Stock Buybacks Can Be Nothing But Glorified Accounting Schemes

wall street sign

wall street (2)One particularly jaded and cynical way to look at the seeming epidemic of stock buyback schemes on Wall Street is to simply dismiss them as accounting scams. Seriously. It is very easy to see the math. Let’s say a company has 100 million shares and it has a lot of available cash while suffering from a relatively low stock price. One particularly effective way to quickly boost its stock price is to reduce the number of shares available. Think about it. Since company earnings are calculated at an earnings-per-share basis, one of the most effective ways to make your company look attractive using a price-per-earnings metric is to simply reduce the number of shares available. This can produce a very nice P/E appreciation.

Accounting tricks aside, these is also a big share of public perception involved. When a company announces a share buyback, it unleashes all sorts of market mechanisms that would lead more investors to value the stock. Not surprisingly, many would-be stock purchasers would factor in the existence of a share buyback program or the possibility of such a program into their stock picking decisions.

It remains an open question whether or not such stock buyback schemes, in and of themselves, truly help propel stock prices upwards. Regardless, what is indisputable is that there is a current trend on Wall Street for companies to announce stock buybacks. From my perspective, I think that a lot of these buyback programs are a waste of money. Companies can put some of that money into dividends and devote the rest to growing the company through strategic investments, or, depending on the industry of the company in question, buying growth by acquiring companies that can add growth to the acquiring company’s bottom line.

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