Are Companies That Buy Back Their Stock More Likely to Raise Their Stock Price?

Are Companies That Buy Back Their Stock More Likely to Raise Their Stock Price?




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Are Companies That Buy Back Their Stock More Likely to Raise Their Stock Price?

Are Companies That Buy Back Their Stock More Likely to Raise Their Stock Price?

By www.Options-Trading-Education.com

Retirees looking for stable income often buy dividend stocks. Unfortunately of late these stocks have not been participating in market gains. In fact a handful of tech giants like Google with a 25% rise in the last twelve months are leading the way while utility stalwarts like Southern Company (SO) are trading flat. On the other hand many expect the market to correct at some point at which point the current leaders will falter and money will rush back to the safety of consumer stocks and utilities. Meanwhile if you are looking for a combination of cash dividends and steady growth what do you do? This brings us to the subject of stock buy backs. A company making money can put their cash in the bank, pay dividends or buy back stock. Are companies that buy back their stock more likely to raise their stock price? Investopedia looks at the impact of share repurchases.

A share repurchase or buyback simply refers to a publicly traded company buying back its own shares from the marketplace. Along with dividends, share repurchases are an avenue for a company to return cash to its shareholders. Many of the best companies strive to reward their shareholders through consistent dividend increases and regular share buybacks. A share repurchase is also known as “float shrink” since it contracts a company’s freely traded shares or share float.

Buying back stock raises earnings per share as the company now has fewer shares outstanding. Since investors commonly use earnings per share as a guide to buying stocks this may end up raising share price as more investors bid up the remaining shares. Does this work over time? As proof look at the S&P 500 Buyback Index. The 100 stocks in the index are those with the highest share repurchase ratios in the S&P 500. This group has appreciated by 7.8% year by year in the last decade. The entire S&P 500 grew 4.72% year upon year.

Current versus Future Earnings

Retirees need income as they go but they also need their stocks to appreciate as well. While dividends are immediately cash in hand cash repurchases tend to add to long term stock appreciation. Apple is a case in point. The Motley Fool looks at Apple’s share repurchases.
Most of the time, companies opt to merely offset the dilution associated with stock-based compensation to employees. But Apple buys back its stock hand over fist, and the result is a significant reduction in shares outstanding. Look no further than Apple’s share count since its capital return program started back in late 2012.
Outstanding Apple shares have fallen from 6.62 billion in 2012 to 5.24 billion today. Since a low in 2013 of a share AAPL has gone up to 7 a share today. During that time the company has also routinely paid a dividend now at 1.64% a year. For retirees, or any investor, it would appear that investing in a stock that can pay dividends and buy back shares as well is a good idea. Companies that buy back their stock tend to raise their stock price.

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