On Tuesday, Wal-Mart Stores, Inc. (WMT) announced a $20 billion stock share buyback, which simply means they’re planning to buy $20 billion worth of their own stock from the market.
Now investors and traders generally love buybacks because they drive a company’s market value, earnings per share (eps), and dividend payout higher.
But – despite Wal-Mart’s announcement – we’re smack dab in the middle of about a year-long “buyback drought.” In fact, the number of buybacks by S&P 500 companies only reached $120 billion in this year’s second quarter.
While $120 billion may seem like a large number, it’s down nearly 10% from the first quarter alone and 5.8% from this same period a year ago.
And that could have huge impacts on your portfolio – especially this earnings season.
Fewer Buybacks Can Actually Hurt This Bull Rally – and Your Profits
Some may argue that buybacks can hurt a company’s image in that investors could take that as a sign of being unable to otherwise meet their eps projections. But there’s three main reasons companies would ever repurchase their shares from the market:
- They believe their shares are undervalued
- The want to drive their eps higher
- They want to boost investor confidence, as a buyback implies a low probability for financial emergencies
As you can see, these are all good things for investors, traders – and the stock market…
That’s why it’s concerning that of all the S&P 500 companies, only 66 reduced their available shares by 4% – down from the 134 companies that reduced their shares in the same period one year ago and the 71 companies that did this in the first quarter of 2017.
And if this continues, here’s how that could hurt your portfolio…
When a company buys its own shares back, it reduces the number of available shares you can buy. So long as demand is strong – which is often the case with a strong earnings report and future projections – it drives the stock higher. That’s because you’ve got the same number of people, if not more, trying to buy fewer shares, which keeps pushing the share price higher.
As you can imagine, this creates strong bullish opportunities in the market – particularly for options traders. In fact, the huge rally we’ve seen in the markets can be largely attributed to massive buybacks from the likes of Apple Inc. (AAPL), Pfizer Inc. (PFE), and CVS Health Corp. (CVS).
Now I do see it as a “tell” that companies believe they’ll be able to meet, even exceed, their eps projections without the need for a buyback program. It’s also possible that they’re simply waiting for a repatriation of capital from overseas to investors and for Congress to pass President Trump’s enormous tax reform.
But until that happens, we’ll likely see this “drought” continue.
So I’ll keep my eyes and ears open for upcoming buyback announcements from the big companies – like Amazon.com, Inc. (AMZN), JPMorgan Chase & Co. (JPM), and The Coca-Cola Company (KO). And the second I hear something, I’ll let you know which trading strategies and trade considerations could give you the best cash flow.
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