It’s an easy way to make your shares look better, but is it the kind of long-term investment companies need?

• Companies these days have a lot of cash on hand. Because of the recession, they’ve been scared to spend too freely and risk losing more money. So they’re doing something kind of unusual: they’re buying back stock they’ve sold to investors.
• Buying up lots of your own company’s shares makes your stock look better to investors because of a statistic called earnings per share. If you reduce the number of total shares available to the public (by buying them back), you make that number go up.
• Spending cash on shares means not investing in company infrastructure or workforce. Some people say it’s a bad long-term strategy because it’s based on short-term gains, not long-term growth.

Facts & Figures

• Firms plan to buy back $273 billion of their own shares this year.
• According to the Federal Reserve, companies (excluding financial firms) held $1.8 trillion in cash and other short-term assets as of June 2010.
• Some of the companies buying back large amounts of their own stock include Hewlett-Packard, Pepsico, and The Washington Post Co.

Best Quote

“It’s totally wasted money. It does not do anything long-term for companies.” – William Lazonick, Professor and Director of the Center for Industrial Competitiveness at University of MA at Lowell