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Goldman Sachs and Meta have recently announced plans to buy back billions of dollars’ worth of their own stocks. Specifically, the news comes at a time when the broader market is experiencing a sell-off, with both institutional and retail investors selling off shares. So, what exactly are stock buybacks, and why are these companies choosing to engage in them now?
What are Stock Buybacks?
When companies go public, they sell shares of their company to investors. Therefore, when a company buys back its own shares, it is essentially buying available shares from the market or individual shareholders. This reduces the number of shares available to the public, increasing the value of each remaining share.
Why Do Companies Engage in Stock Buybacks?
There are several reasons why companies engage in stock buybacks. For example, one reason is to signal to investors whom the stock considers attractive. So, in times of market uncertainty, share buybacks can help reassure investors that the company believes in its own long-term prospects.
Another reason for stock buybacks is to improve the company’s earnings per share (EPS) numbers. S&P 500 companies are currently generating lower net profits and seeing their pricing power decline. By purchasing their own stock, companies can reduce the number of outstanding shares, thus increasing their EPS. As a result, this makes the company more attractive to investors, as lower earnings don’t look as bad when there are fewer shares.
It’s also worth noting that top executives’ pay packages are often tied to the company’s stock price. A higher stock price means more money for CEOs and other executives who are responsible for deploying the company’s capital. So, this can create an incentive for executives to engage in stock buybacks, even if they may not be in the best long-term interest of the company.
Goldman Sachs’ Massive Stock Buyback Plan
Goldman Sachs recently announced that it has authorized $30 billion of planned stock buybacks. This represents a significant increase from the $9.9 billion that the company spent on buybacks in 2021. The news comes as the company’s stock price has sunk, and it has recently announced thousands of layoffs.
Goldman Sachs has a lot of cash on its balance sheet, but the company isn’t without risk. In fact, with interest rates rising, it will be much more expensive for companies to borrow money. Therefore, some firms could find themselves running out of cash while still needing to pay employees, suppliers, and other expenses. As a result, this could create a cash crunch where companies have to sell off assets or declare bankruptcy.
Meta’s Massive Stock Buyback Plan
Meta, formerly known as Facebook, also recently announced plans to buy back $40 billion of its own stock. In particular, Meta’s stock price, like Goldman Sachs’ stock price, has gone down recently. Consequently, it has faced criticism over its handling of issues such as misinformation and privacy concerns.
Meta also has a lot of cash on its balance sheet. However, the company’s massive stock buyback plan has also raised concerns about the company’s long-term growth prospects. Thus, some analysts argue that the company should focus on investing in new products and services rather than buying back stock.
Conclusion
Stock buybacks can be a useful tool for companies looking to improve their stock price and signal to investors that management believes in the company’s long-term prospects. However, buybacks aren’t without risk. Companies must balance the potential benefits of buybacks against the risks of running out of cash or diverting resources away from long-term investments. As Goldman Sachs and Meta move forward with their massive buyback plans, investors will be watching closely to see whether these companies’ stock prices rise or fall.
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Reference List
Big Companies Are Planning Record Stock Buybacks. Here’s Why.
Stock Buybacks Help No One in the Long Term | Opinion.
Demystifying the Trillion-Dollar Debate Over Share Buybacks.