Stock buybacks — when a company buys its own shares — can make it appear like a company is doing quite well. They drive up a company’s EPS and they make balance sheets attractive by sopping up excess cash. Plus, with a more expensive share price, a company is less likely to get taken over.
What’s not to love?
Plenty, according to Josh Brown, the Vice President of Fusion Analytics. Talking on CNBC he called it a contrarian indicator.
First off, the word is “appearance”. After all, it’s not as if this changes a company’s share count. This is a tool to make balance sheets appear more healthy and prevent share dilution, even if the company has not made any innovations or changes to its product or structure.
Furthermore companies are historically bad investors. “When do you see these share buy backs spike? Well you see them at market tops. 2004 to 2008 the S&P 500 bought $1.8 trillion worth of their own stock. That’s up in smoke!” Brown said.
Finally companies can buy shares with borrowed money (at interest rates of almost zero). That means they’re essentially transferring funds from shareholders to employees for almost nothing.
Don’t miss: 10 Market Myths Get Debunked >