Buybacks are surprisingly controversial. You wouldn’t think buybacks would be such a big deal because they are just an alternative way to give excess cash back to shareholders. However, they are blamed for the lack of productivity in the economy and juicing EPS numbers. If firms buyback stock instead of investing in capex, then it can hurt the productivity of the economy. However, the issue is not having a place to put the money; it’s not the place the money goes afterwards. Buybacks can increase EPS numbers if the share count is reduced. It’s not necessary to discuss how the EPS numbers are fake, because everyone on Wall Street knows how earnings per share work. It’s not tricking anyone. You can look at sales growth to tell the health of the business. If sales are slowing, then the ability to continue buying back shares to boost EPS numbers won’t last long.
It could be argued that buybacks boosting EPS numbers aren’t the problem. I think the problem is when retail investors don’t realize how share counts might not be reduced by buybacks if firms issue more shares through compensation, then they buyback. It’s worth noting that the buyback isn’t at fault in this case. The problem is paying management and employees too much money. If people mad about buybacks said money that’s spent on executive compensation should be invested into the business, most people would be on board with that because companies that pay their CEOs the most have much worse performing stocks over the past 10 year than those who pay their CEOs the least.
The chart below is another interesting stat. Firms that buyback the most stock underperform the market while those who don’t buyback stocks outperform the market. This shouldn’t be taken the wrong way. Buybacks are money returned to shareholders. The act of doing this isn’t the problem. The problem is when companies aren’t in a position to invest in new products, it could be a bad sign. It could mean their business is in decline and management can’t fix it. It’s also worth noting that profitable companies need to return cash to shareholders. I’m just trying to review possible explanations for this chart. Keep in mind this is an average stat just like the CEO pay stat. The difference is CEO pay is often not properly aligned with performance as firms give golden parachutes to executives who are fired after doing a bad job.
