A Simple Test to Dispel the Illusion Behind Stock Buybacks – The New York Times

Gretchen Morgenson writes about the skewed incentives for stock buybacks:

Some critics say that top managers who preside over big stock repurchases are failing at one of their most basic tasks: allocating capital so their businesses grow.Even worse, buybacks can be a way for executives to make a company’s earnings per share look better because the purchases reduce the amount of stock it has outstanding. And when per-share earnings are a sizable component of executive pay, the motivation to do buybacks only increases.

She cites the approach of Robert L. Colby:

“The simplest way to evaluate a company’s asset allocation decisions over the years is to see whether its net profit growth is close to its earnings-per-share growth,” Mr. Colby said. “Unlike an investment in the business, share buybacks have no effect on net profit and there is no compounding in future years.”

Source: A Simple Test to Dispel the Illusion Behind Stock Buybacks – The New York Times

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