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Share Buyback: Distorting the Market Picture

The latest data shows that companies are increasingly allocating available cash to share buybacks. In the midst of decreasing earnings and general market slowdown such strategy can not be productive.

The rationale of the buyback strategy is reducing the number of outstanding shares and thus increasing the earnings-per-share figure. The result is the improvement of fundamental metrics of the stock and subsequent increase in the stock price. The problem is that the cash funds that could be used for reinvesting in the company and supporting job stability and future growth are returned to the investors. Since such  spending is not productive, it does not lead to the increase in the company value. Even the companies that are missing their earning targets, restructuring, and cutting jobs are still participating in buyback frenzy. There exists an opinion that many companies are using buybacks as a tool to conceal management’s inability to devise efficient company policies and invest in innovation. Such large-scale misallocation of resources compounded with reduction of earning may contribute to current sluggishness and possible market downturn.