Buybacks: Short-term Boost vs. Long-Term Shareholder Value — As You Sow

We highly recommend this excellent report from As You Sow on buybacks. We share their concern about this poorly timed diversion of corporate assets for short-term gains. An excerpt below (emphasis ours):

When a company has too much cash its executives and directors puzzle the question: What should we do with the money? Should we update our facilities? Should we invest in new research? Should we build a new plant? Should we increase benefits or wages?

This year we are seeing in real time what happens when companies have massive amounts of cash. The combination of corporate tax cuts and repatriation of money from fattened corporate bank accounts abroad to record-breaking balances. For the most part, the companies are not doing any of the things listed above that feed long-term success. Instead, they are repurchasing their shares. In the first quarter of 2018, companies conducted $178 billion in buybacks.

Buybacks, which were illegal and viewed as a form of market manipulation a few decades ago, have become increasingly common, and increasingly questioned….Companies spent nearly $7 trillion in buybacks from 2004 to 2014. Buybacks at the bottom of the market make sense. If a board thinks that the price of its stock is a bargain there are cases where they make sense—an announcement typically increases a stock’s value and the value of shares is diluted less. The recent buybacks are harder to explain, however, unless one considers that the executives are paid in stock and benefit personally from the buybacks.

In June, SEC Commissioner Robert Jackson and his staff came out with a study on buybacks and executive compensation that found many executives sold equity they would have received as compensation after the announcement. “Twice as many companies have insiders selling in the eight days after a buyback announcement as sell on an ordinary day,” according to the study.

If executives really believed that buybacks were the best use of capital for long-term good of the company—in other words that the stock was undervalued—they would be holding on to their shares. Instead they “cash[ed] out their compensation at investor expense.”

Source: Buybacks: Short-term Boost vs. Long-Term Shareholder Value — As You Sow

One Comment Add yours

  1. Good article. Thanks for bringing it to the attention of your readers. Executives aggressively pursue buybacks because of personal incentives tied to short-term metrics, such as earnings per share (EPS), at the cost of long-term value creation. I would like to see more shareholders introducing proposals similar to mine at Walgreens Boots Alliance Inc ($WBA). Want to file a resolution but don’t know how? Feel free to contact me.


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