Share buyback and its implications

Buying back stock is a cold-blooded financial maneuver that favors shareholders at the expense of all other stakeholders, including employees?

When company buy back its own shares, it reduces the shares in circulation, raise earnings per share, and therefore push up the share price—a great outcome for executives who are incentivized to raise the share price. It all happens without investing anything in the company.

Managers know their own business better than anyone else. If they see no growth opportunities, the responsible thing to do for their own shareholders and for the economy as a whole is to buy back stock.

So on that note, share buyback is not in itself harmful.

However, in the context of US, it has some implications. The market has soured on the companies’ share buyback strategy: For much of the last decade, companies buying their own shares have accounted for all net purchases. The total amount of stock bought back by companies since the 2008 crisis even exceeds the Federal Reserve’s spending on buying bonds over the same period as part of quantitative easing. Both pushed up asset prices.

As per the chart shown below, for the first few years after the 2008 crisis, the S&P 500 Buyback Index far outpaced the market – S&P 500, but over the last two years it has failed to do that. With stocks expensive, using shareholders’ money to buy at inflated prices might not be a good deal.

Bloomberg Businessweek, John Authers, 2019-02-07, “Stock Buybacks Aren’t Bad. They’re a Symptom of a Larger Problem”