Buyback Bonanza

Well, here we are, midway through June. We stock investors have dealt with a lot this month. Earlier today, the Palestinian government dissolved…

Abbas to Dissolve Palestinian Authority Government in Wake of Hamas-Fatah War
By the Editorial Staff, Fox News

…interest rates in most developed nations popped up…

Rising Yields May Not Mean Inflation Angst
By Justin Lahart, The Wall Street Journal (*site requires registration)
https://online.wsj.com/article/SB118177829264934622.html?mod=mkts_main_featured_stories_hs

…more protectionist rhetoric against China from the US Senate emerged…

Bill Targets China's Policy On Currency
By John McCary, The Wall Street Journal (*site requires registration)
https://online.wsj.com/article/SB118176070630834178.html?mod=politics_primary_hs

…and Paris Hilton went back to jail.

Paris Hilton Transferred to Los Angeles Jail
By Steve Gorman, The Washington Post

Amazingly, none of this—even the juicy hotel heiress dish—sunk stocks. Why? For starters, none of the aforementioned is significant news for stocks.

The MarketMinder sees a number of reasons today's world is a beautiful one for stock investing, and today we want to update you on one key driver: equity supply reduction.

Our regular readers will recall the basic logic of buying back stock to automatically boost earnings in an environment where borrowing rates are cheaper than earnings yields. (For a refresher, see our past commentaries, "Flip It to See Stocks' Value," "The Boom Isn't Ending Today," and "If CEOs Don't, Investors Will Do It For Them" for more.)

Standard and Poor's regularly makes adjustments to its S&P 500 when there are large changes in share count. This is something worth noting. Lately, the enormous increase in share buybacks has prompted many instances of inter-quarterly adjustments by Standard and Poors.

So far this year, according to S&P, "The net result [of adjustments] was that nine of the 10 sectors reduced their actual share count, with $99.6 billion in market value being reallocated and the overall market reduction being $67.8 Billion." And remember, this is just for the S&P 500. This kind of activity is going on all over the world, not to mention with US companies not represented in the S&P 500.

But as usual, somehow, some way, the financial press is bent on calling this a negative. There are two recurring "concerns" we hear about share repurchases:

1) Dividend growth is slowing. Apparently we're supposed to be worried that investors aren't seeing enough value from their stocks if they're not getting more dividend growth. Anyone familiar with basic finance theory knows that's absurd. It doesn't really matter how the value is delivered—share price gains or dividends. At today's rates, capital gains and dividends are taxed at about the same rate anyway.

2) We quote S&P: "A short-term price upturn, especially where individuals have cumulatively surrendered large numbers of shares via (direct and indirect) tenders." Yes, you read that right. Higher stock prices, apparently, are a risk in the short term. The logic is that equity supply reduction will put "upward pressure" on stocks now, whereas longer term stock prices will be determined by fundamentals and company performance. To be honest, we don't even know what that means. To us, it's a very simple concept. If you have earnings, and those earnings are divided by the total number of shares, and if you reduce the number of shares, then, by simple math, the amount of earnings per share goes up. There's nothing more to it. Those who claim US companies are over-indebting themselves in the process need to go and check aggregate corporate balance sheets, where they'll find very high credit ratings and a titanic pile of cash.

Share buybacks are a beautiful thing, and the bonanza will continue. Long term rates are still at low or normal levels, and earnings yields remain very high throughout the world.

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Source:
Howard Silverblatt,