The Buybacks Bite Back Hard
If the government bails out a business, it’s not allowed to buy back its own shares until a year after the debt is cleared. It’s a new rule, and it’s really important. 70% of company profits were returned to investors through ‘share buybacks’ last year!
When a company lists on the stock exchange, the owners are giving up a slice of the pie and letting the public have a feeding frenzy. Investors buy up and own thousands of shares as a group.
A share buyback is precisely that, the business buying back some of those shares. Investors appreciate the move because it concentrates more value in their shares that remain, and the stock price goes up as a result.
Share repurchases are done in extended ‘programs,’ and are just one possible profit play by management. Coca-Cola is known for depositing money straight into shareholders’ bank accounts with a dividend. Tesla is known for investing the money it can find in new car plants to grow. General Motors is known for paying down debt with the goal of steadying the ship. There’s no right or wrong answer. It’s all about context and what management thinks is most wise with a long-term view, or at least it used to be.
Some say share buybacks are chosen when management runs out of ideas. More say share buybacks are an easy way to juice stock prices and trigger huge bonus criteria for executives. Opponents dispute that completely. Ed Clissold of Ned Davis Research says that as chief of US strategy, he sees “so many things go into supply and demand for stocks. Viewing buybacks in isolation would miss a lot of their value.”
One thing is for sure; some companies have fallen sucker to the short-term kicks from buying back shares. After blindly buying back shares at overvalued levels, airlines are getting humbled by their own holdings in themselves amid this market downturn.
That’s pretty funny, and a pattern for investors to remember. An aggressive share buyback program is wonderful in the good times, but cannibal companies trail their peers on the stock market when markets turn bad.
