Stock Buybacks: Party Now, Regret It Later

Tax cuts are fueling a record-setting boom in company share repurchases. But recent buybacks have left some investors feeling burned. Here’s why.

- Ryan Derousseau

WE ’RE MORE THAN NINE YE ARS into a bull market, and it’s no secret that stocks are expensive. The Shiller price/earnings ratio, which compares companies’ share prices with their inflation adjusted 10-year earnings average, is at 31, well above the historical median of 16—a sign that future returns will be sluggish. Combine that with simmering worries about trade wars and inflation, and you get a climate in which fewer investors are clicking the “buy” button.

Yet there’s one group purchasing company shares with gusto: the companies themselves. As the impact of new tax cuts circulates through corporate balance sheets, businesses are getting an infusion of cash, and much of the windfall is going toward buying back stock. J.P. Morgan estimates that repurchases in 2018 will jump 51% from last year’s mark, to $800 billion, which would be a single year record.

Historically, buyback announcements have attracted investors like a plate of snicker doodles does a kindergartner. Repurchases reduce the number of shares outstanding, giving each remaining shareholder a bigger share of future earnings—and thus making price appreciation more likely.