Corporations have been using buybacks to “rob Peter to pay Paul” since the Reagan administration created laws that allow it.
According to a Goldman Sachs chart, 2018 was a record year for buybacks, which neared $800 billion for S&P 500 companies alone:
Even though these companies bought back shares, which should have spurred investment in more companies, that didn’t keep the S&P from dropping 6 percent by the end of 2018. But corporations are still getting a benefit…
“Buyback Monsters” Perform Market Illusion
This “sleight of hand” illusion allowed Apple to increase their market cap by $118 billion in 2018 on news that it would complete share buybacks in the amount of $210 billion.
They used tax incentives along with other forms of capital to complete the buyback. This move only helped Apple’s economy and their shareholders.
But they’re not the only company that has pulled off this amazing magical feat. Home Depot and “nearly 80 others”are also dipping into the “buyback gravy train.”
Home Depot is in a class of corporations I call “buyback monsters,” companies that have reduced their share count outstanding by at least 25 percent since 2010. It is by no means alone. Nearly 80 companies in the S&P 500 have reduced their share count by at least 25 percent since 2010, and more than 100 (20 percent) have reduced their share count by 20 percent or more, including some of the best-known companies in America.
Using Home Depot’s 35% share buyback as an example, a CNBC article highlighted another implication of being a member of the “buyback monster” club:
All other metrics being equal, Home Depot’s 35 percent share count reduction means that earnings appear 35 percent better, without any change in “fundamentals” like revenues, costs or taxes.
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