This is not investment advice. Do your own research before taking a position in any of the securities mentioned in the post below. The author may hold positions in any of the securities mentioned.
Today I wanted to cover the concept of buybacks, whether by a central bank or a company. Interestingly - the Mississippi Bubble and Davita Inc. have plenty to teach you on this topic.
As readers, you can take solace in the fact that I have the good sense to pinch ideas from minds far smarter than mine. Since everyone is talking about Fed tapering, it is worth remembering some points made in a blog a friend sent me (even it is a tad too academic for my liking):
Japan has done more Quantitative Easing than any other country – yet their market (Nikkei) has lagged other economies
When confidence is gone, even a significant buyback won’t save you (e.g. Mississippi bubble)
So why does all this history matter? The simple reason is that whilst you should not ignore the news surrounding the Fed (who will scale back repurchases from Nov’21 to mid-‘22) that in isolation kill/help the market.
If things were to turn bad, what is more likely: volatility/sentiment weakens -> business outlook slows -> retail punters who recently entered yank capital out of the market -> market valuations compress. Sure, this may/may not happen at a similar time to the Fed slowing down but my point is that Nov’21 is not some magical month where everything changes.
So, what about Davita Inc.?
DaVita Inc. provides kidney dialysis services in the US for patients suffering from chronic kidney failure or end-stage renal disease (ESRD). It is a low growth medical services business. As at last reporting, it provided dialysis and administrative services through a network of 2,816 centres serving +204,000 patients in the US; and +35,000 out of the US.
That’s nice of them… so why should I care?
Well, the reason why I bring this company up is that they are a good example of where share buybacks DO WORK and why this is slightly different from the Mississippi bubble example above.
Where a company produces a half-decent return, share buybacks are one of the best things that investors can hope for because it divides the profit between less share. Although I am no medical expert on kidney treatment – assuming that this form of treatment continues to do good & help people in the future they are protected by their buyback program.
Below you can see how whilst company level profits have historically grown at an abysmal 1%; the buybacks have boosted returns
So when you are looking at the next “Growth” stock, ask yourself how dilutive their growth is. If you run the numbers and you are better off buying a boring company that actively buys back their stock then that is something worth considering
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