When a company buys shares in its own company, then it is an indication that the company’s management believes in the long term prospects of the company. More often than not, it also indicates that the shares in the company could rise considerably in the years to come. However, it is also important to note that companies do not buy their own shares if the stock price is skyrocketing. Instead, they buy their shares when the market is a bit muted, and there are opportunities to buy back stock at a discount. In 2018, some of the biggest companies in the United States bought back their own stocks at a breakneck pace and in a new report, it has emerged that it is continuing in 2019 as well.
In a report compiled by banking giant J. P. Morgan, buybacks have been strong in 2019. That being said, the level of buybacks has not yet reached the level that the markets witnessed last year. It is an important development for investors who have been spooked over the past few months due to the turmoil in the markets owing to the US-China trade war and anxieties pertaining to the interest rates in the country. During that time, big companies have continued to buy back their shares, and as is well known, companies which engage in buybacks generally see the price of their stocks appreciating in the long term. The report by J. P. Morgan has also commented on the high probability of these stocks to gain considerably in the months to come. The report stated in conclusions, “Stocks of companies that buy back their shares tend to outperform both short and long term, and we estimate over 4% outperformance for high-buyback companies in the U.S. and Europe over the past 20 and 25 years.” The report has stated that net buybacks complete this year so far stands at a whopping $400 billion so far and it remains to be seen how the companies behave during the rest of the year. It is a significant development and one that investors should not ignore.
