Stock buy-backs

E.S. Browning at the WSJ uses evidence that corporations are the biggest buyers of stock to suggest that corporate purchases of stock are the biggest driver of recent stock market success.  It is surely true that purchasing treasury stock (to use the accounting term) is likely to have a positive influence on a company’s share price because it increases Earnings Per Share (EPS) by reducing the denominator and also increases the demand for the company’s shares.  It is a way to tread water or perhaps do a little better.

MWG thinks there is a more important point here.  There are a large number corporations with cash to invest that are choosing to purchase treasury stock rather than invest in something new.  According to Mashable, 2013 was a slow year for tech start-ups.  Both are bad for the economy but not for the stock market because that is (almost entirely) established businesses.  Fewer start-up put less of a challenge on established businesses.  Treasury stock allows EPS to grow by shrinking the company.  Each share is more valuable but outcome on the value of the whole company is uncertain.  Since investors own share they are happy with the outcome.  It is a nice short-term solution.  Before long the economy will need to become serious about growth.  Right now all manner of investors are telling the government that there are limited opportunities.  We need to remove the restrictions.


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