[tomp]

> buy back their own stock so they make themselves rich while screwing ordinary investors and employees and companies

I'm not sure how this is valid reasoning... Aren't stocks "bought-back" on the public market? If so, then buybacks would push up the stock price, which would benefit arbitrary investors directly (those who were willing to sell at a slightly higher price) and all investors indirectly.

[mattzito]

I'm not 100% sure this is what the GP was referring to, but a common (and totally legal!) technique to prop up a flat or trending downward company is to start a share buyback program. You take cash that you have no idea what to do with anyway, and rather than return it to investors through a dividend, you start buying back shares. That props up your EPS, since there are fewer shares on the market, and you continue to make your numbers.

In addition, this helps to keep your share price high/growing, which benefits insiders who then sell the stock, knowing that the fundamentals of the business are shaky.

The best part is that all of this is done in the open, it's just that typical retail investors are not necessarily sophisticated enough to understand what's happening, and accept the company's argument that they're buying back their stock because it's "undervalued"

[yummyfajitas]

This is the same as dividends, except that the shareholders pay lower taxes.

Suppose you own 100 shares shares worth $100. If they issue $10 worth of dividends, then you receive $10 and the stock price goes down to $0.90, so your 100 shares are worth $90. If they do a share buyback, you get $10 and your remaining 90 shares are worth $90.

The main difference is that in the first case you pay dividend tax on $10, in the second case you only pay capital gains tax on 10x($1 - cost basis), plus the cap gains rate is lower than the dividend rate.

[WalterBright]

I hear again the notion that investors are too stupid to know what is going on. The institutional investors, the ones who manage funds, are the ones that move markets, and they know damm well what is going on, and the shares get priced accordingly.

[mattzito]

So - I do advisory work sometimes for institutional investors. They ask me to consult on technology companies and talk about their market prospects and what X means in a company's earnings report. Those folks, while definitely savvier than the retail investor I described, are often so far off from the realities of the business we are discussing that it's shocking. There are exceptions of course, but by and large the market makers are equally victim to the representation of the company management

[WalterBright]

A CEO once told me how he (legally) manipulated the books to "get the numbers Wall Street was looking for". The stock tanked. Evidently he was only fooling himself.

A CEO might be able to hide poor results for a quarter or two, but the investors always catch on.

[erbo]

The downside of that strategy, of course, is that if you incur losses after the buyback, those losses, on a per-share basis, are magnified to the same degree as your earnings were. The sword cuts both ways.

[mattzito]

Yes, but since you are the insiders and have a long-term vision of subsequent quarters, you often know (or suspect) what will happen and adjust accordingly.