Explained : Share Buybacks and it’s impact

0
231
Share Buybacks
Share buybacks

Whenever a company announces share buybacks it always bring positive sentiment and push the share prices higher ( at least for short term ) But who actually is benefited from it ?

Only investors or insiders of that company who sell the stock ! it is hard truth .Let’s take a simple example to understand share buyback process and it’s impact.

Company Y earning is 10$ . It has 100 shares in market.

Next year they Made 10$ in earning. They will be announcing EPS 0.2$ ( EPS Got Doubled ! ) This Normally boost the share price . (Insiders of the company Sells many of their stock and Regular investors keeps buying )

As they spent all their cash they don’t have much left in driving growth hence next year earning is 10$ and resulting EPS is same 0.2$ (Stock drops !).

This might be too simplified version it, But when most of the companies in S&P500 or UK100 does the final result is scary , Based on research 40% of the stock upside in S&P500 is driven by Share buy backs ! in chart this looks something as below :

In other words, in the absence of share repurchases, the stock market would not be pushing record highs of 4600 but instead levels closer to 2800.

To see this in action we can take a look at below chart.

Bull Market Buybacks, 40% Of The Bull Market Is Due Solely To Buybacks
Share buy backs Vs S&P500 US market performance

During Pandemic corporates used their cash to trigger huge share buybacks that result into 108% upside of Stock from march-2020 low ! Yellow lines in the above chart shows 1Year Actual change of Share buy backs .

What does all means for your investment ?

Try to understand why the stock buy backs are happening , Check Insider activities before after and around this news , this should help you to make better decision and in some case you can choose to liquidate the position fully or partially.