eli5: what are stock buybacks, why are they generally considered a bad thing (for most of us), and what’s the rationale for having it?
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They aren’t always bad. There are legitimate uses for doing buybacks that have positive effects.
1. It can reduce costs. Buying back shares and not increasing dividend prices means less of the company’s money is being paid out to investors. If it isn’t using the money for growth because of economic or market conditions, but is still highly profitable, it can be better to buy back the shares rather than continue paying dividends on all of them. In this situation there’s a financial disadvantage to having so many outstanding shares.
2. Can protect the company during a recession/downturn. Instead of having to just cut dividends and suffer a mass sell off from short term investors, the company can do buybacks prior to or at the onset of an economic downturn to soften the blow. This use can leave the company with more operating cash during the downturn if it’s not in a position to reduce dividend payments without suffering catastrophic devaluation.
3. Undervalued stocks can be bought by the company and later reissued when the stock price is high to acquire new capital without having to issue new shares. This one can be tricky, but because a lot of investors tend to be short-sighted it’s very possible for a company’s stock price to be significantly undervalued (or bad press, frivolous lawsuits, etc.. can cause an undervalued stock).
The company can take advantage of this situation and do a buyback while the prices are low, which will help shrink the valuation gap and then resell those shares later to bring in more cash.
4. It can make their stock more attractive to investors. Stocks compete with each other (it’s a market, after all). The act of doing a buyback can signal to investors that the company no longer needs excess capital and/or is in a good enough financial position that it can afford buybacks. That increases investor confidence.
You can read a bit more in depth at [investopedia](https://www.investopedia.com/ask/answers/042015/why-would-company-buyback-its-own-shares.asp)
Note: The “here’s how they can be bad” are pretty well covered by other posts here, so I did not include them. This isn’t a “make them seem rosey and good” post, but a balance post. Please do read other posts in here to see how they can be (and often are) a negative.
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