Despite their proven track record of long-term success, stock buybacks still don’t get any love from America’s progressive politicians (or progressive citizens). To the more left-leaning part of the country, they’re the epitome of evil, corporate greed.
A tool used to line the pockets of dastardly executives.
Some folks even think that stock buybacks will eventually harm the integrity of America’s top corporations – a projection that, based on scores of economic data, appears to be completely untrue.
They contribute to income inequality, the progressives say, and stifle productivity.
Bears don’t like share repurchases either. They claim that buybacks end up “rigging” the market in the favor of bulls.
Which, to me, sounds like they’re working as intended. Most investors want equities to rise long-term, believe it or not.
What the critics get wrong time and time again is the reason companies repurchase shares. They all think it’s part of a scheme to artificially raise stock prices short-term at the cost of true prosperity.
The truth is, stock buybacks are simply a tool, often brought out when a company has excess cash and nowhere to spend their money internally. Michael Burry, one of the investors who shorted the housing market (and was made famous in The Big Short), said just last week that “there is no better use of capital [than buybacks].”
Especially when a company’s shares appear oversold.
But the most common reason corporations repurchase shares is to offset the dilution of corporate ownership in the company. Corporations that offer employee compensation in the form of stock options lose ownership power over time, as it’s slowly shifted to employees quarter-after-quarter.
Stock buybacks offer the most direct (and convenient) route to solve that problem.
Bears say that’s not the real reason they’re used, though, since share repurchases have been occurring with more regularity over the last few years. They claim that when share prices start dropping, companies roll out buybacks to keep them afloat.
And while that might make sense when taken at face value, the reality is that the buybacks of the last 10 years have all occurred in a bull market. Due to rising stock prices, employees have happily taken stock options as a part of their compensation – something that’s become much more popular since 2011.
In order to offset the loss in corporate ownership of shares, companies have had to buyback shares with more regularity.
That’s still not enough for some buyback detractors, though, who believe that companies repurchase shares to simply boost EPS (earnings per share).
But since 2011, S&P 500 companies repurchased roughly 72 billion shares while issuing 50 billion, resulting in 22 billion net repurchasing of shares.
By reducing the number of outstanding shares, the EPS of America’s top firms should’ve skyrocketed.
But EPS barely budged following the buybacks, suggesting that artificially hiking EPS was hardly the endgame of S&P companies.
Moreover, they weren’t trying to hastily raise share prices.
Because over the last decade, strong earnings growth has driven the bull market. NOT stock buybacks.
Some politicians running for president want to actually ban (or limit) share repurchases to protect the American people.
And while their intentions may be pure, their understanding of stock buybacks is woefully insufficient. A “buyback ban” would be ruinous to corporate America, and after a few quarters, the economy.
At that point, the recession everyone’s worried about would seem like a walk in the park by comparison. If Trump loses in 2020, I can guarantee you that the market would instantly plummet as a result.
Is that something Americans are willing to deal with just to stop “corporate greed”? Apparently, yes, it is.
Simply because they’re too ignorant to understand the true ramifications of such a damaging proposal.
