Insiders & Buybacks

Insiders run off the market

During the last decade, we have experienced many market manipulations in order to inflate share prices of mostly large companies. One of these suspicious activities are buybacks which volume rises year by year, starting from 2009. Within the last 12 months, the so-called share repurchases reached their all-time high. The reason behind that was mainly due to the corporate tax reform where corporate tax and tax on foreign income were decreased significantly.

It is worth recalling that the buyback is the process where a company buys its own outstanding shares to reduce the number of shares available on the market. After repurchase, the shares are usually canceled. According to the companies' quarterly filings, in the first 3 quarters of 2018, S&P 500 companies bought back shares amounting to 583,4 billion dollars, giving 52,6% growth in comparison to the same period in 2017. As a result of that process, the number of shares in turnover decreased at least by 4% in 18% of S&P 500 companies (which also inflated prices of those shares). In 2019, buybacks are expected to reach roughly 770-800 billion dollars.  

This process has a huge influence on stock prices which is clearly showed on the graph below. Red line represents S&P 500 index, blue and green bars represent buybacks and dividends of S&P 500 companies, respectively. This chart illustrates a strong correlation between S&P 500 and buybacks, beginning from 2003.

In recent years, the most active in buybacks were tech companies. During the first 3 quarters of 2018, companies known for having the largest amount of cash (Apple, Alphabet, Microsoft, Oracle, and Cisco) burned more than 115 billion dollars which is almost 20% of all US buybacks. Furthermore, the pace of share repurchasing is expected to increase in 2019 to as much as 940 billion dollars, which would be a 22% growth relative to 2018.

Apple as clear example of wasting capital

Apple is known as the most aggressive purchaser of its own shares. It is even more evident since the US corporate tax reform came into play. In the first 3 quarters of 2018, they spent 62,9 billion dollars for share repurchases averagely quoted 222,07 dollars, near the peak. Now, when we write this article the stock price of Apple is around 155 dollars, which gives more than 10 billion completely wasted dollars on buybacks.

This irrational activity seems to be impossible to explain but this is not a coincidence. Within many US companies, it is well-known behavior in order to help Insiders get rid of overvalued stocks. They first initiate extremely huge buybacks in order to inflate the share price and in the meantime they sell their own shares on premium. It hasn't to be mentioned how much it adversely affects on shareholders and companies in the long run.

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