The stock market's secret weapon

By John Spence

America has the lowest level of stock ownership in nearly two decades, yet the market keeps rising to new all-time highs. So if individuals don't seem to be very excited about stocks, then who is buying company shares?

It turns out the answer is the companies themselves.

stock-buyback-investing

 

"Companies are buying their own shares at the briskest clip since the financial crisis, helping fuel a stock rally amid a broad trading slowdown," The Wall Street Journal reports.

Companies with cash in their coffers are electing to return the money to shareholders with stock repurchases and dividend payments.

"Everyone knows the stock market has skyrocketed in the past few years, but far too few understand why. No, it hasn't been magic. It hasn't been levitation. It hasn't been the natural state of affairs. It's been supply and demand," writes Brett Arends at MarketWatch.

"U.S. corporations have been spending hundreds of billions of dollars a year buying in their own stock, simultaneously increasing the demand for the stock and reducing the supply," he adds.

Over the past year, more than $500 billion has been spent by companies on share buybacks, according to Kapitall Wire.

“The announcement of a buyback scheme often sees a spike in share price and quick profits for short-term investors,” writes Nico Willson at Kapitall. “However, if buybacks are overdone and share prices artificially supported, they will, at some point, topple.”

 

"Corporate cocaine"

Low borrowing rates and shrinking investments in their own businesses have helped drive companies' buyback binge in recent years. In fact, there are concerns that companies are emphasizing dividends and stock repurchases at the expense of future growth.

Critics of share buybacks question whether companies are getting reckless in the amount they are spending. Corporations bought back $338.3 billion of stock in the first half of the year, the most for any six-month period since 2007, the WSJ reported, citing research from Birinyi Associates.