Buybacks buoy the bull?

The Wall Street Journal offers an interesting explanation for the sustained bull run: "Companies are buying back their shares at a furious pace, one of the big reasons the Dow Jones Industrial Average is pushing toward 14000... Companies have increasingly resorted to buybacks -- which boost stock prices and per-share earnings by reducing the supply of stock in public hands -- as a way to return cash to shareholders. In doing so, they have supercharged the stock market's rally."

But while the Journal seems to see this as an unsustainable phenomenon, asking "How long can they keep up?"

But I believe that the shift may be sustainable: Given the unfavorable tax treatment of dividends compared to buybacks, a shift toward buyback should cause share prices to rise. It's a more efficient way for corporations to allocate capital. In addition to the boost to EPS caused by buybacks, it is rational for investors to flock toward companies buying back shares.

It's possible that the pace of buybacks will slow down but if the bull does turn into a bear, I don't that will be looked as one of the reasons for the downturn.