Salomon's View Salomon also argues that stock buybacks don't justify the market's lofty valuations. But many analysts routinely dismiss this signal of overvaluation by arguing companies are using buybacks instead of dividends to distribute cash to shareholders. In the 1980s, he says, buybacks took more stock out of the market. Intel's experience highlights the issue. Every year since 1992, the semiconductor manufacturer has bought back stock.
Some investors take pains to ensure that the benefits of a stock-repurchase plan are real.
That way, Mr. Feuerman says, analysts and investors don't have to work their way through footnotes to financial statements, trying to figure out what the real impact of buyback and options programs has been. But it's not just the smoke and mirrors caused by the issuance of shares under options programs that undermine the usefulness of repurchase plans as a stock market indicator. Another factor is that many companies are now borrowing to finance buybacks. While such moves might have tax or other advantages, they simply replace equity with debt, which means shareholders get the buyback's benefits only at the expense of owning a more-leveraged company and the risk that an economic downturn could make it harder to service debt. It also would transform the stock from an income stock to a growth stock, allowing shareholders to realize capital gains rather than a stream of dividend payments.