Fisher Investments Editorial Staff
Market Cycles

Paring Shares

By, 10/05/2010
 

Story Highlights:

  • Share buybacks have been on the rise.
  • Compared to 2009, share buybacks by US firms have increased five-fold so far in 2010.
  • Supply and demand determine stock prices—and share buybacks shrink the overall stock supply, positively pressuring stock prices.
  • As firms start to spend more of their savings, expect to see stock repurchases increase even more. 

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(Editor's Note: MarketMinder does NOT recommend individual securities; the below are simply examples of a broader theme we wish to highlight.) 

Among friends, sharing is caring, but between companies and investors, it might be better to do the opposite—share buybacks have been on the rise lately, and that typically is a good sign for stock prices.  

Just a few of many examples: IBM spent over $8.1 billion so far in 2010 on share repurchases. Wal-Mart spent a little less, about $7.8 billion. Microsoft, the software giant, bought back $5.8 billion worth of its stock, while Procter & Gamble spent $4.6 billion—and it doesn't stop there 

All this share buyback activity shouldn't be too surprising. Low-cost financing is widely available, and companies are sitting on historically huge corporate cash hoards that earn little interest. With stocks' earnings yields (the inverse of the P/E ratio) at such attractive levels relative to prevailing interest rates, firms can buy back their own stocks to give their per-share earnings a boost. In fact, since June, US firms have announced over $55 billion in share buybacks, adding to the more than $200 billion in the first two quarters of 2010—compared to the $125 billion spent for all of 2009. So far, US firms' share buybacks through Q3 are five times what they were through Q3 2009. 

Why is this good news? We've said it before: The stock market is all about supply and demand. Share buybacks shrink the overall stock supply—which, all else equal, puts positive pressure on stock prices. And the other side of the equation (demand) should help too. The National Bureau of Economic Research recently announced the US recession ended in June 2009, yet few believe the economy is improving. Each time the recovery fails to implode, more investors will likely be drawn to stocks' attractive valuations and higher potential return. Unfulfilled worry is an important bull market engine—and there's plenty of it right now.  

Recent share buybacks are only the beginning—repurchases are still well below record levels, and stocks continue to be hugely undervalued relative to other similarly liquid asset classes. As the recovery forges ahead, supply and demand look well-aligned to keep the bull running.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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