Tags: Reynolds | buybacks | CEOs | credit

Rosenblatt’s Reynolds: ‘CEOs Are Making Up for Lost Time’ with Stock Buybacks

By Dan Weil   |   Friday, 08 Mar 2013 09:24 AM

The credit boom that began in 2009 has now spawned $1 trillion of stock buybacks for companies in the Standard & Poor’s 500 Index, according to Brian Reynolds, chief market strategist at Rosenblatt Securities.

"Even though this boom is about to begin its fifth year, this past month has seen the fastest growth for buyback announcements, as if CEOs are making up for lost time," he writes in a commentary obtained by CNBC.

And while most analysts attribute record-high stock prices to the Federal Reserve’s massive easing program, Reynolds thinks it’s the corporate buybacks that are pushing stocks higher.

Editor's Note:
Billionaires Dump Stocks. Prepare for the Unthinkable.

"Buybacks have been the main driver of higher equity prices during the current credit boom, which began in 2009, as all other major stock market participants combined have been net sellers," he writes.

The S&P 500 has soared 130 percent from its March 2009 low.

While buybacks slowed at the beginning of the year, Reynolds expects them to continue this year.

"Buyback announcements got off to a sluggish start this year, partly because many CEOs advanced dividends at the end of last year to beat tax hikes, and partly because CEOs were spooked about fiscal cliff issues, even though the credit market kept on humming."

While Reynolds obviously sees corporate buybacks as positive for the stock market as a whole, one can question whether they work out well for shareholders.

Theoretically, buybacks increase earnings per share by cutting the number of shares in circulation, but there’s no guarantee that will benefit anyone outside of management, whose compensation is often tied to earnings per share.

Moreover, sometimes the number of shares doesn’t actually decrease, because the company issues shares to employees at the same time that it’s performing the buybacks in the market.

And in any case, buybacks don’t necessarily lead to a higher share price.

Many experts argue that if companies have the excess cash to buy back their stocks, shareholders would be better off receiving the cash themselves, in the form of dividends.

Editor's Note: Billionaires Dump Stocks. Prepare for the Unthinkable.

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