Companies normally jump at the chance to repurchase shares they see as undervalued. But the wretched economy makes for much-tougher choices, says Jonas Elmerraji, editor of the Rhino Stock Report, a monthly investment newsletter.
“Clearly the biggest downside is letting go of your cash,” he said. “Right now, cash is king. If companies part with liquidity on their balance sheet, they could be put in a very precarious position.”
Ultimately, I think that share buyback programs can be effective for companies looking to increase their share price, but they’re not an end all be all. True, I’ll definitely mention a material share buyback when a company I like has an initiative in place, but the chances of a buyback alone changing my tune on a stock are pretty much nill.
Seeing a flaky company stage a buyback when they don’t have a mountain of cash to sit on is a bad idea in this environment, and it’s actually one situation where I’d say a buyback program can hurt a company’s share price.
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