But none of this explains the main reason they would do this (a buyback or a dividend) instead of reinvest the profits. Yes the have lots of cash, but they have for awhile.
So the interesting question is why are they doing this now given the medium/long term ROI a company with cash looks generate. It could mean they stopped seeing obvious medium/long term investments. Maybe a small bubble is 5-10 years away.
TLDR earnings are going down, but earnings/shares are going up. So what is going on ? Earnings for the US economy as a whole are dropping (pretty fast even). But the metric investors use to value shares, earnings per share is going up.
That means U.S. companies are buying back shares at a faster rate than their earnings are dropping. Why ? Exactly to generate this outcome : normal valuation metrics for shares (net-present-value of future earnings per share) go up as a result of this operation. When cutting a million corners the share price of any (large cap) stock should be roughly NPV(8%, future_cashflow).
The next question to ask is ... given that this uses a LOT of debt that is currently at very low interest rates, what happens if interest payments inevitably go up (either as a result of inflation, or of the FED raising rates) ? The problem with low interest rates is that, at the moment, 1% rate rise would quadruple interest payments for the government, and double interest payments for AA corporations.
I might be wrong here but aren't most US companies flush with cash these days? I would assume that they use their cash reserves for the buybacks and not debt. Are there any stats on what is used to finance the buybacks?
Most US companies have cash overseas and have never bought them back to the US because doing so will incur a third gone in taxes. Thus they are lending the cash to the US entity to execute but backs, hoping that a tax holiday is declared in the future.
It's trivially true that not all companies can provide ROI surpassing the market average. The more interesting question to me is why they ever stopped.
So the interesting question is why are they doing this now given the medium/long term ROI a company with cash looks generate. It could mean they stopped seeing obvious medium/long term investments. Maybe a small bubble is 5-10 years away.