Not all buybacks are value-adding – look for high quality buybacks
Share buybacks have become widespread in the US. In 2014, American companies bought back more than USD 5501 billion of their shares and the momentum has continued throughout the recent years.
However, not all companies that conduct share buybacks are good investments. “On the contrary, just picking stocks based on the size of their share buyback program is not prudent. Some companies may be loading up on cheap debt to fund buyback programs to keep pace with competitors or as a way to prop up falling prices. These companies risk not being able to maintain their buyback programs and their share prices might fall”, says Jeremy Raccio, portfolio manager at UBS Asset Management.
It is important for investors to identify quality companies that have the ability to sustain share buyback programs through a solid business operation.
Jeremy explains that quality companies often display a number of common traits such as:
- Low financial leverage
- High return on equity and assets
- Low historical price movements
- Stability of dividend payments
Buybacks add value for shareholders, but prudent stock-picking is crucial for better returns.
Urs Raebsamen, Senior Equity Specialist