Dear David, Company share buybacks have been a significant factor in this bull market. The Lex article in today's FT shows that this trend is now moving sideways. How serious is this for the future of the equities markets?

David Fuller's view

Thanks for an interesting question of general interest, and for also providing the article of reference.

Corporate buybacks are generally a bullish medium-term tailwind for the companies involved in this practice, because they increase demand for shares, reduce the float against which earnings per share are calculated, and this reduced float lowers the corporate cost of dividend payments.

However, not everyone agrees that buybacks are bullish.  Critics point out that they flatter earnings per share which would be lower without the buybacks.  I have made this point on a number of occasions.  

Critics also say that buybacks mainly serve management over the medium term, to the detriment of shareholders over the longer term.  A share price and earnings flattered by buybacks can lead to higher bonuses for management than would otherwise be the case.  Critics of buybacks would prefer management to use spare cash by either increasing savings, paying down debt, or investing in the business’ future.

Lastly, in terms of your concluding question, if the Lex article worried you, it will have also worried other people.  Sentiment is fragile, as one would expect during a significant correction.  Markets overshoot in both directions.  “Buy when there’s blood in the streets, even if the blood is your own”, as Baron Rothschild said.  Incrementally, I suggest, as October can also be a difficult month.