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Share Buybacks: Financial Jiggery-Pokery
March 6, 2015
With valuations at all-time highs, why do corporates continue to repurchase shares? As we’ve said before, this is totally non-sensical. The fixation on beating quarterly consensus earnings forecasts mean that investors are simply suffering financial jiggery-pokery, with corporates not even attempting to justify huge buybacks - and the debt issuance to fund them – with any reference to value.
And there seems no stopping the buyback gravy train. Data for February 2015 shows that there were US$118bn of buyback authorisations, a 48% increase against the same month a year earlier. In fact, February was the strongest month ever with regards authorisations and 2015 the strongest start to the year ever with US$152bn of authorisations recorded.
What worries us is that cash dividends are increasingly accounting for a smaller proportion of distributions to shareholders, killing off the effects of compounding, boosting volatility and embedding too much value in the fortunes of the prevailing share price. Indeed, the basics of a reinvested and compounding dividend stream for long-term returns seems lost to many. That’s a real shame.