A new study purports to show that stock buybacks do not impede long-term growth. Ira Kay and Blaine Martin conclude:
Contrary to the common assertion that share buybacks damage long-term growth and investment, we found that companies conducting larger share buybacks (-12.8% change in common shares outstanding over four years) showed higher TSR, higher CapEx growth, and higher employee count growth over the subsequent four-year period. Additionally, the companies conducting large buybacks continued to grow revenue in the subsequent period at a pace nearly as fast as the group with smaller buybacks (3.8% annualized revenue growth versus 4.2%). Earnings growth was equal between the two groups (9.15%).
While buybacks are explicitly intended to optimize EPS and potentially increase stock prices, we make no claim that the large buybacks are causing the subsequent favorable TSR and CapEx growth. However, the TSR and other data in a “post-buyback” period appear to demonstrate no long-term damage or obvious cannibalization of CapEx investment. This is confirmed in the following sections.
While it is possible a company could have grown revenues even further through investing or hiring, it is also not clear that incremental investment would have resulted in higher revenue growth or, more importantly, earnings growth that shareholders would have valued on par with a share buyback. The equal bottom-line EPS growth (9.15% annualized growth) between the two buyback groups suggests that both appear to be optimizing earnings growth.
We are still skeptical. Our concerns about buybacks are in part based on the marked difference in size, rationale, and impact of buyback decisions over the past one to three years, not nearly enough time to provide a chance to evaluate the results. And we still believe that to the extent these findings continue to be the case compensation committees should still adjust EPS targets in executive compensation proportionate to any buybacks to make sure there are no misaligned incentives or windfall increases in pay.