Buybacks have been put back into the spotlight as boogeymen. Earlier this week, Senators Chuck Schumer and Bernie Sanders wrote an op-ed in The New York Times attacking share repurchases. Among their accusations were that stock buybacks mostly benefit the wealthy and divert money from being spent on capital expenditures, salary increases and other worker benefits.
It’s not the first time buybacks have been criticized and I doubt it will be the last. Making buybacks a scapegoat is an easy sound bite to score political points with. The reality about share repurchases is more complicated; as such, I’m going to provide some perspective.
If you invest in stocks, you should prefer companies with either falling counts of shares outstanding or at least no increase in the number of shares outstanding, all other things being equal. Such stocks have outperformed by a big margin, with annualized gains of 17.5% and 16.6% based on data from Dartmouth professor Kenneth French’s data library for the period of 1964 through 2018. You also want to avoid the companies with the largest increases in share counts; such companies have annualized returns of just 4.4%.
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More on AAII.com
- Stock Buybacks: Misunderstood, Misanalyzed and Misdiagnosed – For another view of buybacks, I suggest reading this 2015 AAII Journal article by New York University professor Aswath Damodaran.
- The Cash Flow Statement: Tracing the Sources and Uses of Cash – If you want to see how a company is spending its cash, look at the cash flow statement. This primer will help familiarize you with it.
Highlights from this month’s AAII Journal
- The Individual Investor’s Guide to the Top Mutual Funds 2019 – This popular guide helps to compare and contrast 727 funds. Plus, an expanded worksheet gives you detailed data on more than 1,600 funds.
- Majority of Retirees Regret Not Saving More for Retirement – Many retirees say they wish they had saved more for retirement, with more than a third retiring earlier than planned.
AAII Sentiment Survey
Optimism jumped to its highest level in three months, though not far above its historical average. Plus, this month’s special question asked AAII members what they thought about the Federal Reserve potentially pausing its rate-tightening cycle. More about this week’s results.
This week’s results:
- Bullish: 39.9%, up 8.1 points
- Neutral: 37.3%, up 0.9 points
- Bearish: 22.8%, down 9.0 points
- Bullish: 38.5%
- Neutral: 31.0%
- Bearish: 30.5%
Take the Sentiment Survey.
AAII Asset Allocation Survey
Equity allocations jumped to a 12-month high. Plus, AAII members discussed what, if any, allocation changes they plan to make this year. More about the latest results.
January AAII Asset Allocation Survey results:
- Stocks and stock funds: 71.2%, up 8.8 percentage points
- Bonds and bond funds: 15.5%, down 0.3 percentage points
- Cash: 13.3%, down 8.4 percentage points
January AAII Asset Allocation Details:
- Stocks: 33.3%, up 5.4 percentage points
- Stock Funds: 38.0%, 3.4 percentage points
- Bonds: 3.2%, down 1.1 percentage points
- Bond Funds: 12.3%, up 0.7 percentage points
Take the Asset Allocation Survey.
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The Week Ahead
It’s going to be another busy week for earnings, with many smaller companies reporting in addition to the more than 60 S&P 500 companies on the calendar. Included in the group are Dow Jones industrial average components Cisco Systems Inc. (CSCO) on Wednesday and Coca-Cola Co. (KO) on Thursday.
The week’s first economic report will be the December JOLTS report, released on Tuesday. Wednesday will feature the January consumer price index (CPI). The January producer price index (PPI), January retail sales and November business inventories will be released on Thursday. Friday will feature the February Empire State manufacturing survey, January import and export prices, January industrial production and capacity utilization and the University of Michigan’s preliminary February consumer sentiment survey.
Three Federal Reserve officials will make public appearances: Kansas City president Ester George on Tuesday, Cleveland president Loretta Mester on Tuesday and Wednesday and Atlanta president Raphael Bostic on Wednesday and Friday.