Are Companies That Buy Back Their Stock More Likely to Raise Their Stock Price?

Are Companies That Buy Back Their Stock
More Likely to Raise Their Stock Price?
By www.Options-Trading-Education.com

http://www.options-trading-education.com/24594/are-companies-that-buy-back-their-stock-more-likely-to-raise-their-stock-price/
Retirees looking for stable income
often buy dividend stocks.

Unfortunately of late these stocks
have not been participating in market
gains.

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Before We Continue…

In fact a handful of tech giants like
Google with a 25% rise in the last
twelve months are leading the way
while utility stalwarts like Southern
Company (SO) are trading flat.

On the other hand many expect the
market to correct at some point at
which point the current leaders will
falter and money will rush back to the
safety of consumer stocks and
utilities.

Meanwhile if you are looking for a
combination of cash dividends and
steady growth what do you do?

This brings us to the subject of stock
buy backs.

A company making money can put
their cash in the bank, pay dividends
or buy back stock.

Are companies that buy back their
stock more likely to raise their stock
price?

Investopedia looks at the impact of
share repurchases.

A share repurchase or buyback
simply refers to a publicly traded
company buying back its own shares
from the marketplace.

Along with dividends, share
repurchases are an avenue for a
company to return cash to its
shareholders.

Many of the best companies strive to
reward their shareholders through
consistent dividend increases and
regular share buybacks.

A share repurchase is also known as
“float shrink” since it contracts a
company’s freely trading shares or
share float.

Buying back stock raises earnings per
share as the company now has fewer
shares outstanding.

Since investors commonly use
earnings per share as a guide to
buying stocks this may end up raising
share price a more investors bid up
the remaining shares.

Does this work over time? As proof
look at the S&P 500 Buyback Index.

The 100 stocks in the index are those
with the highest share repurchase
ratios in the S&P 500.

This group has appreciated by 7.8%
year by year in the last decade.

The entire S&P 500 grew 4.72% year
upon year.

Current versus Future
Earnings

Retirees need income as they go but
they also need their stocks to
appreciate as well.

While dividends are immediate cash
in hand cash repurchases tend to add
to long term stock appreciation.

Apple is a case in point. The Motley
Fool looks at Apple’s share
repurchases.

Most of the time, companies opt to
merely offset the dilution associated
with stock-based compensation to
employees.

But Apple buys back its stock hand
over fist, and the result is a significant
reduction in shares outstanding.

Look no further than Apple’s share
count since its capital return program
started back in late 2012.

Outstanding Apple shares have fallen
from 6.62 billion in 2012 to 5.24 billion
today.

Since a low in 2013 of $60 a share
AAPL has gone up to $157 a share
today.

During that time the company has
also routinely paid a dividend now at
1.64% a year.

For retirees, or any investor, it would
appear that investing in a stock that
can pay dividends and buy back
shares as well is a good idea.

Are Companies That Buy Back Their Stock More Likely to Raise Their Stock Price?

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