Goldman Sachs calls record stock buybacks a 'questionable use of cash' (SPY, DJI, IXIC, SPX)

Akin Oyedele

There's something suspect about the way companies are spending their excess cash.

Stock buybacks have surged this year, and in April, companies announced plans to spend a record $133 billion on buying their own shares.

When a company buys back its own stock — instead of using that money to invest in equipment, employees, or buying another company — it implies that companies think their shares are undervalued and that there is nothing else to do with that money.

But in a note to clients, Goldman Sachs equity strategist David Kostin notes that this spending is happening at a time whenstocks are very expensive.

Kostin forecasts that buyback spending will likely pass $600 billion this year — about 30% of total cash spending. But in Kostin's view, companies could be using this money in smarter ways.

Here's Kostin:

We recognize activist investors often agitate for firms to return excess cash to shareholders via buybacks. However, while repurchases may lift share prices in the near term, they are a questionable use of cash at the current time when the median S&P 500 multiple is so high. In our view, acquisitions – particularly in the form of stock deals – represent a more compelling strategic use of cash than buybacks given the current stretched valuation of US equities.

Kostin goes on to note, however, that investors will likely continue to reward companies that repurchase their shares, despite these companies making less-than-optimal use of their cash hoard. 

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