The Dubious Value of Stock Buybacks

Stock Buybacks and Repurchases

One of the fads on Wall Street has been the need to buy back shares.

I am not enthusiastic of stock buy-backs for the following reasons. On the surface, stock buybacks look benign and clever deployment of shareholder capital. Share buybacks are a great idea on paper: share buybacks lift the per-share earnings of a company—fewer outstanding shares imply better earnings-per-share.

However, several companies use share repurchases to mask options grants issued as compensation to employees. Taken together, the money used in buybacks indirectly goes to executives.

As is often the case, a company that engages in stock buy-back misuses earnings on its own probably overpriced stock. It is the fiduciary duty of a company’s leadership to manage the company’s business and not to manage shareholder’s money. Corporate leaders who might be smart at managing a business, but they are not the greatest of investors and often are not very prescient about capital markets and how the markets evaluate their own company’s stock. The corporate leadership and the board work for the investors and the profits truly belong to the investor. I would rather get the cash in the form of increased dividends or, rarely, as special one-time dividends.

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