Big companies are squandering their cash reserves to prop up their stock prices.
The stock market dropped almost 9.5% in January, its worst start of any
year on record.
Of course, every time a stock is traded, there’s a buyer and a seller.
So, who was buying in January when the sellers were pushing prices down?
Goldman Sachs Group says U.S. companies were buying their own shares with corporate cash reserves, accounting for about 20 percent of market volume
last month.
That’s stunning. American companies have a couple trillion dollars
sitting in their cash accounts, and they can’t think of anything better to do
with it. The money could have been used for new product development, expansion
and job creation, training and productivity enhancements or other productive
purposes.
Yahoo Finance says hundreds of S&P 500 companies have lost $126
billion in the past three years by investing in their own shares and then watching
the share price go down. Some of these firms actually borrowed money to cover
their share repurchases. By the way, the stock market overall was up 39 percent
in the same period.
Why are all these companies using their cash with such awful results?
The standard wisdom is that companies buy their own shares when the stock price
is “cheap,” below their actual value as determined by the company. This reduces
cash outflow for dividends, and makes more shares available for stock grants
and options as part of executive compensation plans.
Another result is that earnings per share (EPS) are increased when
there are fewer outstanding shares, and this looks good in corporate reports and
also may boost executive compensation.
Let’s call the spade a spade, here. Corporate directors and CEOs are
spending their hoarded cash to try to prop up share prices—often for their own
benefit—instead of using the money for constructive corporate purposes that
would preserve and expand jobs.
Shame on them.
Copyright
© Richard Carl Subber 2016 All rights reserved.
