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    Bruce K Behn
    Treasury Report (ACAP) Section VI - Human Capital
    background document posted July 25, 2010 by Bruce K Behn 
    3503 Views, 1 Comment
    title:
    Treasury Report (ACAP) Section VI - Human Capital

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    • Robert E Jensen

      Teaching Case
      From The Wall Street Journal Weekly Accounting Review on June 26,2015

      Beware the Stock-Buyback Craze
      by: John Waggoner
      Jun 20, 2015
      Click here to view the full article on WSJ.com
       

      TOPICS: Stock Buybacks

      SUMMARY: Companies are spending vast amounts of perfectly good capital to buy back their own shares. Whether or not you think buybacks are a good way for companies to spend their cash, the strategy of buying companies that have reduced their shares through buybacks has worked well-except when buyback fever bursts. In theory, buying back your own stock reduces the number of shares, thereby making the remaining shares more valuable. But it isn't a precise formula: Stocks can go down despite a buyback program. And companies can use repurchased shares to pay executives and employees who get shares or options as part of their compensation, so the share count remains more or less the same despite the buyback program. Even when buybacks do reduce a company's float and drive up the stock price, it is hard to argue that buying back shares is a particularly wise use of a company's capital. After all, management could use the money for more practical things that will expand the business: research and development, for example, or new products.

      CLASSROOM APPLICATION: This is a good article about the current trends in stock buybacks, as well as its impact on the company, its growth and strategy, and the financial statements.

      QUESTIONS: 
      1. (Introductory) What is a stock buyback? Why do some companies choose to participate in stock buybacks?

      2. (Advanced) How do stock buybacks affect a company's financial statements? How is the transaction entered into the company's financial records? What accounts are affected?

      3. (Advanced) How is a business affected by the stock buyback? How does it affect the company's stock price? How does it affect the company's strategies and options for growth?

      4. (Advanced) Why are stock buybacks so common now? Are certain economic conditions encouraging this behavior at this particular time?
       

      Reviewed By: Linda Christiansen, Indiana University Southeast

      "Beware the Stock-Buyback Craze," by John Waggone, The Wall Street Journal, June 20, 2015 ---
      http://www.wsj.com/articles/beware-the-stock-buyback-craze-1434727038?mod=djem_jiewr_AC_domainid

      Investing in companies that are buying back shares is a time-tested strategy. But the rapid pace of buybacks is one reason for caution.

      Sometimes people do silly things with money, particularly if everyone else is doing it. There simply is no other way to explain the box-office success of “Avengers: Age of Ultron.”

      Companies aren’t any different. Currently, they are spending vast amounts of perfectly good capital to buy back their own shares. And now you can buy mutual funds that invest in the biggest players in the buyback craze.

      Whether or not you think buybacks are a good way for companies to spend their cash, the strategy of buying companies that have reduced their shares through buybacks has worked well—except when buyback fever bursts.

      Chief executives can be just as faddish as anyone else, and currently, corporate buybacks are what all the cool kids are doing. Companies in the S&P 500 stock index bought back about $148 billion of their own shares in the first quarter of 2015, says Howard Silverblatt, senior index analyst at S&P Dow Jones Indices. That’s up from $132.6 billion in the fourth quarter of 2014, although still shy of the $172 billion record set in the third quarter of 2007.

      The ETFs that buy stocks of companies engaged in buybacks are “a twist on a traditional equity portfolio, and there’s plenty of evidence that supports the rationale for the strategy,” says Stoyan Bojinov, ETF analyst at ETFdb.com, an online guide to exchange-traded funds.

      In theory, buying back your own stock reduces the number of shares, thereby making the remaining shares more valuable. But it isn’t a precise formula: Stocks can go down despite a buyback program. And companies can use repurchased shares to pay executives and employees who get shares or options as part of their compensation, so the share count remains more or less the same despite the buyback program.

      Continued in article