Why Increased Buybacks May Not Be a ‘Buy’ Signal

Why Increased Buybacks May Not Be a ‘Buy’ Signal

Printer-friendly version
a a
Type Size: Small

Corporate stock buyback announcements just keep coming. The folks at Birinyi Associates track this data, and on Wednesday they reported that companies announced a whopping $57.1 billion in new authorizations in May, bringing the year-to-date total to $343 billion, 83 percent more than 2012.

At this rate, 2013 is on track to become second only to 2007 in terms of the number of buyback authorizations. But if you’re waiting for this to translate into higher stock prices, there are three factors to ponder.

First, not all companies that put in place buyback authorizations actually follow through by repurchasing shares. Second, many of those buybacks don’t end up reducing the number of shares outstanding, since companies need to issue shares as employees exercise in-the-money options to purchase company stock. The companies don’t want those option grants to dilute the number of shares outstanding, so they simply buy back shares. That, in turn, means that buybacks aren’t always a signal that companies think their stocks are a bargain at current prices.

Indeed, buyback activity can actually pick up as stock prices rise and more insiders exercise options. So even if the blistering pace of buybacks continues, investors need to exercise caution in reacting to this particular market “indicator.”

Business journalist Suzanne McGee spent more than 13 years at The Wall Street Journal before turning to freelance writing. Author of the book Chasing Goldman Sachs, she has written for Barron’s, The Financial Times, and Institutional Investor.