Q: Are stock buybacks really easy money for investors?
A: Investors know the buyback drill. A company announces a plan to either buyback shares or boost an existing buyback plan, and the stock often goes higher.
Investors love buybacks because, in theory, the company is using its cash to reduce the number of shares outstanding. The fewer shares outstanding, the fewer slices earnings must be cut into. That means each investor should get a bigger part of the bottom line.
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That's the theory. But the reality is much different. Companies spent 39.5% more in the third quarter buying back their stock than they did in the same period of 2012. Interestingly, because of the stock market rally, companies paid nearly 20% more during the quarter to buy the shares than they would have a year ago.
Is this spending paying off for investors? Not really. Companies have been issuing new shares, in large part as payment to officers and employees, negating at least part of the benefit of the buybacks, says Howard Silverblatt of S&P Dow Jones Indices.
The number of shares outstanding actually rose about 1% in the third quarter, he says. Investors must be careful to not assume that just because a company is buying back its shares, that it will benefit them.