Practical analysis for investment professionals
08 April 2016

The Buyback Binge: Is It Good for Shareowners?

Share buybacks haven’t been getting the best press of late.

They’ve been dismissed as “self-cannibalization,” “corporate cocaine,” a recipe for conflict of interest, and a form of stock price manipulation — not to mention shortsighted and counterproductive.

Yet share buybacks are incredibly popular. Since 2009, S&P 500 companies have spent more than $2 trillion on repurchases. From 2005 through late 2015, IBM spent $125 billion on them. In the first three quarters of 2015 alone, Apple bought back $30.2 billion worth. Indeed, much of the credit for the post-financial crisis bull market of the last seven years can be attributed to the ubiquity of share buybacks.

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At bottom, repurchases are a way of rewarding shareowners. By buying up shares, a company raises the value of those remaining with its stockholders, which in turn will tend to boost earnings per share (EPS). At the same time, buybacks are more tax efficient for shareowners, than, say, spending the capital on taxable dividends. Share buybacks, proponents maintain, are also a good use of excess cash when business circumstances make the timing for other outlays, whether acquisitions, new research, expansion, etc., less than ideal.

Critics argue that whatever the upsides of buybacks, they tend to be short-lived, adding no real value over the long term. Every dollar spent on buybacks is one less that could otherwise be used on research and development, acquisitions, etc. Management surely could find a a more productive use of capital. And sometimes the repurchases are financed by issuing debt. The timing can also be problematic. Repurchases may make sense if a stock is undervalued, but if a stock is priced higher than its intrinsic worth, any buyback is a net loss.

Buybacks can create a degree of moral hazard for management as well, skeptics claim. Pay packages are often tied to EPS, so executives may be incentivized to implement buybacks and sacrifice the firm’s future viability for a short-term boost in EPS. Similarly, if compensation is in any way a function of share price, executives might be inclined to use share repurchases to meet their targets. Buybacks can likewise be employed to facilitate share options programs for management, effectively transferring value from shareowner to executives.

Financial Analysts Journal Current Issue Tile

To get a sense of how investment professionals view share buybacks, we polled readers of CFA Institute Financial NewsBrief. Specifically, we asked them whether share buybacks were good for shareowners.

Are share buybacks a net positive or negative for shareowners?
Are share buybacks a net positive or negative for share owners?

A majority (53%) of the 814 respondents said that, on the whole, share buybacks constituted a net benefit to shareowners. Another 24% declared that they were neither positive nor negative, while 21% felt they were detrimental.

Of course the poll question and the results have a number of enigmas embedded in them. The degree of variation encapsulated in the word “shareowner” necessarily complicates the matter. Each shareowner is unique, with different inclinations and incentives. Certainly, share buybacks might benefit the shareowners anxious to unload their stakes. But those with a longer time horizon might have a vastly different take on things. It also brings up the whole concept of shareholder value and, by extension, shareholder value maximization and whether that is or isn’t a dumb idea.

Tile for The Current State of Quantitative Equity Investing

And what about the larger implications of share buybacks? Ultimately, the poll focuses on only one kind of stakeholder. Whether repurchases are beneficial to a company’s long-term health, its employees, the markets, and the larger economy are entirely different issues, and well worth further exploration.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

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About the Author(s)
Paul McCaffrey

Paul McCaffrey was formerly the editor of Enterprising Investor at CFA Institute. Prior to that role, he served as an editor at the H.W. Wilson Company. His writing has appeared in Financial Planning and On Wall Street, among other publications. He is a graduate of Vassar College and the Craig Newmark Graduate School of Journalism at CUNY.

3 thoughts on “The Buyback Binge: Is It Good for Shareowners?”

  1. Had I been included in the poll, I would have voted ‘Neither’. . .but I’d also be leaning heavily against the idea of buy-backs. I believe that it’s in the DNA of of most corporate managers to prefer controlling corporate cash to paying dividends. They are nothing if not self-interested. But that’s also human nature.

    In addition, if corporate incentive programs such as EPS don’t provide for adjustments based on the number of shares issued and outstanding, excluding those in the treasury, then those drawing such programs are clueless. I find it regrettable that a clear majority in this survey thought share buy-backs were a good idea. They might be. . .but, more often than not, I’d bet they’re self-serving for executives who are already insanely and ridiculously overpaid in most cases.

    If Boards really want to incent senior executives to do the right thing in all of their decision-making, Boards should defer a substantial portion of all bonus monies due all officers and make them payable in long-term bonds of the company. The maturity dates for such bonds would be at least five years after the age at which an executive will be able to draw a full social-security benefit; the bonds would be unable to be sold in the meantime. . .unless the executive dies or is 100% disabled. Extending executives’ horizons in this way would, in my view, lead to much better decision-making for all stakeholders, including the executives themselves. The moral hazard aspect of stock buy-backs would also be eliminated.

    FWIW, I don’t recall Warren Buffett EVER buying back any of Berkshire’s shares, either the A or the B series. His politics notwithstanding, I think he’s a pretty good bellwether for these kinds of questions.

  2. Buck says:

    The debate over whether buybacks are good or bad largely presumes a company faces the decision to *either* buyback stock *or* invest in R&D, etc. This is a false either/or. Companies can and frequently do execute both simultaneously. The debate here is a politicians’ invention. Besides, there is a scaling issue. You can get a lot of bang out of relatively little investment in R&D/expansion, see Apple for more.

  3. John P. Killeen says:

    So, IBM as an example: $125 billion? The overall firm value declined after periods of purchases. Why is the analysis limited to the shares rather than the money spent. Microsoft bought and then wrote off the Nokia purchase and investors went nuts right? Why are people not going nuts when a firm spends 1 HUNDRED Billion on something that actually declines?

    This is as thrilling as a firm issuing shares or taking on debt: a re-arrangement of the balance sheet.

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