What A Healthy Stock Buyback Program Can Do For Your Investment
When considering a stock for investment purposes, there are usually a number of qualities that always need to be addressed – price-to-earnings, sales, profit margins, dividends, EPS growth, debt, and other items. But one of the things that tend to get overlooked far too often is stock buyback programs.
Stock buyback (or repurchase) programs are a way the companies have to mitigate price declines and reduce the number of overall shares on the market. Usually a company buying its own stock is seen as a positive thing – after all, if the company believes in their own stock, maybe investors should too.
Pros and cons of a stock buyback program
It’s not too difficult to find a stock that has an active share repurchase program. You can usually find out if a company has an active program through a simple Google query or simply check the company’s 10-K statement to find out definitively.
Investors normally view stock buyback programs as a positive thing in a potential investment. It means that the underlying company is literally investing in their own brand sending a message to investors that management is “all-in” on the company’s future. It also creates a price support level for investors – an important takeaway in bear markets since it creates an extra layer of support to prevent the stock from falling too far too fast.
Not all stock buyback programs are a good thing for investors though. Sometimes companies use them to hide poor ratios and skew financial data. Because stock buybacks mean fewer outstanding shares, it makes the earnings per share figure go higher if all other things stay the same. For companies looking for a quick EPS boost, buying back stock can inflate that number without actually doing anything meaningful to the business. It also boosts the stock price since a large number of shares are being purchased. While it’s not necessarily a negative thing to watch a stock you own jump higher, it could just be a way for insiders to sell their shares at a higher price.
Depending on an investors’ needs, a share repurchase program can be a great boon to any portfolio. Having a built-in safety net means lower price volatility, especially during bear markets. But investors should keep a careful watch for companies who are only using buybacks to artificially boost prices or inflate EPS figure.
While stock buyback programs are generally a good thing for investors, they should always follow up to see how and when the stock is actually repurchased. Many times a company will announce a stock buyback program but not actually use it in an attempt to lure investors. Simply announcing a buyback program isn’t enough – investors should always follow up and check to see the company’s history of such programs and whether or not share are actually being bought back.