by Lance Roberts
My articles My offerMy siteAbout meMy videosMy books
Follow on:TwitterSeeking AlphaFacebookAmazon
Corporate buybacks have become a hot topic, drawing criticism from regulators and policymakers. In recent years, Washington, D.C., has considered proposals to tax or limit them. Historically, buybacks were banned as a form of market manipulation, but in 1982, the SEC legalized open-market repurchases through Rule 10b-18. Although intended to offer companies flexibility in managing capital, buybacks have evolved into tools often serving executive interests over broader shareholder value.
This article explores the mechanics of buybacks, how they impact markets, and whether they truly return capital to shareholders—or merely enrich insiders.
The Rise of Corporate Buybacks: By the Numbers
Since 2003, U.S. corporations have spent over $11 trillion on share repurchases. Corporate buyback activity has surged in recent years, even in volatile markets:
- 2021: $881 billion
- 2023: $795 billion
- 2024 (Projected): Expected to exceed $988 billion
Introducing a 1% excise tax on corporate buybacks in 2023 has barely slowed the trend. Companies prioritize repurchases over reinvesting in business growth, raising wages, or developing new technologies. Apple and Meta, among others, regularly allocate billions toward buybacks, supporting their stock prices and meeting shareholder expectations.
How Buybacks Affect Markets
The impact of buybacks extends beyond individual companies. Since 2000, net corporate buybacks have accounted for 100% of the equity market’s net asset purchases—a reflection of the diminished participation from pensions, mutual funds, and individual investors:
- Pensions & Mutual Funds: –$2.7 trillion
- Households & Foreign Investors: +$2.4 trillion
- Corporations (Buybacks): +$5.5 trillion
- Net Flow: +$5.2 trillion
There are often statements made that corporate buybacks have only a limited impact on stock prices. However, the evidence is pretty overwhelming to the contrary since 2012, when corporations became very aggressive about buybacks.
This trend raises important concerns. While buybacks temporarily support share prices, they can crowd out investments in innovation, capital expenditures, and employee compensation, contributing to long-term economic stagnation and inequality.
Who Benefits Most from Stock Buybacks?
Many analysts argue that buybacks return excess capital to shareholders. However, the reality is more complicated. Buybacks primarily benefit insiders through carefully timed stock sales, inflated earnings metrics, and compensation triggers:
- Timing Insider Sales with Buybacks
- Insiders, aware of buyback schedules, can sell shares during repurchase periods when prices are temporarily elevated.
- This practice boosts insider profits without triggering price declines or regulatory scrutiny.
- Boosting Earnings Per Share (EPS) to Unlock Bonuses
- Buybacks reduce the number of outstanding shares, artificially inflating EPS.
- Since many executive compensation packages tie bonuses to EPS growth, buybacks help executives meet targets and secure stock awards.
- Offsetting Dilution from Stock Options and RSUs
- Buybacks reabsorb shares issued through stock options and restricted stock units (RSUs), preventing dilution and keeping share prices elevated for insiders.
Despite these benefits to executives, the average shareholder sees little return unless they sell their shares during buyback periods. This creates an uneven distribution of profits, favoring insiders and short-term traders over long-term investors.
Companies often market corporate buybacks as a "return of capital to shareholders," but this framing is somewhat misleading. Unlike dividends, which distribute cash to all shareholders equally, buybacks benefit those who sell their shares. As a result, buybacks:
- Prioritize short-term stock price gains over long-term investments.
- Signal a lack of business reinvestment opportunities—or a deliberate choice not to pursue them.
- Concentrate benefits among insiders and executives, whose compensation is tied to stock performance.
A study from the Securities and Exchange Commission (SEC) found that executives often sell significant amounts of stock shortly after buybacks are announced, reinforcing the idea that buybacks serve insiders more than ordinary shareholders.
Alternatives to Buybacks: Real Ways to Return Capital
To promote sustainable growth and equitable returns, companies could shift their focus from buybacks to more transparent and shareholder-friendly strategies.
- Tender Offers
- Tender offers involve buying back shares at a pre-determined premium, ensuring all shareholders have a fair opportunity to participate.
- This process reduces the risk of manipulation and aligns better with shareholder interests.
- Dividends
- Dividends provide predictable income to all shareholders, promoting financial stability, especially for retirees and long-term investors.
- Regular dividend payments encourage companies to focus on profitability rather than temporary stock price boosts.
- Long-Term Investment in Growth
- Companies can create sustainable value over time by reinvesting profits into research, innovation, and employee compensation.
- This approach aligns corporate management with broader economic growth rather than short-term financial engineering.
While corporate buybacks can support stock prices in the short term, they do little to enhance long-term business performance. Studies, including the Bank for International Settlements research, have shown that buybacks prioritize EPS manipulation over actual value creation. This emphasis on stock price gains discourages investment in productive assets and innovation, weakening companies' ability to grow sustainably.
William Lazonick, in his seminal article "Profits Without Prosperity," highlighted how stock buybacks divert corporate resources away from economic growth and into executive compensation. Between 2003 and 2012, S&P 500 companies allocated 54% of their earnings to buybacks and another 37% to dividends (91% of total earnings), leaving little for business expansion, wages, or job creation investments.
Conclusion: A Shift Away from Buybacks Is Necessary
While corporate buybacks are marketed as a "return of capital," they primarily benefit insiders and short-term traders. Their rise reflects a broader shift in corporate priorities—from investing in growth and innovation to maximizing executive compensation through financial engineering.
To promote long-term shareholder value and economic prosperity, companies should adopt more transparent capital return strategies, such as tender offers and dividends. These methods distribute profits more equitably and encourage sustainable growth. A shift in focus could rebuild trust between corporations and shareholders, aligning business strategies with broader economic health.
Call to Action:
Want to learn more about sustainable investment strategies and how they impact your portfolio? Visit RealInvestmentAdvice.com for the latest insights and actionable advice.
The post Corporate Buybacks: A Wolf In Sheep’s Clothing appeared first on RIA.
Full story here Are you the author?You Might Also Like
Exuberance – Investors Have Rarely Been So Optimistic
2024-11-12
Investor exuberance has rarely been so optimistic. In a recent post, we discussed investor expectations of returns over the next year, according to the Conference Board’s Sentiment Index. To wit:
“Consumer confidence in higher stock prices in the next year remains at the highest since 2018, following the 2017 “Trump” tax cuts.“ (Note: this survey was completed before the Presidential Election.)
We also discussed households’ allocations to equities, which, according to Federal Reserve data, have reached the highest levels on record.
In that article, we discussed the risk associated with high levels of investor exuberance.
“Risk isn’t always what it seems. When the market feels the safest, that’s often when it’s often the riskiest. Think about it — when everything is
Trump Presidency – Quick Thoughts On Market Impact
2024-11-08
The prospect of a Trump presidency has led to much debate and speculation about how markets might react. Depending on what policies are eventually passed, there are potential risks and opportunities in both the stock and bond markets. While the market surged immediately following the election, many potential future headwinds may impact returns from economic growth, monetary and fiscal policy, and geopolitical events.
Here are some quick thoughts about what we at RIA Advisors think about the stock and bond markets in 2025.
Stock Markets
Upside Potential: During the Trump presidency, he will focus on ensuring the Tax Cut and Jobs Act, passed in 2017, does not sunset in 2025, which will keep corporate tax rates at 21%. However, it is not unlikely that he will also push for a new
Election Day! Plan For Volatility
2024-11-05
With Election Day finally here, markets are bracing for potential volatility. History shows that the stock market can react unpredictably to election outcomes, especially when the results are unclear or contested. In past elections, sudden policy shifts, political uncertainty, or contentious outcomes caused heightened volatility—making it essential to prepare your portfolio now to weather whatever …
Key Market Indicators for November 2024
2024-10-29
Key market indicators for November 2024 present a complex but opportunity-filled environment for traders and investors. Following the first phase of Federal Reserve rate cuts and growing global uncertainties, the technical landscape suggests several notable shifts. Let’s explore the key market indicators to watch.
Note: If you are unfamiliar with basic technical analysis, this video is a short tutorial.
Seasonality and Breakout Patterns
As discussed recently, Seasonality is a crucial key market trend in November. Historically, the stock market transitions from the weaker summer months into a stronger end-of-year rally, often dubbed the “Santa Claus Rally,” beginning mid-December. On a rolling 6-month basis, November to April has both the highest percentage returns and the
Bastiat And The “Broken Window”
2024-10-18
In times of disaster and destruction, a common narrative often emerges that rebuilding efforts will lead to economic growth. The idea that repairing damage and replacing destroyed goods creates jobs that spur consumption and stimulate economic activity is tempting. However, as French economist Frédéric Bastiat explained in his famous “Broken Window Theory,” this reasoning is fundamentally flawed. Rather than generating net economic benefits, destruction diverts resources and wealth that could have been used for more productive purposes, ultimately stifling real economic growth.
Recent events, particularly the devastation caused by Hurricanes Helene and Milton in 2024, provide a clear example of why destruction does not create long-term economic prosperity. Despite the short-term boost
GDP Report Continues To Defy Recession Forecasts
2024-10-11
The Bureau of Economic Analysis (BEA) recently released its second-quarter GDP report for 2024, showcasing a 2.96% growth rate. This number has sparked discussions among investors and analysts, particularly those predicting an imminent recession. There are certainly many supportive data points that have historically predicted recessionary downturns. The reversal of the yield curve inversion, the 6-month rate of change in the leading economic index, and most recently, consumer confidence warn of a recessionary onset.
However, despite these warning signs, the U.S. economy continues to show resilience, defying many bearish forecasts. This article will explore the recent GDP report, the risks to continued growth, and potential investing opportunities.
Defying Recession Calls: The
The “Everything Market” Could Last A While Longer
2024-10-01
We are currently in the “everything market.” It doesn’t matter what you have probably invested in; it is currently increasing in value. However, it isn’t likely for the reasons you think. A recent Marketwatch interview with the always bullish Jim Paulson got his reasoning for the rally.
“It is this cocktail of ‘full support’ at the front end of a bull market which commonly has created an ‘Everything Market’ during the early part of a new bull. That is, for a period, almost everything simultaneously rises – value, growth, small, large, defensive, and cyclical stocks – and usually by a lot.
Short rates are falling, bond yields have declined, money growth is rising, fiscal stimulus has again expanded, and disinflation is still evident; and because of this new and overwhelming
Tags: Bear Market,Featured,Investing,Lance Roberts,newsletter,recession,S&P 500
