UNITED STATES (VOP TODAY NEWS) — Buyback, or the repurchase of shares from the market, is a very common phenomenon in the United States, where companies spend billions of dollars to buy their own securities.
In recent years, everything went smoothly: the value of the shares increased, the shareholders were satisfied, the management paid out bonuses. But now the situation has changed.
There is a funny thing about repurchase: when stocks grow, companies have no doubts about carrying out such operations, especially if such a purchase is funded with cheap debts.
Of course, the price becomes even higher, which increases the value of management and explains why management teams usually have no doubts about the allocation of capital for this most simplified corporate use of funds.
However, when stocks fall, the CFO has to explain to the board of directors and shareholders why he risks the company’s money, instead of investing in safer corporate strategies, such as M & A, R & D or capex.
But the funniest moments are connected with the cases when companies spent tens of billions on stock repurchases and at this moment the market begins to collapse, resulting in billions in losses.
A striking example is the company Apple, which in the first half of 2018 spent huge sums on the repurchase of its shares, the volume of operations amounted to a quarter of all buybacks in the US stock market.
In total, the company bought shares worth $ 700 billion, and announced purchases of $ 1 trillion.
So, in the end, Apple lost almost $ 10 billion from these operations.
Apple and companies, including Wells Fargo, Citigroup and Applied Materials, bought out their own shares at close to record prices, after which a collapse occurred.
Supporters of repurchase argue that repurchases are a good way to return excess capital to shareholders and that paper losses may disappear if the value of the shares recovers, but they are clearly unfamiliar with stories, such as IBM shares.
Their value peaked in 2012, after the paper were down trend.
In addition, a sharp decline in the value of shares calls into question the very decision to send so much money received as part of tax reform to buy shares, and not use them to invest in your business, increase employee salaries or pay higher dividends.
S & P 500 bought out their own shares worth $ 583.4 billion in the first nine months of 2018 according to S & P Dow Jones Indices, which is 52.6% more than in the same period in 2017. At the same time, 18% of S & P 500 companies reduced their according to S & P Dow Jones Indices, the share of shares is at least 4% on an annualized basis.
Apple spent $ 62.9 billion on stock repurchases.
The recent sell-off in the markets led to a drop in its shares, and as a result, the company’s repurchased shares at auction on Thursday cost about $ 51.8 billion, which is about $ 11 billion less than their purchase was spent.
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