WHEN supply falls and demand is strong, prices tend to go up. So it has been in America’s stockmarkets. Short-term interest rates at record lows and minuscule yields on government bonds have boosted investors’ demand for equities. And thanks to share buy-backs, the supply of shares has been steadily falling. BCA Research estimates that the number of shares in issue on American stockmarkets has fallen by 6% since 2009. This tailwind for share prices, however, may be starting to fade.
A few decades ago many firms deliberately kept a bit of cash on their balance-sheet as a “rainy-day fund” to help them cope with recessions. That has gone out of fashion, partly due to pressure from activist investors. If firms have no better use for their money, the argument runs, they should return it to their shareholders.
Share buy-backs also help improve a number of financial ratios. Especially at current interest rates, companies earn a low return on their cash. So buying back shares barely dents the company’s total earnings, but reduces the number of shares; earnings per share rise. The same arguments apply to measures such as...
from The Economist: Finance and economics http://ift.tt/1TF2cI9
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