Friday, February 19, 2016

Stock Buybacks Can Inflate Earnings, Fooling Investors - by Chris Versace

One of the key drivers of the rebound has been the surge in companies upsizing their share repurchase programs. When companies buy back their shares, they shrink the shares-outstanding figure we find on the income statement. Such a move leads to more favorable earnings-per-share (EPS) comparisons. Think about it: buying back shares doesn’t change a company’s net income. It just reduces the number of shares that are divided into net income to compute the earnings per share for a given quarter. If you were to think those share buyback programs could help artificially inflate the earnings growth rate, you would be correct…..

Despite the market’s rebound during the last few days, much of the economic data we’ve been getting points to further softening in the economy.  For example, the February reading for the Empire Manufacturing Survey from the Federal Reserve Bank of New York came in at -16.6 with continued contractions in new order activity during the month.
This morning, Feb. 17, we received the Fed’s January reading on Industrial Production. While the metrics were up month over month, if you dug into the report, you would have seen that total industrial production was down 0.7% year over year. Moreover, most of the month-over-month strength was due to the jump in utility activity in January. That makes sense and I can attest firsthand to winter’s belated arrival in the latter part of December as I shoveled snow that fell more than 34-inches deep on my driveway.
As long as we continue to get economic data that raises concerns about growth expectations, either for the economy or for a company’s earnings, we’ll continue to sit on the sidelines and collect our dividends as we wait for even more attractive entry points on growth-oriented stocks.