One in four companies in the S&P 500 index is expected to have juiced its EPS by 4% or more by buying back its own stock, according to S&P Dow Jones Indices. That’s up from one in five at the beginning of the year, The Wall Street Journal said. After a dip in the second quarter, this third-quarter pace represented the quickest series of buybacks since the recession, and the Journal reports that the pace is expected to accelerate through year-end.
The election to buy back stock from their shareholders is partly a result of the stunted recovery. Such moves return some of that excess cash to the company’s owners by making each of the returned number of shares worth a larger stake in the company, and bolstering the company’s earnings-per-share results. But even that isn’t without risk or controversy.
One risk is that CEOs won’t have as much, or enough, cash to deploy once they want to pull the trigger on more investments in the company if their industries, markets or the U.S. and global economies lean toward greater growth—which remains the consensus expectation of CEOs and economists despite an erratic few weeks.
Another factor for CEOs to consider in the buyback equation is the suspicion that one of their motives in launching such a move is to make EPS and stock prices reflect better on their individual performances; often, those metrics are included in their compensation formulas. The more secure the CEO already is in his or her job, the better idea a stock buyback might be.
Whether the worldwide economy is a glass half-empty or half-full remains a quandary of perspective for many CEOs. The consensus view of 15 U.S. chiefs in a wide variety of businesses, cited in Chief Executive’s CEO Confidence Index report, tilted toward the “half-full” view in September for the first time since before the Great Recession. But many chiefs remain reluctant to invest in that point of view given the still-erratic progress of the U.S. economy, repeated stumbling in Europe and the cooling of growth in many emerging nations.
While not without its merit, CEOs should tread cautiously with the buyback maneuver.