No. of Recommendations: 5

I'm afraid I have to disagree with you on companies buying back stock. There are a few good reasons to do it such as get stock to give to deserving employees and decreasing the amount of stock a large amount might enable an increase in the dividend. However, most buybacks are a waste of money. Yes, it is true that it improves the P/E, but it is PROFITS that count, not P/E.* Buybacks are a phony way of "giving" something back to the stock holders and are a waste of money. It means that the company can't think of a profitable way of investing that money to increase profits.

If you give me a case of a company that has declining profits but buying back stock to improve the RPS and the stock price is improving, then I'll grant it is possible that buying back stock may do some good in an exceptional case. I know of no such example, and I spent years looking for an example but I gave up looking.

So far as I am concerned, the companies would do better to give the repurchase money back to investors as a special dividend.

* Incidentally, at least on the NASDAQ, companies losing money are just counted as zero in the NASDAQ 100 whereas if there are no profits the P/E should go to infinity. And companies with loses are also counted as zero, whereas the P/E should be negative. Thus in the ballon period around the end of the 20th century, the NASDAQ was allowed to show a rational, if large, P/E whereas a rational accounting might have shown the P/E to even have been negative. It was a strange period in which it was claimed that it was revenues and not PROFITS that were important. Well, we found out that the Greater Fool Theory applied and that PROFITS were important after all. REITs, incidentally, were murdered in that period,and it was a good time to buy them which I did.

Print the post  


When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.