Share buy-backs: good or bad indicators?

Pepsi have just announced it intends to buy back $15 billion of its own shares over the next 3 years. But why, and what does this say about the wider economic situation?

Share buy-backs generally happen when a company has too much cash and cannot put it to more productive use, and so it returns money to the shareholders, who can gain the same return on a lower level of investment (boosting return on equity and often the share price). This move (and Pepsi is only one of many) is seen by many as a good indicator - that companies no longer feel the need to hoard cash to protect against the downturn.

Others however see this as something more pessimistic, and with long lasting effects. Perhaps companies undertaking buy-backs really cannot see any productive growth opportunities in the short term, and so are returning capital to their shareholders.

These are some of the themes we explore in courses like Financial Analysis and Business Strategy.