The Effect of Share Buy Backs: Re-issue of Past Post

We issued this newsletter before and we want to emphasize its importance as US corporations preserve cash & reduce share buy backs in the short term. The virus panic has now spread to corporate america as they move to preserve cash given short term economic uncertainty. Buy backs have not only fueled earnings growth as we discuss below but acted to fuel share appreciation in past years through direct share purchases in the market. Now that it has waned this may be adding to the short term market pressure since a major buyer ie US corporations has slowed involvement at least for now. Further buy backs acted to inflate earnings making stocks attractive fundamentally. The question will be as more certainty occurs and the virus passes to what extent will buy backs return?

Below was our original post:

As the major banks report earnings, we wish to re-emphasize a point we have made in the past. A significant portion of past EPS growth of public companies in the S&P500 has been driven by buying back shares using cheap low interest rate money from the Federal Reserve as well as debt. The recent earnings reports from major banks re-emphasizes this point as they are ground zero of this occurring. Why this is so important to understand is that earnings in 2019 for the most part DECLINED and would have been much worse if not for the buybacks. This buyback is expected to continue in 2020, but if it wanes tied to slower economic activity straining company cash flow earnings will be negatively impacted EVEN MORE. Many large cap technology companies are creating the same accounting magic via share buybacks artificially boosting report earning PER SHARE (if shares fall the Earnings / Shares number goes UP). It is something to consider the very least when investing.

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