Reports of Large Corporate Share Repurchases

London’s Financial Times is reporting this morning that a number of U.S. corporations have engaged in large share repurchases this week.  Frankly, this soothes the soul as I have been complaining since late 2010 that businesses ought to be deploying their excess cash to earn higher rates of return.

One area of return that they seem to have been avoiding is repurchasing shares of their own stock.  But reportedly Morgan Stanley, Chiquita Brands, General Motors, United Continental (airline), Corning, Yellow Media and others have all bought back shares this week.

These share repurchases are a good sign and they will also help to inject stability into the financial markets.  Share repurchases are often an indication of corporate confidence.  Why?

Because businesses have all of the business-specific information needed to value their own companies.  So to repurchase their shares in the open market is an indication that they feel shares in the company are undervalued and consequently, a good investment.

Share repurchases benefit shareholders in a number of ways, for example:

• It creates demand for shares, and consequently upward price pressure on the stock
• Once bought the shares are often retired so they are no longer part of the open market; by reducing the number of shares feasting on profits each remaining shareholder has a bigger share of profits
• Because of the above they are tax efficient; dividends generate taxes for shareholders, whereas share repurchases do not
• Reducing the size of the equity pie increases the effects of financial leverage

I wouldn’t be surprised to hear several months from now that many companies bought shares back amidst this week’s very volatile trading environment.

Jason