Stock ​Buybacks Are Back

Guild Investment Management  |


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We have noted before that a great deal of performance of the long bull market that began in March 2009 can be attributed to the demand for stocks created by companies that are buying their own stock back (some analysts believe that they are in fact the only net purchasers of stock). This phenomenon is in full swing in 2018, bolstered by tax reform. While many companies are ramping up capital expenditures, many are also buying back stock -- overall, S&P 500 companies are buying back their own stock at the greatest pace since 1998. The buybacks may be having an effect: the group of the top 20 share repurchasers in the S&P 500 are significantly outperforming the index for 2018 so far. Further, although 2018 has seen significantly more volatility than recent years, it is likely that this volatility has been somewhat dampened by the extent of stock buybacks. Apple (AAPL) (AAPL) announced a $100 billion buyback during their reporting of first-quarter earnings, which helped power its stock to a new all-time high.

(The tax reform windfall is giving fuel to buybacks, but they are also being driven by the demand for corporate debt. Since 2009, with interest rates at historic lows, corporations have issued debt and used the proceeds to buy back shares -- helping boost earnings-per-share and allowing management to hit performance targets. That debt in turn has been used, as we noted in the article above, to fuel leveraged debt funds employed by pensions as they attempt to earn their needed 7% returns in an extremely low-interest-rate environment.)

We believe that these trends are likely to continue throughout 2018. We do not believe that buybacks are an infallible key to performance for a company’s stock; some buyback leaders have underperformed the market. On the whole, though, in a period in which the market seems to be unnerved by an endless series of economic, financial, political, and geopolitical worries, buybacks will continue to provide a measure of stability.

Investment implications: Has 2018 been a more volatile year? Yes, it has. But on the bright side, there continue to be many underlying trends supporting U.S. markets. Besides the fundamental economic and financial positives, companies are continuing to buy back their own stock -- and overall, this will continue to have a positive and stabilizing effect on markets. Please note that principals of Guild Investment Management, Inc. (“Guild”) and/or Guild’s clients may at any time own any of the stocks mentioned in this article, and may sell them at any time. Currently, Guild’s principals and clients own AAPL. In addition, for investment advisory clients of Guild, please check with Guild prior to taking positions in any of the companies mentioned in this article, since Guild may not believe that particular stock is right for the client, either because Guild has already taken a position in that stock for the client or for other reasons.

To learn more about Guild Investment Management, please go to www.guildinvestment.com.


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DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
AAPL Apple Inc. 190.60 3.80 2.03 29,080,177 Trade

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