Tags: Milano | stock | buybacks | boost

Fortuna Advisors’ Milano: Stock Buybacks Don’t Boost Share Price for Long

Monday, 31 Dec 2012 08:16 AM

By Dan Weil

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Corporate stock buybacks are all the rage, but they won’t do shareholders much good, says Greg Milano, CEO of Fortuna Advisors, a shareholder value-consulting firm.

Buybacks in the first three quarters of the year ran at a rate 50 percent higher than the average since 2000, according to Standard & Poor’s.

The argument for stock buybacks is that by decreasing the amount of shares, the company increases earnings per share (EPS) and increases the ownership stake of each investor.

Video: Economist Predicts 'Unthinkable' for 2013

But what really matters to investors is what happens to the share price, and Milano tells Yahoo the evidence on this score is negative for buybacks.

Announcements of buybacks initially lift companies’ stock prices, but the pop doesn’t last for long, he says. "Over time the companies that buy back more stock tend to produce worse shareholder returns."

A study by Milano’s colleagues proved “conclusively” that the more a company’s EPS grows thanks to a buyback, the more its price-earnings multiple slides.

"If you're growing EPS in a way that's really just financial engineering, the market doesn't think much of that," Milano states.

For those investors who are interested in the stocks of companies doing buybacks, make sure that a company isn’t overpaying for its stock and that a company’s share count is indeed shrinking, writes Wall Street Journal columnist Brett Arends.

Video: Economist Predicts 'Unthinkable' for 2013

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