U.S. stock buybacks are back.
According to Morningstar, U.S. companies have already announced over $150 billion stock buybacks this year, which is a huge increase from the less than $20 billion announced during the same period last year.
While enormous, these new cash commitments are just a fraction of the $1 trillion U.S. non-financial companies have sitting on their balance sheets.
So is this good news or bad news? Well, for the stocks in the near-term, additional buying support provides price support, and if you think a company is undervalued then you should be happy with it buying back its shares since this will increase the value per share of its remaining shares. Paying nickels for dimes is a good deal, as long as your dimes don’t turn out being pennies as was the case with many buyback programs ahead of the financial crisis. Still though, given the depressed prices these days, buybacks are probably good deals for many U.S. companies, such as say a Pepsi (PEP) or McDonald’s (MCD) which I happen to think are undervalued relative to the enormous global franchises they are today and where they’ll be in five years.
Thing is, even if individual companies are getting a decent deal for their buybacks (let’s assume all are for the moment), in terms of the greater economy right now, a surge in buybacks might signal that U.S. companies don’t see many expansion opportunities right now, or that they aren’t confident in the sustainability of current U.S. GDP growth. Money used for buybacks is money that isn’t used for creating jobs, research, or new business lines.
Thus buybacks might be good for some individual stocks while at the same time signaling sluggish U.S. growth ahead.
(The author owns shares of McDonalds, Morningstar tip via Abnormal Returns)