In the first quarter of 2014, S&P 500 companies repurchased
about $160 billion of their own shares. Companies may be motivated to
repurchase shares because of slow domestic growth, which can make share
repurchases an attractive alternative for corporations. Another
motivation mentioned in the article is that share repurchases may be
used to readjust a company's capital structure. In the past several
years, the stock market has increased in value, which has likely
increased the equity weight of a company's capital structure. As a
result, a company's capital structure may be too heavily tilted toward
equity. A share repurchase can reduce the equity, thus restoring the
capital structure to the optimal level.
A point about share repurchases addressed in the article that is particularly near and dear to us is research that finds companies are not particularly good investors.
In fact, companies tend to undertake repurchases when company stock
valuation is at a peak instead of when company stock is undervalued. One
reason for this contradiction may be that as company performance
increases, cash held by the company increases, as well as the stock
price. As a result, companies have cash available when its stock price
is high, which is the worst time to buy stock.
