Share buybacks can’t ‘rescue bad companies’, expert says
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Share buybacks can lift returns or be a potential red flag, but finance experts say investors should look at the overall picture of how companies allocate their capital.
TORONTO — Share buybacks can lift returns or be a potential red flag, but finance experts say investors should look at the overall picture of how companies allocate their capital to determine for themselves.
When companies buy back their own stock, they often cancel those securities, reducing the number of outstanding shares available for trading in the market. That spreads profits over fewer shares, which can boost earnings per share metrics come earnings season and potentially lift the company’s stock price.
“Some of the best and worst investments over the past few decades were heavy buyers of their own stock. Buybacks magnify what’s already there; it can be better for shareholders and good for businesses, but can’t rescue bad companies from their ultimate fates,” said Theresa Shutt, chief investment officer at Harbourfront Wealth Management.
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