I cannot believe how much hysteria there is about stock buybacks. Stock buybacks are something companies should be able to do to manage their shares outstanding. Plain and simple. Companies are responsible for managing their capital structure. Choosing how much debt to have, what sort of dividend to pay and how many shares to have outstanding are all in the purview of the company and senior management.
The fact that this topic is gaining so much attention is incomprehensible to me.
This will be the first in a series of pieces on the subject, because there is so much misinformation and vitriol and innuendo on the subject that need to be addressed, that it can’t be done well in just one piece.
While we will dig into buybacks in more detail, let’s start by boiling it down to the constituents involved and how they should respond to any potential concerns about buybacks.
- If you own the stock and don’t like management’s policy regarding share buybacks – then sale the shares. It really is that simple. If you think spending money to buy back shares is an inappropriate use of cash that will put the company at risk or hurt shareholders, then you are free to sell. There is nothing to stop you from selling and if you’ve had the shares for over a year, then the long term capital gains rate applies which isn’t particularly punitive. Had you spotted AIG, which repurchased a lot of stock ahead of the financial crisis, and sold AIG you would have saved a lot of money. More recently, had you identified GE as a potential candidate for a company that was spending money to buy back shares only to see its stock price hit hard on credit concerns down the road – then again you could have made a lot of money. Most shareholders don’t have enough shares to influence policy at the company but there is nothing to stop you from selling.
- There seems to be a narrative that companies should somehow be using their cash for the ‘public’ good. That story seems to be gaining momentum as there is strong evidence that corporate tax cut in 2018 has lead to more money being allocated to stock buybacks relative to other uses of proceeds. Companies are responsible for managing their global business, including taxes and determining their best allocation of cash and resources. If you want to change the tax code, go right ahead. If you want to ensure that certain behavior is rewarded in the tax code, go right ahead. There will be consequences for any changes in tax codes. Companies will adapt their behavior to tax codes, like they adapt it to other changing aspects of their operating environment. But don’t expect to force behavior down the throat of any company. Companies are there for the benefit of their shareholders while working within the law. If the law, or taxes become too restrictive – companies will respond and forcing behavior via punitive or regressive tax plans may backfire. Politicians can do what they want, but they must keep in mind that companies are responsible to their shareholders and will do what is necessary for shareholders. Think about that before enacting policy and make sure you really consider the potential ramifications of any policy.
- If there is concern that buybacks are being used to change compensation of senior management of the company, than maybe change compensation from being based on share prices or factors that are influenced by the number of shares outstanding. Maybe it is time to look at compensating management for increasing net enterprise value. Share price is often a proxy for market capitalization. With share buybacks increasing at a rate that can distort historical relationships between market capitalization and share price, maybe it is time to focus on the former more than the latter? Everyone should agree that increasing market capitalization is the real goal and that isn’t achieved by simply reducing the number of shares outstanding. Let’s move away from things like earnings per share (EPS) to just earnings, which aren’t affected by the number of shares outstanding.
- shareholders can exercise their right to sell,
- policy makers can attempt to sway policy, but must understand that companies exist for their shareholders, not policy makers,
- company boards should assure that interests of shareholders and management are aligned, and if that means tweaking some existing views to be less fixated on shares, then let’s do it
I will attempt to address each of these points in much more detail, but suffice it to say that I cannot understand how this subject has become such a become issue in the first place. That what seem like brazenly silly ‘accusations’ are getting so much traction is shocking. But what has really concerns me is that some proposed ‘solutions’ that are nonsensical to me, are gaining traction and we must stop these in their tracks.