Huge share buybacks are becoming de rigueur for big companies. But do they really do anything for shareholders?
That's a bit of a shame, given that S&P 500 companies spent $567.2 billion on buybacks in the 12 months through Sept. 30, according to FactSet.
"Stock repurchases are a clever accounting trick to inflate the much-publicized earnings-per-share metric for a stock," Reeves notes. And surprise, surprise, part of the compensation for many top executives is determined by earnings per share.
But higher earnings per share don't necessarily boost the stock price. Studies have shown little evidence that buybacks help lift share prices.
And buybacks can actually hurt a company if it's taking on excessive debt to pay for the buybacks or it's using money that could be invested to boost the company's business.
Moreover, some companies have a way of buying their shares at peak prices, rather than when the valuation is attractive.
Reeves points out that not all buybacks are bad. "In some circumstances a repurchase of stock makes sense, both for the company and for individual shareholders," he explains.
"But it often appears that some S&P 500 corporations are committed to buying their own stock at elevated levels to enrich executives because they have no good ideas for growth."
Esteemed entrepreneur/venture capitalist Nick Hanauer doesn't think too highly of buybacks either. "In the past, this money flowed through the broader economy in the form of higher wages or increased investments in plants and equipment," he writes in The Atlantic.
"But today, these buybacks drain trillions of dollars of windfall profits out of the real economy and into a paper-asset bubble, inflating share prices while producing nothing of tangible value."
The harm is great, Hanauer says. "This practice is not only unfair to the American middle class, but is also demonstrably harmful to both individual companies and the American economy as a whole."
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