Go with what you know. Or at least that’s what many CEOs are doing when it comes to the piles of spare cash they are sitting on. U.S. corporations are buying back shares of their own company at the fastest pace since the financial crisis. Companies have repurchased a total of $338.3 billion of their own stock so far this year. This is according to a report from the Wall Street Journal.
Is it navel-gazing, heads-up investing or something else at work? Yahoo Finance’s Rick Newman says big U.S. companies are getting nervous about the sustainability of the market, and they want to buy back shares of their own companies to help bolster their stock price. Newman believes that most corporations “don’t want to be the ones to sort of start the correction that we are all waiting for.”
But the practice has broader implications. If a company is putting its spare cash toward buying its own stock, it is not investing in growing the business or increasing company wages. Critics also say the practice could be masking underlying weaknesses in the stock market, propping up stock prices and padding the pockets of executives who have stock options. The executives are the ones making the decisions afterall. But many investors welcome the rise in stock prices despite that claim. That’s because, through a buyback, they benefit from the company’s previously-sidelined cash.
But are massive stock buybacks a bigger sign of the overall economy? Buybacks are often simply an indication that a CEO sees no better way to spend corporate cash. Rick Newman says many CEOs are looking at the current global economy and not seeing a lot of return on investment. The alternative is hoping for a higher return if a company sinks cash into its own stock. “It’s a chicken and the egg thing,” says Newman. “They are not investing because I don’t think the business is there.”
So who is doing the buying? In this latest buyback frenzy, Apple (AAPL) has led the way. It has repurchased a total of $32.9 billion in its own stock over the last year. IBM (IBM) was second with $19.5 billion in repurchases. ExxonMobil (XOM), Pfizer (PFE) and Cisco Systems (CSCO) round out the top five, each sinking more than $9 billion dollars into repurchasing their companies' own stock.
More from Yahoo Finance