3 reasons stock buybacks are booming

Companies shouldn't be criticized so much for repurchasing shares in bull markets, argues one portfolio manager.

By MSN Money Partner Aug 7, 2014 2:53PM
Image: Arrow Up (© Photodisc/Photolibrary)By Victor Reklaitis, MarketWatch

From airlines to 21st Century Fox (FOX), U.S. companies keep buying back their own shares.

Buyback announcements jumped to a three-month high in July after faltering for a couple of months, and 2014 is on track to become the third-biggest year for buybacks ever, according to Minyi Chen, portfolio manager for the AdvisorShares TrimTabs Float Shrink ETF (TTFS), which picks stocks in part on their buyback trends.

He sees three big reasons for the boom in buybacks, and argues that companies shouldn't be criticized so much for repurchasing shares in bull markets. 

Here are the three reasons:

1. Financial engineering: By repurchasing shares, companies can maintain or boost their earnings per share, even when their actual earnings aren't so hot. The buyback shrinks the denominator -- shares outstanding. "You can call it a little bit of financial engineering," Chen told MarketWatch, but he said he sees the logic behind it for a company that wants to bolster its per-share earnings and sustain its stock's momentum.

2. A better way to return money to shareholders: Companies are often criticized for buying back shares instead of investing in equipment or hiring, but Chen suggests that makes about as much sense as blasting dividend payments. He said a buyback is just another way of distributing corporate profit to shareholders, and it could be seen as a better (and increasingly popular) way of doing so because it avoids the double-taxation issue seen with cash dividends.

3. Offsetting employees who cash in: "A lot of people are criticizing the public companies for being poor market timers," Chen said, referring to buybacks ramping up after stocks have climbed. But these critics don't understand that "companies need to buy high," he said, as they try to offset employees cashing in. When stock prices advance, more employees have in-the-money stock options and exercise them, while when stocks drop, employees hold back from exercising their options because they're out of the money, the TrimTabs portfolio manager said.

July had $55 billion in new buybacks announced, the most since April's $56 billion total, according to TrimTabs data. That comes after worries about a drop in repurchase announcements in June

Buybacks announced so far in 2014 total about $300 billion, so this year is unlikely to top last year’s total of $669 billion, while also remaining less than the all-time record hit in 2007. 

How can you play the boom in buybacks? The AdvisorShares TrimTabs Float Shrink ETF is one option, though its assets under management are a modest $145 million, according to ETF.com, which also gives a grade of C to the fund. Chen said the ETF, which launched in October 2011, will attract more money after it has a three-year history. 

"We're slowly getting there, and once we can establish ourselves with a longer track record, it will gather more assets," he said.

More from MoneyWatch

Tags: FOXA
Aug 7, 2014 4:37PM
Now we see why stocks are up besides the money the feds are dumping in it.
Aug 7, 2014 6:18PM
Ain't nothing booming,  but MSNs overactive imagination.
Aug 11, 2014 5:05PM

Companies with lots of cash buy back shares because the transaction is tax free.  If they paid out the money to shareholders they would give the government a huge windfall.  This way they are doing what is best for shareholders.   This is fully a function of the broken tax code and nothing more.

Government and their liberal press sycophants would like to have that money to buy votes from the parasitic classes.  Corporations have decided to either buy back shares or invest it overseas, in the best interests of SHAREHOLDER, and not the parasitic democrats.

Aug 7, 2014 3:39PM
This is just more proof that since most CEO types don't actually know how to run a Company, they have to resort to massive financial Engineering to hide that Very Fact.
Aug 7, 2014 5:14PM
the CEO'S buy back so there golden parachutes are much bigger after they get fired for being ****es 
Aug 8, 2014 6:51PM

Why pay a premium to book value when they can just reinvest in their business at book value?.  Buy backs are truly ignorant waste of shareholder equity.

If they have no investment opportunities then pay dividends.

Aug 7, 2014 4:52PM
When you buy back stock the person you buy it from hopefully has a gain so they will pay capital gains tax on the gain so still double taxed if you want to look at it that way because buying  back stock is done with after tax dollars by corps. Also dividends come every qtr if you sell you don't  get them anymore a buyback is a 1 time deal.
Aug 7, 2014 4:53PM
Just call it as we see it people, another heck of a turn around, up 60 and change on the Dow this morning and down almost triple digits by the close....And as usual they had a couple of sucker's rallies, the last one almost brought as to the flat line early this afternoon but we knew it was matter of time before they would stick it to everyone and manipulated the market down...By now you can see their mo and deal with it accordingly...Remember, these scumbags make their money by dropping indexes, they don't care how or at what expense. cheating is their game and scumbags their name.
Aug 7, 2014 5:13PM
In my opinion a company should buy back its own stock only when it is valued below its long term value as determined by the company's historical P/E.  Otherwise pay the stock owners back with dividends and let them decide what to do with their money.  Of course if the company can invest the money wisely in the company's business that is also OK.
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