This Earnings Season isn't just about AI, another big theme this cycle: stock buybacks. With Meta, BYD, Uber, Stellantis all announcing share repurchases this quarter.
So, what are stock buybacks and how should investors think about them? A stock buyback is sorta what it sounds like: companies repurchasing some of the stock they issued from shareholders, which reduces the amount of shares outstanding in the market. Meta recently approved $50 billion in buybacks, meaning the company announced its intention to purchase $50 billion worth of stock in…itself.
For investors, buybacks like this can be seen in different lights. On the one hand, it could be considered a bullish signal, because it indicates that companies are willing to bet on their own success. But some critics say buybacks are just a way for companies to artificially inflate their stock price. The chairman of BYD alluded to this, saying their potential $56 million buyback is meant to both “enhance investor confidence” and “stabilize and improve company value,”.
But to propose buybacks in the first place, company’s have to have a relatively stable balance sheet, because they need cash to buy their own shares. Thats one reason behind investor speculation that Nvidia could be ripe for buybacks, given its pristine balance sheet While buybacks can increase share values, some experts say the real focus should be on dividends, which provide a tangible increase in the underlying value of a holding for investors. Like dividends, buybacks return company profits to shareholders. But critically, investors must pay capital gains taxes on dividends, while buybacks do not trigger this tax liability.
Video Transcript
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MADISON MILLS: This earnings season isn't just about AI. Another big theme this cycle-- stock buybacks, with Meta, BYD, Uber, and Stellantis all announcing share repurchases this quarter. So what are stock buybacks, and how should investors be thinking about them? A stock buyback is sort of what it sounds like, companies repurchasing some of the stock they issued from shareholders. And that reduces the amount of shares outstanding in the market.
Meta recently approved $50 billion in buybacks, meaning the company announced its intention to purchase $50 billion worth of stock in itself. Now, for investors, buybacks like this can be seen in different light. On the one hand, it could be considered a bullish signal because it indicates that companies are willing to bet on their own success. But critics say that buybacks are just a way for companies to artificially inflate their own stock price.
The chairman of BYD alluded to this, saying their potential $56 billion buyback is meant to both enhance investor confidence and stabilize and improve company value. But to propose buybacks in the first place, companies have to have a pretty stable balance sheet. They need cash to buy their own shares. That's one reason behind investor speculation that NVIDIA could be ripe for buybacks, given its pristine balance sheet.
While buybacks can increase share values, some experts say the real focus should be on dividends, which provide a tangible increase in the underlying value of a holding. Like dividends, buybacks return company profits to shareholders. But very important here, investors have to pay capital gains taxes on dividends. Buybacks do not trigger that tax liability.
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