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Matt Levine has a rebuttal to this argument today. Also, buybacks absolutely benefit shareholders that continue to hold. The supply of shares decreases, often
by ISL 7y ago
Matt Levine has a rebuttal to this argument today.
Also, buybacks absolutely benefit shareholders that continue to hold. The supply of shares decreases, often increasing the value of the held shares.
Levine's argument did implicitly point out to me that there are times when those who don't sell back some of their shares during buybacks are inherently taking on more forward risk than with dividend stocks; a lesson I'm learning now the hard way. One lives and learns.
- rmrfstar 7y agoThanks for pointing out a rebuttal. Taking a step back from "good or bad?"... One thing I haven't seen outside the academic literature is a discussion of the leverage ratchet effect [1]. Buybacks are just one lever that actuates the ratchet. A question worth asking: "why has corporate leverage increased so much over the past 30 years?" I don't claim to have an answer, but asking that question could shed some light on whether buybacks are "good or bad". [1] https://www.gsb.stanford.edu/faculty-research/working-papers/leverage-ratchet-effect https://www.gsb.stanford.edu/faculty-research/working-papers...
- scott_s 7y agoThe value increase caused by the buyback tends to disappear in a year or so. There was a study which found this, but I don’t have a reference on hand.
- AznHisoka 7y agoWhich makes sense, because usually the buy back happens during a limited period less than a year.
- jsight 7y agoI do not understand why that would happen. Wouldn't they inflate the earnings per share, resulting in a permanently higher share price (all else being equal)?
- dlp211 7y agoIf stock price was actually based on pure fundamental analysis, sure. That is not at all reality though.
- jsight 7y agoAfter I wrote that, it occurred to me that there is another counterargument. If cash-on-hand decreases along with the inflation of earnings-per-share, the business value doesn't really increase. I have always assumed that shareholders wouldn't take this into account, but maybe they deserve more credit than I've been giving them.
- luckydata 7y agoWhat kind of rebuttal is one that makes the same point of the original argument? The only difference is the point of view here. I hold stocks, so I'm happy they are getting bought back. That's it.
- tobias3 7y agoIt's not really a rebuttal, it's more of a description of how deeply flawed the system is. Given all currently available information CEOs should choose stock buybacks again. If they need to be rescued now they should be regulated like other industries that are critical but don't seem to be able to weather crisis on their own (like banks), e.g. minimum cash reserve requirements with stress testing.
- ISL 7y agoAgreed, rebuttal isn't quite the right word. A broader question -- can a company that allocates that much capital to preparedness be expected to survive during normal times? I don't think there is a re-insurer big enough to handle viable pandemic insurance. Such an entity/industry would need to hold >$1T in pure cash right now.