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  • Writer's pictureKevin Jones

Stock Buybacks/What do they tell us about the economy

As we are well aware, publicly traded companies have been buying back significant amount sof their own shares over the past few years. As investors, we generally support such as it can increase EPS, providing that option exercises do not amount to more than the shares retired. However, we rarely put ourselves in the role of the CFO who decides on the allocation of capital and cash flows available to shareholders. As CFO, the options for redeploying cash flows are numerous. Acquisitions, CapX, share repurchase, debt paydown, dividends. Hopefully the CFO's are looking to generate the highest return on this capital. What does repurchasing their own shares tell us about their perceptions of the alternatives? In my opinion it says that the alternatives are inferior. If so, what does that tell us about the economy, industry, and company? In my opinion it indicates that the the return on assets of these alternatives is lower than the company's current ROA. This is not congruent with an economy that is expanding and offering opportunities to expand ROA. I am not saying that CFO's are forecasting a recession, however their actions not only demonstrate their perceptions of such, but also may be the cause of the next one.

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