Public companies have a fiduciary duty to maximize vale to the owners of the company (the stock holders). When a company has excess cash they basically have five options. 1) Increase their cash reserves for future opportunities (usually not the option of choice), 2) re-invest the money into the company if management views future return on investment opportunities favorably (typically done with growth versus mature companies), 3) use the money for mergers/acquisitions if they believe opportunities exist that will enhance shareholder value, 4) to pay out dividends to shareholders (typically more common with mature versus growth companies), 5) to buy back outstanding shares of stock (typically done when management believes the stock is undervalued or when the other options are less likely to maximize shareholder value). Another factor to consider (always follow managements financial incentive) is how management is compensated. Management is often paid huge annual bonuses based on a companies short term performance, including stock price, and is often paid in shares of stock. Re-investing in future growth is a longer term strategy to maximize value, while stock buy back programs are a short term strategy. Selling a stock after a jump in price following a buy back program can be a good idea as it is often a sign of weak future growth prospects.
I share the view of other posters in this thread that the market is currently overvalued and that it is at risk of multiple very dangerous bubbles popping. Has anyone read the book the Aftershock Investor, written by Weidemer and Spitzer? Very scary and hard to argue with. Our federal deficit and associated debt, which continues to grow rapidly, is the most toxic of all bubbles.
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