How Will Stock Buybacks Affect Future Market Returns?
The answer is otherwise than appears at first impression.
Using Warren Buffett’s formula that long-term equity returns equal 1) gross domestic product growth plus 2) the current yield from stock dividends plus 3) inflation, Friday’s column estimated that stocks would gain an annualized 6.5% over the next 30 years. The projection expected GDP growth to chug along at its historic average of 3%, with dividends and future inflation each contributing 1.75% of return.
A reader responded, “Since buybacks have reduced dividends, should they be added back to dividends? If so, what would the amount be?” Oh, dear. It's the kindest objections that cut the deepest. My article had indeed failed to address the effect of stock-repurchase programs.