why are stock buybacks bad?
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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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