‘Shrinking’ Dow is good for your 401(k)

This is a story about the incredible “shrinking” Dow and what it means for your 401(k) and stock portfolio.

It turns out the buyback boom on Wall Street, where companies repurchase their own shares as a way to shrink the number of shares available to trade, is providing a price lift to the companies doing the bulk of the buybacks.

In fact, due to buyback activity, the overall shares outstanding for the 30 stocks in the Dow Jones industrial average has declined by 15 percent since the start of 2008, according to data from Bespoke Investment Group in a report titled “The Incredible Shrinking Dow – Buybacks.”

Overall, total shares outstanding of current stocks in the Dow has declined from a peak of 85.5 million shares in early 2010 to 72.8 million now.

“But that’s not a bad thing,” according to the Bespoke report, especially for Main Street investors who own stock in companies responsible for the buyback boom, such as iPhone maker Apple, which reported $20.8 billion of repurchases during their quarter ending June 30, according to S&P Dow Jones Indices.

The reason: The Dow stocks that have seen the largest decline in the percentage of shares outstanding have tended to post better returns than those where the percentage of shares outstanding only saw small declines or increased, the Bespoke analysis found.

Buybacks, a way for companies to put excess cash to work, have been credited with boosting the stock market’s rise.

“The less supply,” Bespoke wrote, “the more valuable an asset becomes.”