Profit Confidential Warns Stock Buybacks Will Be a Terrible Investment for Companies

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Profit Confidential warns of indications that corporate share buybacks will be awful investments. ??

Profit Confidential (www.ProfitConfidential.com) an e-letter published by Lombardi Publishing Corporation, a 28-year-old consumer publisher that has served over one million customers in 141 countries, is warning that corporate share repurchase programs will become a terrible investment.

“When times are good, there are different ways a company can return value to shareholders, namely through regular dividends and share repurchase programs. Dividends put cash back into the hands of investors, while share repurchase programs reduce the number of outstanding shares,” says economist and lead contributor Michael Lombardi. “But, in times of economic uncertainty and fiscal restraint, stock buybacks are nothing more than a form of financial engineering used to manipulate per-share corporate earnings.”

According to data compiled by Bloomberg and the S&P Dow Jones Indices, companies on the key stock indices are expected to spend $914 billion on share buybacks and dividends this year. From a corporate earnings perspective, public companies will be paying out 95% of what they earn; this means that for every $100.00 of corporate earnings, they are paying out $95.00. (Source: Wang, L. and Bost, C., “S&P 500 Companies Spend 95% of Profits on Buybacks, Payouts,” Bloomberg web site, October 6, 2014; www.bloomberg.com/news/2014-10-06/s-p-500-companies-spend-almost-all-profits-on-buybacks-payouts.html.)

 “Instead of relying on revenue growth and improved profitability to increase price-per-share corporate earnings, companies are using share repurchase programs to show so-called quarterly improvements,” Lombardi adds. “In fact, since the markets bottomed in 2009, almost $2.0 trillion has been spent by public companies on stock buybacks. By buying back shares, businesses have created a mirage that business is good. Investors reward these companies with higher share prices.”

But business isn’t better. If S&P 500 companies are spending 95% of their corporate earnings on share buybacks and dividends, it means they are spending very little on growing their business. According to Barclays PLC, companies in key stock indices have significantly increased their cash flow towards buybacks, doubling what it was in 2002. Meanwhile, capital spending (money spent to grow a business) has declined more than 20% over the same period. (Source: Ibid.)

“Businesses don’t grow their bottom line by borrowing money and reducing the amount of outstanding shares; they do it by reinvesting money back into the business: hiring staff, creating or buying technology, and expanding into different markets,” Lombardi observes. “But businesses have borrowed; since 2009, the S&P companies have accumulated $3.59 trillion in cash.”

“The amount of money spent on share buybacks is draining capital spending, something we desperately need to spur economic growth in this country,” Lombardi concludes. “As this stock market continues to crash lower, the billions that public companies have spent on buying back their stocks will look like a terrible investment.”

For more information on Profit Confidential, visit www.ProfitConfidential.com.

Founded in 1986, Lombardi Publishing Corporation, which has served over one million customers in 141 countries, is one of the largest consumer information publishers in the world. For more information on Lombardi Publishing Corporation, visit www.lombardipublishing.com/customer-service.html.

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Organization: Lombardi Publishing Corporation
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Release ID: 66386

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Name: Wendy Potter
Email: Send Email
Organization: Lombardi Publishing Corporation
Address: 350 5th Avenue, 59th Floor, New York, NY 10118
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