Share buy-backs highlight low corporate confidence
It’s good news for bondholders and shareholders that companies are awash with cash: it’s bad news for everyone that they can find nothing better to do with it than buy back their own shares.
A feature of the third-quarter earnings season in Europe was the number of large corporations reinstating share repurchase programmes. Vodafone and Diageo were prominent examples while Groupe Danone announced new plans to divert surplus cash to buying in stock and BHP Billiton announced a share buy-back on withdrawing its bid for Potash Corp. Tracking this trend, Morgan Stanley notes a doubling in 2010 of the number of companies buying back shares and the volume of transactions compared with 2009. The firm also points out that companies have a lot of firepower to put behind these repurchases. Cash has become a big portion of the corporate assets of the EuroStoxx 600 companies, accounting for 7.5% of total assets.
With profit margins back to 2005 and 2006 levels, corporations look to be in robust health.