We hear a lot about surplus corporate cash, and how executives are afraid to spend it because of economic uncertainty.
So when a company chooses to spend cash to buy back its own shares, that's a big vote of confidence in the firm's future.
And that's just the type of spending they've been doing.
"...share buybacks rose 49% in the third quarter (versus the same quarter in 2010), the ninth straight quarterly increase. Analysts using standard assumptions about market causality view the trend as bullish. Their logic goes like this: Purchases reduce the number of shares outstanding and therefore increase earnings per share (assuming that earnings remain stable). Our chart shows this conclusion to be 180 degrees from the truth. The irony of buybacks is that when they reach peak popularity, companies pour all their available cash into their own shares only to have the value gobbled up almost immediately by a bear market. We see the current buyback craze as a sign of a psychological extreme..."
Financial Forecast, January 2012
Here's the accompanying chart (minus the wave labels):
Note that the buybacks surge has well exceeded the 2000 level, and is approaching the record peak in 2007.
Warren Buffett has been among those buying back their own company's shares. The latest Financial Forecast says:
"Previously, Buffett derided buybacks, saying that through them companies tend to overpay 'departing shareholders at the expense of those who stay.' He made the comment in March 2000, which turned out to be pretty prescient, as it happened to be a high point of a then-record buyback frenzy..."
Given that the Oracle of Omaha is buying back Berkshire shares, could that be a sign that this time is different -- that we're heading into a rip-roaring bull market? After all, the market appears to be "holding up" so far in 2012.
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