Companies are buying back their shares again
This week’s Economist mentioned that Companies are buying lots of their own shares again:
“Although companies collectively were the biggest net buyers of shares before the financial crisis, buy-backs fell by the wayside when the markets froze in 2008 and firms began clinging to any cash they did not urgently need to spend. Sooner than might have been expected, however, companies have regained confidence in their financial health.”
This reminds me of what Smithers and Wright had to say in their book Valuing Wall Street:
“household and overseas investors have increasingly, and sensibly, been net sellers of stocks…corporations have simultaneously switched to being net buyers, despite the fact that, in order to do so, they have had to raise additional, and far from cheap, financing. If this seems more than slightly crazy, it is…The fact that it has been allowed to happen may well appear, after the greatest bubble of the twentieth century has broken, to have been one of the greatest follies of the twentieth century.”
Remember, they were talking about about the last bubble that ended in 2000, not the current one.
The likely source for The Economist article is the latest U.S. Flow of Funds Accounts, which do indeed confirm (in table “F.213 Corporate Equities”) that after a brief lull last year, nonfinancial corporate purchases of equities are back up again to levels somewhat below their peak in 2007, and significantly higher than those Smithers and Wright were complaining about ten years ago.
The Economist’s explanation for what’s going on is not terribly optimistic:
“In practice, buy-backs tend to occur when firms lack other sensible uses for their cash. So their reappearance may mean that firms are pessimistic about the broader economic outlook.”
In other words, rising stock markets are just another sign of our current malaise.
1 Valuing Wall Street by Andrew Smithers and Stephen Wright. McGraw Hill, 2000, pages 151-2