How are stock buybacks any worse than dividend payouts to investors?
I get how they are logistically different, but to me, whether you give the investors cash that they use to buy more stock, or you internally increase the value of a stock by buying it back with company funds, the result is the same – Investors get richer at the cost of investment.
Not saying buybacks aren’t bad, but I guess I just don’t understand the hate relative to dividend payments.
In: 98
**TL:DR**: Because often times it can become something of a grift for upper management to get bonuses at the expense of the longer term future of the company.
Because it skews the incentives of the Management and board. Many CEOs and the like are compensated with bonuses based on things like growing a companies Earnings per share, or growing the share price. Doing stock buybacks is an easy way for management to artificially boost those things, without having to focus on creating real value through innovation and great business. So it can often become a major problem of capital misallocation that benefits a CEO, who is likely to jump ship in a couple years, instead of focusing on the business long term. Even to the point where companies borrow tons of money, and actually buy back shares with borrowed money. No company takes out loans to pay dividends though, those actually have to come from profit.
Board member and big investors are ok with it, because their shares go up, and they can always sell out of their positions later on. But in the longer term, too much focus on buybacks is what leads companies to stagnate and eventually get surpassed by new innovative companies that focus on creating actual value.
Latest Answers