Stock Buy Backs....Buying High

[Rickshaw Man]

For the past few years, corporations have been borrowing money to buy back their stock. What happens when the average price paid falls below the current prices. This had been propping up their balance sheets.

What happens when rates rise and prices fall?

 

[ET180]

That's what happened before the GFC. Companies bought the most of their own stock in 2007 near the highs, least in 2009 near the lows. Same as in Q1 2020. When stocks were at their lows, buybacks stopped. Then last year in Q3 after the S&P more than doubled from their lows the previous year, buybacks were at record highs. This mirrors individual investor behavior. People tend to buy the most at highs and the least at lows.

https://www.yardeni.com/pub/buybackdiv.pdf

 

[qlai]

Why do you say “borrowing?” Don’t they (legitimate companies) just use cash to buy stock? So they reduce shares outstanding which improves per-share earnings. I assume lots of cash-hoarding tech companies will buy shares on this pull back. Unless they would rather buy other companies. Either way, should be bullish.

 

[Nine_Ender]

Why do you say “borrowing?” Don’t they (legitimate companies) just use cash to buy stock? So they reduce shares outstanding which improves per-share earnings. I assume lots of cash-hoarding tech companies will buy shares on this pull back. Unless they would rather buy other companies. Either way, should be bullish.

It's kind of funny how many traders have completely forgotten about 2009-2013 ( or 2016 ) and seem quite capable of making the same mistakes as others back then in coming years. Last forecast I heard was +15% earnings growth in 2022 ( 2021 was even better ) and NA economies are looking at +4-5% GDP ( and a tight job market ). Yet traders on here are talking about deep recessions, carnage in markets, margin calls. It's a complete disconnect from reality. Even if we get such a event in the future, it won't be in 2022.

I don't know what US indexes will do this year but a modest increase ( but choppy as hell ) seems about right. Every drop this week the blue chips with growing earnings were bought up. I know because I have been looking for entry points for family members and possibly myself if the commodity trade slows up or reverses. Devoid of any huge negative catalyst, these 10-20% corrections are usually good buying opportunities in quality names that get dragged into the mess.