Large U.S. companies with plenty of cash on hand have four choices: sit on the money, buy back stock, give higher dividends or buy another company. Of these choices only raising the dividend tends to be positive for investors.
Share buybacks – which most investors think is wonderful – too often ends of being a stupid move. Buybacks reduce the number of shares outstanding, and raise the price earnings ratios. But for the gamble to work, the company’s stock price must RISE after the share buybacks.
The latest report from Thomson Reuters shows that most companies paid too much money for their stock.
“We found that surprisingly few companies were able to repurchase shares at lower prices as well as see future price appreciation within the following 12 months,” says the report.
“According to the report, out of 380 companies in the S&P 500 that repurchased shares in at least five of the quarters, 84 companies bought shares when the stock price was high, and only 60 firms were able to buy low,” said CNBC news. “In addition, 72 companies saw poor returns within a year following share repurchases, versus 57 that saw good results.”
