).
    Hopefully a good company will pay off short-term debt, and possibly give out dividends for excess on-hand cash.

    CFS
    Aug 17, 2015 17:04 PM

    A strange photo-analysis of the explosion and fire in China:
    http://nesaranews.blogspot.com/2015/08/dead-meat-revelation-no-warehouse-at.html

    I do not agree with the rest of the site, but the claim about the warehouse fire is worrisome after looking at the photos.

    Aug 18, 2015 18:39 AM

    CORY………….THANKS FOR THE GOLDEN OBSERVATION NEWS LETTER……
    good call by DOC on RICHMOND…………………………………………….JOOTB