why are stock buybacks bad?
In:
Because they are using money that they should be saving for a rainy day to instead by back their own stock at all time high prices
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A share of stock represents a piece of the company. Every company has a value. Valuation is too large of a subject to cover here. But, as an example, say my company can be proven to be worth $100,000 and I have 1,000 shares. Then each share should be worth $100.
As others have said, we cannot say *a priori* if a stock buyback is good or bad. It depends on how much the company pays to buy back their business relative to it’s true underlying value. It is **bad** for the current shareholders if management chooses to pay $150 per share when the shares are only worth $100 per share. It is **good** for current shareholders if management manages to buy existing shares for $75 each when they’re actually worth $100.
IRL, valuation is quite complicated so it can be difficult to assess whether or not management is making intelligent purchases of their shares. They may be motivated by other factors that have nothing to do with shareholder value. The may be overly optimistic about their own plans and strategies.
Given the recent declines in equity prices in March 2020, I would be inclined to assume that companies buying back shares today are getting a great bargain.
[EDIT] See a book called _The Intelligent Investor_ for details on how the price of a stock can deviate from the value of the underlying business. The short summary is that investors tend to overreact in terms of either optimism or fear. When investors are optimistic they believe the business is worth a lot and are willing to pay very high prices. When they are fearful (like now) they are pessimistic about future conditions and future earnings they will only be willing to pay much lower prices for the same company.
who’s going to stop them? congress? they are bought and sold by these same companies. it’s an endless cycle of graft.
they are not always bad. BUT these companies used cash reserves and tax break funds to make their companies appear solvent and profitable, so they can justify huge salaries for board members and ceos.
kicking the can down the road, impending doom & financial fuckeroo around the corner. most companies have a mountain of debt due in 2021-2023. when that debt is due these companies and our financial system will implode. they will need further bailouts to prop themselves up.
They’re not necessarily bad. They increase the value of the outstanding shares (which gives share holders a great big stiffy), but the Company burns a lot of cash with the buybacks. Cash that could be used right now to live over low income times.
I always thought that buying shares are prices higher than their actual price will benefit the shareholders. Can anyone tell me how this is bad for shareholders?
Two motivations to point out.
1. Often, executives and board members are paid in stock options. The theory is they only make more if they drive the share price up, which is a big motivator for shareholders. Using company funds to buy shares back can make these execs more. A 20% move in one year can be millions for a CEO.
2. If a responsible company is paying its employees well, carries no debt, and is sitting on piles of cash, it’s reasonable to hand the excess cash to shareholders. Dividends are taxed as ordinary income and extra capital appreciation (from buybacks) is taxed at the capital gains rate, typically less. So, in theory, it’s a more tax efficient way to distribute cash to shareholders. The noise of the markets can get in the way of this.
It isn’t bad, it just means the company gets more control of their business.
BUT! When the buyback is done with money that was given by the government, so the company could keep paying their bills, buying supplies, and keeping people working, instead they do buy shareholders out of the company, so they get to keep more of the profits. Now this is kinda grotesque if you aren’t making any real profit and rely on subsidies and tax cuts to stay afloat. In which case you are basically just using tax payers money.
This is over simplifying it a bit, and since I’m nor from USA I can’t explain to you what US government wants companies to actually do.
But lets imagine you own a baking company, times are tough and barely anyone is buying your cupcakes. While ago when things were good you asked made a deal with a local raccoon, if he gives you money for a new dough machine, he get 10% of the profits. Now government gives you money so you can pay your bills during these hard times, to get flour, pay your utilities, pay your employee. To keep money flowing in the economy around you. Instead of doing this, you buy back the Raccoon’s profit share.
Can you see this issue here? Your local miller who is also struggling, needs business, and you need flour to run your business. But instead of buying said flour, you pay back Raccoons share. The money given to you doesn’t actually do anything. Economy is just long chain reactions. You buy flour from the miller, miller buys grain from farmer, farmer buys fertiliser from the rancher… etc… When you buy flour to make cupcakes, it is small amount of movement in the supply chain. You want this chain to keep moving. Imagine it as the belt of a machine, spreading momentum to other parts of the machine. (And before people barge in here… No… This is not “Trickle down economics”).
Stock buybacks are a form of stock price manipulation.
A share of stock represents ownership of a piece of a company. The price of a share depends on how much people think the company is worth, and on how many shares company ownership has been split up into. The more valuable the company, the more expensive the stock. The more shares that exist, the smaller a portion each one represents, and the cheaper each one is.
Company, X, is valued at $100 and ownership is split into 100 shares, each share costs $1.
$1/share x 100 shares = $100.
When companies “buy back” their stock, they’re paying money to buy some number of shares, and then (usually) ***eliminating*** (“retiring”) them, so that each of the remaining shares now represent ownership of a larger portion of the company.
In theory, this doesn’t change the price of the shares. Each remaining share represents a bigger piece of a company which has become less valuable (having spent its money to buy and retire shares). It all balances out.
Company, X, spends $50 to buy back 50 shares.
The remaining shares represent twice of much ownership of a company worth half as much.
$1/share x 50 shares = ($100 previous value – $50 spent buying back shares).
But in practice, this usually ***increases*** the price of the remaining shares, because investors see it as a sign that the company is able to generate lots of money, in excess of what’s needed to run the business, and is therefore more valuable than previously thought.
Also in practice, stock buybacks are generally ***bad*** for the company, because it gets essentially nothing, for money which could have been used for business purposes. Buybacks are bad for stock holders, for the same reason, but good for the stock holders in the short term, because the stock they hold tends to get an immediate price bump.
The people running the business, and making these decisions, tend to personally hold significant stock in the company, and so tend to benefit immediately from them. In addition, they may be rewarded (in the form of salary increases and bonuses) for increasing the stock price.
This practice has been called out recently, because the company money ***could have*** been saved to help weather hard times, rather than to line executives’ pockets. And now these same executives are asking congress to gift their companies taxpayer money because they have no cash reserves.
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