Investing: The Good-Bad-Good of Share Buybacks

This is very much in vogue in the US. Share buybacks total US$750 billion year-to-date, already more than 2017’s full-year number. Goldman Sachs estimate it could reach US$1 trillion by year-end. Corporate tax cuts in the US have been the main ingredient fuelling the fire, combined with record levels of cash on hand at some of the world’s largest companies.

From an investor’s perspective buybacks can be broken into three groups depending on how deeply you investigate them – these are the “good-bad-good” of share buybacks.

The good: At a shallow level of analysis

When a company decides to buy back shares, it reduces the number of shares outstanding. This, in turn, drives up the price - a sugar rush for investors. This also increases earnings per share (albeit artificially), fuelling a perception of stronger earnings. All good, at a superficial level.

The bad: Digging deeper

All sugar rushes are followed by a crash. For share buybacks, the crash is the perceived conflict of interest and manipulation. In the US, companies are required to report earnings quarterly, which increases the focus on near-term earnings at the expense of long-term investments.