The thing to understand about buybacks is that they serve no legitimate economic purpose. They're pure transfer; no surplus.
We use public policy to, in general, encourage firms to do things that create Economic Surplus: en.wikipedia.org/wiki/Economic_…
Not all surplus-creating transactions are socially valuable, of course, and we do lots with the public purse to pursue transfers to create equality of opportunity and the environment necessary for trade.
But, in general, transactions that don't create a surplus are weird and suspect.
And buybacks such a bad look, even by those standards. Why? A quick tour:
And buybacks such a bad look, even by those standards. Why? A quick tour:
First, understand that investors provide their capital to businesses in the hopes that mangers will use it wisely to create a return on that investment. That is, they entrust money to others to invest.
Some managers believe they won't be able to grow their businesses further; can't find a good way to spend what they've got and no prospects to invest it well. The usual solution is a dividend:
investopedia.com/terms/d/divide…
investopedia.com/terms/d/divide…
Dividends do not affect the ownership structure of the firm. The same set of owners retain the same % interest in the firm before and after a dividend.
Buybacks, on the other hand, serve to shrink the pool of public owners (shares are bought from public owners and "taken private").
*IN THEORY* buybacks shouldn't affect the price of the stock more than a dividend of equivalent size would.
*IN THEORY* buybacks shouldn't affect the price of the stock more than a dividend of equivalent size would.
Further, in the very short term, buybacks look like demand for the stock ("information"), but do not reflect a material change in the prospects for the business. They're old news that looks like new-news. They game the market's information-gathering and pricing system.
...all while concentrating ownership, giving managers greater power, and depriving the firm of ways to invest in growth.
Buybacks should be a red flag, and yet: us.spindices.com/indices/strate…
Buybacks should be a red flag, and yet: us.spindices.com/indices/strate…
It should also be disturbing to work at a firm that engages in this sort of thing. It means management is spending time engineering share price increases rather than using cash-on-hand to invest in future growth.
