Jeffrey Viksjo, CFA
jeffrey.viksjo@ogorek.com

According to the Wall Street Journal, the first quarter of 2019 is on pace to be the second highest quarter on record for share buybacks. Interestingly, the highest quarter on record came in the fourth-quarter last year, when stock prices were plummeting some 20%. In other words, companies took advantage of the weakness in their shares to buy back stock at discounted prices (and in the process, also stemmed the decline in their shares by eventually bidding up prices).

When companies buy-back stock, they essentially use cash on their balance sheet to “retire” shares, lowering their overall share count, and thereby increasing their earnings per-share.

Amazingly, analysts at Ned Davis Research estimate that the S&P 500 “ would by 19% lower through the end of the first quarter if companies hadn’t bought back any stock.”

The trick, of course, will be to know when the buybacks will end. When the economic outlook turns bleak, companies may decide to preserve cash on their balance sheets (rather than buying back shares) in the interest of saving for a rainy day.

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