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by freetime2
1237 days ago
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I had to think about this for a bit, and then ended up Googling it. According to Investopedia [1] the key reasons buybacks are controversial are: > Artificial financial results: The impact on earnings per share can give an artificial lift to the stock and mask financial problems revealed by a closer look at the company’s ratios. > Abuse: Companies can use buybacks as a way to allow executives to take advantage of stock option programs while not diluting EPS. However, there isn't much evidence supporting the widespread belief that this happens. > Price bumps: Buybacks can create a short-term bump in the stock price that some say allows insiders to profit while suckering other investors. This price increase may look good at first, but the positive effect is usually temporary, with equilibrium regaining when the market realizes that the company has done nothing to increase its actual value. Those who buy in after the bump can then lose money. Basically there is a greater potential for price distortion and abuse with buybacks than dividends. Of course dividends can be gamed too, but as a relatively unsophisticated buy-and-hold investor I feel a lot more confident about buying a stock with a solid yield and long history of increasing dividends than I do about buying a stock with no yield whose valuation has shot up recently and is sitting near its record high. [1] https://www.investopedia.com/articles/financial-advisors/121... |
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1. There have been a studies that show companies are very good at doing buybacks near market highs rather than market lows so they are not efficient use of capital. Note that there have also been studies that try to claim stock buybacks do deliver long term value, but I have not found them convincing.
2. To build on the price bump point, the biggest beneficiary is actually short term activist investors and traders(who conveniently have similar time horizons as the executives) rather than long term shareholders.
3. Frequently buybacks are funded by draining reserves and/or with debt(especially when interest rates were low), this leaves companies weak when economic shocks happen like when the pandemic hit and we had to bail out the airlines who had no cash because they had been spending all their spare cash on buybacks. This could happen with dividends too but it is harder because it is an ongoing 'expense' you have to plan for because you pay it out every quarter rather than allow large sudden expenditures like you have with buybacks.
https://hbr.org/2020/01/why-stock-buybacks-are-dangerous-for...