Stock buybacks: Who benefits?

Advisers should thoroughly vet every share repurchase offer in light of each client's unique situation
AUG 09, 2015
Stock buybacks are once again in the news, with Democratic presidential candidate Hillary Clinton criticizing companies for spending their cash on buybacks rather than investing it. Buybacks have been controversial for many years. Defenders argue that if corporate management cannot see profitable investments on which to spend cash, then it ought to give it back to the shareholders who might find good uses for it, including buying other stocks. While management could give it back in higher dividends, dividend increases are long-term commitments by the company because they are hard to reverse. If a company has to cut its dividend, that can cause significant declines in its stock price. As a result, many corporate managers prefer share buyback programs, which do not imply a long-term commitment and can be shut off after reaching a target amount, to be repeated in the future if desired.

FINANCIAL ENGINEERING

Critics argue that companies use stock buybacks for financial engineering. Reducing the number of shares outstanding increases the earnings per share, which can push up the share price and help executives achieve performance compensation targets. They should instead be investing it in new productivity-enhancing plants and equipment. Defenders say companies hold back from investing in new plants and equipment not because they want to use the money for financial engineering or because they don't have good investment ideas, but because consumer demand is weak around the world and the investment might not pay off. According to one estimate, the number of U.S. shares outstanding has declined 6% since 2009, though the pace of share repurchases has slowed this year. In the first quarter of 2014, companies bought back stock worth $159 billion, but in the first quarter of 2015 that declined to $144 billion. The decline in share repurchases possibly indicates that companies are expecting, or have experienced, weaknesses in earnings and are husbanding cash. It might also be an indicator of stock market weakness in the coming months. It's also possible that the decline means companies now are beginning to invest some of their cash, which would be good for the economy and investors in the long run. But the evidence won't be clear for some time. These are issues for advisers and their clients to be aware of. In addition, advisers should thoroughly vet every share repurchase offer in light of each client's unique situation and advise the client on whether to accept or ignore the offer.

Latest News

DOJ's fraud sweep bags over $1B in convictions, guilty pleas and indictments in a single week
DOJ's fraud sweep bags over $1B in convictions, guilty pleas and indictments in a single week

Medicare scam, pandemic benefit theft, offshore tax evasion — federal prosecutors are casting a wide net.

Retirement without guaranteed income streams may mean near-total asset wipeout
Retirement without guaranteed income streams may mean near-total asset wipeout

Report finds that pension income acts as a financial lifeline for retirees facing late-life shocks and raises urgent questions about the DC-only future.

Federal judge dismisses Eltek manipulation lawsuit against Morgan Stanley Smith Barney
Federal judge dismisses Eltek manipulation lawsuit against Morgan Stanley Smith Barney

Nine-month electronic trading freeze and share lending program at the center of dismissed claim.

RIA wrap: Dynamic strikes South Carolina deal to reach $7B AUM milestone
RIA wrap: Dynamic strikes South Carolina deal to reach $7B AUM milestone

Meanwhile, Rossby Financial's leadership buildout rolls on with a new COO appointment as Balefire Wealth welcomes a distinguished retirement specialist to its national network.

Rethinking diversification amid a concentrated S&P 500
Rethinking diversification amid a concentrated S&P 500

With a smaller group of companies driving stock market performance, advisors must work more intentionally to manage concentration risks within client portfolios.

SPONSORED Beyond wealth management: Why the future of advice is becoming more human

As technical expertise becomes increasingly commoditized, advisors who can integrate strategy, relationships, and specialized expertise into a cohesive client experience will define the next era of wealth management

SPONSORED Durability over scale: What actually defines a great advisory firm

Growth may get the headlines, but in my experience, longevity is earned through structure, culture, and discipline