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Tags: Reilly | bank | stock | buybacks

WSJ's Reilly: Bank Stock Buybacks Aren't All They're Cracked Up to Be

By    |   Tuesday, 18 March 2014 10:01 AM

While many investors hope that the Federal Reserve will approve major share buybacks in its decisions on bank capital plans next week, these investors should be careful what they wish for, says David Reilly of The Wall Street Journal.

"Buybacks often don't provide the benefit investors expect," he writes in the "Heard on the Street" column. "Namely, that they will boost earnings and book value per share by shrinking the amount of stock outstanding and so dividing the profit pie into fewer slices."

That doesn't happen for a few reasons, Reilly explains. First, big banks provide large amounts of options and restricted stock to their workers. As a result, buybacks don't necessarily trim the number of shares outstanding by a significant amount.

Editor’s Note:
250% Gains Bagged Using Secret Calendar (See Video)

In addition, the torrid rally of bank stocks last year means that companies are paying up to buy back their shares, Reilly says.

"Plus, rising share prices push a higher proportion of older options 'into the money,' in which market value exceeds the strike price," he writes. "This raises the chance of options being exercised, expanding the share count."

Moreover, he notes, "The diminished impact of buybacks means the total yield of bank stocks, that arising from both dividend payouts and share repurchases, may be something of a mirage.

"Making matters worse: Most banks don't impose valuation discipline around buybacks. Only J.P. Morgan has officially signaled it wouldn't repurchase shares over certain loose valuation thresholds."

Many experts say shareholders are better off when companies opt for dividends rather than share buybacks.

"Unlike dividends, share buybacks only return cash to those shareholders who sell their stock and reduce or eliminate their position in the company," David Blitzer, managing director and chairman of the S&P Index Committee, tells Fox Business Network.

Editor’s Note: 250% Gains Bagged Using Secret Calendar (See Video)

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StreetTalk
While many investors hope that the Federal Reserve will approve major share buybacks in its decisions on bank capital plans next week, these investors should be careful what they wish for, says David Reilly of The Wall Street Journal.
Reilly,bank,stock,buybacks
313
2014-01-18
Tuesday, 18 March 2014 10:01 AM
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