Corporations Artificially Make Themselves Look Good By Buying Their Own Stock
Stock buybacks by corporations are one of the main factors driving up stock prices.
John Crudelle explains:
There’s another kind of market rigging that is also going on. This is being done by companies themselves.
Since corporate profits and revenues aren’t growing enough to justify current high stock prices, companies have been aggressively buying back massive quantities of their own shares.
By doing this, companies reduce the number of their shares owned by the public. This accounting trick boosts the calculation of profit-per-shares because the numerator of the equation (earnings) remains the same while the denominator (outstanding shares) is reduced.
Paul Buchheit notes:
In 1981, major corporations were spending less than 3 percent of their combined net income on buybacks, but in recent years they’ve been spending up to 95 percent of their profits on buybacks and dividends.
Business Insider points out:
Goldman Sachs’ David Kostin believes a temporary pullback may explain why the S&P 500 has tumbled from its all-time high of 2,019 on Sept. 19.
“Most companies are precluded from engaging in open-market stock repurchases during the five weeks before releasing earnings,” Kostin notes. “For many firms, the beginning of the blackout period coincided with the S&P 500 peak on September 18. So the sell-off occurred during a time when the single largest source of equity demand was absent.
In other words, when companies stop buying so much of their own stock, the stock market goes down.
Indeed, zombie banks are so eager to redeem their shares that they are financing buybacks with preferred shares of stock they may never redeem.
A soaring stock market is not the only effect of corporate buybacks.
The Washington Post, Harvard Business Review, U.S. News and World Review, Forbes and others note that – while corporate buybacks may benefit a handful of people at the companies doing them – they hurt the economy as a whole.