continued higher in a relatively quiet week. Third quarter earnings are
largely over, with roughly 75% of all companies reporting better than
expected earnings. We hit all-time highs several times this week and
while the indices were down most of the day on Trump’s negative trade
remarks this morning, both closed slightly up on the day. The S&P
500 has been up five straight weeks with the Dow posting three
consecutive positive weeks. The Dow gained 1.2% while the S&P
increased 0.7% this week. Read More
Stock buybacks have become front page news during the Democratic primary election. Stocks buybacks are simply companies using their own money to buy shares in the market, reducing the overall number of shares outstanding. As stockholders, you own a small percentage of a company. In a simple example, if an investor owns 100 shares of a company that had 1,000 shares outstanding, the investor would own 10% of the company. If the company bought back 50 shares, there would now be 950 shares outstanding. The investor would now own 100/950 = 10.5% of the company. This is one of two ways companies return capital to shareholders. Dividends is the other. Many companies prefer buybacks to dividends because they can adjust their purchases easily from year to year, whereas dividend payments are very difficult to cut. Some investors prefer buybacks because it doesn’t create a taxable event while receiving a dividend does.
How a company decides to use the money it generates is arguably the single most important decision a management team makes. There are four options – share buybacks, dividends, reinvesting in the business and building up cash. Growth is challenging for many large companies and management teams have decided investors are best served by getting the capital back and letting them reinvest the money. I think it’s critically important to leave these capital allocation decisions in the hands of management. Investors can debate the value of buybacks versus other uses of capital, but having the government get in the middle and decide what companies can and cannot do seems like a bad idea and potentially a slippery slope.
Oil increased 2.3% this week to close at $57.41/barrel. The yield on the 10-yr Treasury moved sharply higher, closing at 1.94%, from 1.72% last week. The average rate on a 30-yr fixed rate mortgage moved lower to 3.69% from 3.78% last week.
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