Corporate share buybacks are on the rise, reports Mark Hulbert of MarketWatch. This is good news for investors who have benefited from the increase in repurchases.
Buyback programs are a way for company to distribute its cash holdings to shareholders, an alternative to dividend payouts. When shares are bought back, each shareholder owns a bigger slice of the company because the number of outstanding shares is reduced. When a company buys back its own shares from the market place, this is often a sign that management has faith in the future performance of the company. If they weren't confident, they would likely hang on to the cash just in case business slumps.
Simply, if a company has 100 shares, then each share owns 1% of the company. If the company buys back 50 shares (effectively canceling those shares), then only 50 shares outstanding remain. This means that, after the buyback, each share owns 2% of the company.
Buybacks can also be used to try and lift share prices after they have fallen. This is because buybacks decrease the number of outstanding shares and the cash flow of the company, which improves several financial metrics, including return on assets (ROA), return on equity (ROE), P/E ratios, and earnings per share (EPS). These are widely used metrics that would improve because of good business performance, but could also be manipulated in order to boost share prices. Be careful when using these numbers in your own analysis.
Amid the dark clouds of global debt issues and weak economic indicators, this buyback activity is a silver lining for harried investors. Of course, "double dip recession" is a catchphrase that has been prominent in the media. There is clearly a lot of uncertainty about where markets are headed.
To jump-start your own analysis, here are this week's five best and worst performing S&P 500 stocks. Do you feel as confident as corporate management seems to be? (Click here to access free, interactive tools to analyze these ideas.)
This Week's Top 5 Performing S&P 500 Stocks
1. J. C. Penney Company
2. V.F. Corporation
5. Sears Holdings
This Week's 5 Worst Performing S&P 500 Stocks
2. Cognizant Technology Solutions
3. JDS Uniphase
4. Alpha Natural Resources
5. CB Richard Ellis Group
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.
Kapitall's Andrew Dominguez does not own any of the shares mentioned above. Data sourced on Finviz
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