Stock buybacks …

Recent economic stimulus legislation prevents companies receiving taxpayer loans from employing stock buybacks. The popular perception is that buybacks are used by greedy executives to increase the value of their company stock holdings. It’s true, nearly 60% of total executive compensation is in the form of stock such a restricted shares, options, incentive payments, etc. All contain some risk in that the expected value may not be realized. Just ask an executive about the last few months or what will happen to company performance or stock prices if we have a recession.

Or, ask me. I accumulated shares in my former employer over many years through options and various awards. Since January their value has dropped over 40%, poof.

While buying back shares of stock will increase the value of company’s remaining shares and increase earnings per share simply because dividing fewer shares into total earnings increases the per share amount, that result benefits all shareholders large and small, individual investors, mutual fund investors, 401k, IRA investors and even recipients of pensions as funds are invested in the stock market.

To mischaracterize buybacks as an evil tool of greedy executives is unfair and politically motivated. Executive compensation is insignificant as far as workers and consumers are concerned.

No doubt buybacks can be misused, they can be a tool to mask a companies financial troubles, to mask poor management, but that’s an issue for shareholders to deal with and will soon come to light in any case.

Take look at this article on Investopedia for a better understanding of buybacks.

“In the same let­ter, Mr. Schumer said the leg­is­la­tion in­cluded a ban on stock buy­backs for any com­pany re­ceiv­ing a gov­ern­ment loan from the stim­u­lus pack­age. The ban lasts the term of the gov­ern­ment as­sistance plus 1 year.” Source: Wall Street Journal 3-25-20

9 comments

  1. I’ve always been against stock buybacks because executive Bonus is often based on a metric that uses on number of shares, like EPS. As you noted, that’s indicative of a compliant or lazy Board of Directors. Buybacks indicate a lack of ideas for how to move the business forward. If the corporation has ‘extra’ money, I agree that it would be better spent on increased R&D. If that’s not possible, the it should be paid as a one-time special dividend to shareholders.

    My condolences on your extended cruise. I hope they’re taking good care of you. We were on the Vaandam last fall for 10 days and had a good time.

    John

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  2. I think the controversy abt buybacks is also a concern abt other uses of excess capital. Also, can’t help but notice how much better off companies would be if they were sitting on lots of $cash$. Sorry for your seagoing saga, stay well.

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  3. My main issue with stock buybacks is that they encourage executives to act in their own short-term interests by the way they siphon off funds that could be really put to better use for long-term shareholder benefit, particularly as investments in R&D. I recently retired after 50 years in the computer industry, and I have seen over time a steady shrinking of long-term R&D investments across the industry. In my final five years I was spending a lot of time watching Huawei emerge as a major player in areas other than networking, where the magic of free R&D (their business basically started by stealing Cisco’s networking designs and software) did not apply. Where US competitors were investing low-single-digits in R&D, Huawei was investing somewhere around 14%, and now has a solid competitive line of server, storage and other core infrastructure offerings. The same pattern has repeated itself across other industries as well.

    As a stockholder I think I would have benefited more from a better future competitive position than from a short-term rise in share prices.

    Richard Fichera
    richardfichera@hotmail.com

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    1. A valid concern, but that also has to do with the effectiveness of the BOD and the design of the total compensation package.

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  4. The Investopedia article by Cory Janssen is informative. And contains a key reason why buy backs are considered with skepticism by those both inside and outside the “investment community”.

    Janssen writes, “After all, the goal of a firm’s management is to maximize return for shareholders, and a buyback typically increases shareholder value.”

    Note he writes “the goal” not “a goal” or even “the chief goal”.

    The recent history of American business can be much understood by discussing those critical distinctions.

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  5. As a NY’er I so embarrassed that Chuck Schumer is my senator!! The guy is a complete moron and that’s holding back how I really feel!! Like the typical democrat moron, he still thinks big business is bad! And more than likely he is jealous of CEO’s who make more than him. Like Mr. Quinn states, stock buybacks help share prices and are a better way for companies to use their cash. Anyone with a pension, 401(k), 403(b) or mutual funds should cheer when a company buys its own shares.

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  6. This may drop in a hole in cyberspace. But here goes……I’ve enjoyed your newsletter. Look forward to seeing it in my inbox. Practical and down to earth. You mentioned a few days ago that you were on a ship. I keep thinking about that and would like to know when you are back HOME. Thanks for all you do! Linda Burden Sent from my iPhone.

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