It’s beyond dispute: U.S. companies are announcing big plans to buy back their own shares. What is not so certain is whether this constitutes good news.
Mark Hulbert, founder of Hulbert Financial Digest, thinks that the recent spate of buyback announcements by companies such as Philip Morris, Colgate-Palmolive, United Health and Amazon is cause for rejoicing. He points out that if buyback activity continues at its current pace, the total for 2010 could easily double the 2009 level.
Share buybacks suggest that managers think their shares are undervalued. Buybacks also signal that companies are finally deciding to spend their cash hoards. And that, in turn, suggests that the economy may get a boost in the months ahead as corporate coffers pop open and money pours out.
The problem is that buybacks don’t always signal good news. While they can be a sign that companies think their shares are undervalued, buybacks can also be a way for management to offset the dilution caused by stock-option plans.
Megan Barnett of the Minyanville blog points out that buybacks have a knack for being badly timed. The volume of stock buybacks in the United States peaked in 2007, when the Dow reached a record high. In that case, buybacks proved to be a sign of a market top, not a market bottom.
Freelance business journalist Ian McGugan blogs for the Financial Post.