Are Stock Buybacks Less Effective in a Bear Market?
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This Wall Street Journal article raises a very interesting question: Are stock buyback programs becoming less effective thanks to current market conditions?
The article points out that many companies involved in large scale share repurchase programs are not following a rudimentary principal of investing: buy low, sell high. Due to the current credit crunch that is ultimately slowing the U.S. economy, corporations are now realizing that they maybe should have held onto cash and waited for a better time to buyback shares, if at all.
The WSJ article informs readers that the Federal Reserve has reported a $1.5 trillion loss in the value of equity securities over the last five years as a result of shares being eaten up through buybacks and mergers or buyouts. Now that the economy is slowing, companies are having a tougher time keeping balance sheets clean, and certainly some of the $1.5 trillion in cash that disappeared over the last few years could now be crucial considering market conditions.
Going on, the article talks about how stock buyback programs have become so popular and trendy that some companies have even began borrowing money in order to initiate share repurchase programs. The WSJ article blames this problem on extremely high investor demands - investors who are always looking for catalysts to drive stock prices higher.
Examples of companies who could be currently dealing with such buyback issues include Freddie Mac (NYSE: FRE), which repurchased more than $1 billion this year, Countrywide Financial (NYSE: CFC), which bought back about $2.4 billion, and Home Depot (NYSE: HD), which recently halted its stock buyback program until further notice.
It is not hard to notice that each of the companies listed above are now dealing with problems related to the credit crisis. A dilemma which could be turning into a potential death blow for several companies appears as if it could have been easily solved by keeping cash used for buybacks on the balance sheet for just a little longer.
The article points out that many companies involved in large scale share repurchase programs are not following a rudimentary principal of investing: buy low, sell high. Due to the current credit crunch that is ultimately slowing the U.S. economy, corporations are now realizing that they maybe should have held onto cash and waited for a better time to buyback shares, if at all.
The WSJ article informs readers that the Federal Reserve has reported a $1.5 trillion loss in the value of equity securities over the last five years as a result of shares being eaten up through buybacks and mergers or buyouts. Now that the economy is slowing, companies are having a tougher time keeping balance sheets clean, and certainly some of the $1.5 trillion in cash that disappeared over the last few years could now be crucial considering market conditions.
Going on, the article talks about how stock buyback programs have become so popular and trendy that some companies have even began borrowing money in order to initiate share repurchase programs. The WSJ article blames this problem on extremely high investor demands - investors who are always looking for catalysts to drive stock prices higher.
Examples of companies who could be currently dealing with such buyback issues include Freddie Mac (NYSE: FRE), which repurchased more than $1 billion this year, Countrywide Financial (NYSE: CFC), which bought back about $2.4 billion, and Home Depot (NYSE: HD), which recently halted its stock buyback program until further notice.
It is not hard to notice that each of the companies listed above are now dealing with problems related to the credit crisis. A dilemma which could be turning into a potential death blow for several companies appears as if it could have been easily solved by keeping cash used for buybacks on the balance sheet for just a little longer.
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