CEOs Now Spending $211 Billion on Their Own Shares

Companies such as “Apple” and other big players are buying back shares in an attempt to increase performance and show confidence.
6:56 | 08/05/14

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Transcript for CEOs Now Spending $211 Billion on Their Own Shares
-- -- It's Tuesday August 5 the markets and new Yorker open in today's big number is 211. Billion dollars. That's much CEOs are shelling out for shares of their own companies these days. Big box going toward -- hello everyone I'm Michelle Franzen in New York. Here with the details of those big numbers -- -- finances Rick Newman Rick good morning. Michelle example of a big buy buy back going on right now. Apple is the one that's gotten most attention so far this year they've. For purchased about eighteen billion dollars at least eighteen billion dollars that's -- we know about of their own stock. And the stock has had a terrific year so far it has to they've basically you share buybacks. To help turn around a slide in the stock they bought sixteen billion dollars worth of their own stock last year. And that shows a couple of things -- can tell you. Apple feels its own shares -- to rallied in the market and they have the -- do something about it they've got up more than a 150 billion dollars just a huge. Cash reservoir and they've been using some of it to push the share price back up. But he did that this is not necessarily all good news because some times. Companies will buy back their shares. When the shares might otherwise be falling. And this is also a little bit of a gimmick to make your earnings look better because analysts like to calculate the -- your earnings per share. And if you have fewer shares outstanding in your earnings per share -- -- given quarter are gonna look a little bit better. So this in one hand it shows and I see as having confidence in their own. Businesses but it also shows that maybe pulling a few strings to make their numbers look a little bit better than they would otherwise. OK so Rick walk us through this a little bit when companies and billions and of their own shares. What usually happens to the market. That's fairly straightforward. You repurchase those shares from people who hold them in -- in the market. This is not something usually advertise. Are necessarily allow advertise in advance. Because you really want the -- investors necessarily to know this is gonna happen but -- buybacks -- Lira and shares. That means those shares are no longer publicly floated that so. The -- the amount of outstanding stock actually goes down. So here shareholder at the time -- almost by definition if everything else stays the same the value of the shares we'll go up so this is great. -- if -- shareholder at the time. And investors in fact one of the things investors try to do is predict. Which companies are likely to execute share buybacks because it's usually something that will push the price up a little bit so. If you can accurately forecast which companies are likely to do this you might. That might be a way to boost your profits will be any given year. And as -- sort of to build confidence in that company what sort of message does that send and could it be looked data's been deceiving. Well you know one of the questions about the market obviously were asking this every day -- Yahoo! -- -- Is this market overvalued -- is the bull market that's been going on for five years peering out running out of steam. And in the last two years one of the things we have seen. Is much higher level of its stock -- so there's a couple of reasons that's happening one is that companies have a lot of cash. Com and what you really would prefer to see companies do is invest that cash in new business he liked to see them build new factories because demand is going up. The you'd like to see them hiring new employees because they need those people to meet the man and for the most part that's not happening so companies are looking around. And they're trying to say what other ways can we make our performance looked better and boost our numbers and buying back your own stock is one way to do it so it's good news that. Companies have a lot of cash that they can use in this fashion but you really rather see them. Using that cash in the real economy to increase production rather than just sort of engineer. Better looking numbers. And you meant that it doesn't always take give us an idea that -- blitzing some big companies where the buyback just did not pay off. -- there have been a few big companies. That did not really get the desired result Boeing -- -- -- But several billion dollars -- of their own stock what late last year and that and the stock is down since then. That doesn't mean -- repurchase didn't work. Because the stock might have been down by more if Boeing had not done that but -- Boeing has not gotten the desired result ExxonMobil is another. There are few other firms like that. So. That you know you don't you can't always for obviously predict what the market's gonna do. And investors sometimes might see this as a sign of weakness because you're trying to paper over. Some numbers that otherwise would look so good so there are risks to this strategy. There's a quote out there from Wells Fargo a Wells Fargo advisor says quote it's a low quality way to increase your earnings to bring -- back. Sure because you're you're not increase your -- improving your performance your organic performance you're operating performance if you will you're not necessarily. Earning a bigger profit -- just making the profit look better. By dividing it by smaller number of shares so. You know this is what Wall Street pays you know very close attention to every quarter of those numbers. We all know that CEOs probably pay more attention than they should to. Trying to impress the Wall Street analysts. At the expense of worrying about how -- -- build the business. Become more productive. Contribute more to the real economy you know we just we just have a slow growing economy right now. And you know the CEOs do get paid to sort of off the company and make it look good that's one of the things they get paid -- and this is one of the ways they have found to do it. So in this slow economy is there are any average annual return on buybacks that looks good for these companies. Well I mean if you're an ordinary investor you are this is this is a little bit too clever strategy try to play -- by -- strategy. And one thing that's worth pointing out is that companies that have the capacity to do buybacks for the most part. Are that are the healthiest companies in the S&P 500 index if you will they're the ones that have cash to spend. Which means they're not in some kind of distress that's obviously -- huge luxury. Sometimes -- -- see. Companies taking on debt to in order to buy back their shares that's one way of -- -- -- keeping activist investors away if you feel that your stock is getting dangerously low and it makes you. A takeover target but for the most part. You know this is something that's going on Wall Street. The institutional investors kinda know how to play this ordinary people at home she just look for quality stocks they want to. Hold for longer term and not get into this buying and selling based on what some CEO might decide to do this. Order next quarter Rick Newman from Yahoo! finance thank you for joining us sure thing Michelle you of course and keep up with the latest headlines right here on Even watching the big number. I'm Michelle Franzen in New York.

This transcript has been automatically generated and may not be 100% accurate.

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