Big Corporate Stock Buybacks Could Drive U.S. Markets Higher

Hefty corporate stock buybacks may be a good sign for the economy according to some bull-minded analysts. Companies including big names such as Disney (NYSE:DIS), IBM (NYSE:IBM), Berkshire (BRK.A), and Amgen (NASDAQ:AMGN) have allotted $453 billion for purchasing back shares of their own stocks. Bloomberg reports that these totals are the third highest buyback amounts in recent history behind only 2006 and 2007, according to a study by Birinyi Associates.

Some analysts believe these expenditures show a vote of confidence for the economy. Bloomberg quoted James Paulsen, chief investment strategist at Wells Capital Management, who said, “If the corporate community really agreed on the idea we’re heading to a recession, they wouldn’t be buying back their stock.” Buybacks can also bode well for investors by reducing the number of shares available in the marketplace and therefore increasing the company’s earnings per share.

But not everyone agrees with this sunny outlook. Some view stock buybacks as a sign that the companies don’t have anything better to do with their money due to economic stagnancy. Gregor Smith, a fund manager at Daiwa Asset Management, believes that investors would benefit more from funds being spent on equipment or issuing dividends. “I’d rather see cash used for investment. At the end of the day, there is a short-term illusory benefit from having fewer shares in issue,” says Smith per Bloomberg.

Further Reading: American Stock Buybacks Reach Highest Level in Past 4 Years>>