Some Perspective on Buybacks Given Recent Criticism

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Buybacks have been put back into the spotlight as boogeymen. Earlier this week, Senators Chuck Schumer and Bernie Sanders wrote an op-ed in The New York Times attacking share repurchases. Among their accusations were that stock buybacks mostly benefit the wealthy and divert money from being spent on capital expenditures, salary increases and other worker benefits.

It’s not the first time buybacks have been criticized and I doubt it will be the last. Making buybacks a scapegoat is an easy sound bite to score political points with. The reality about share repurchases is more complicated; as such, I’m going to provide some perspective.

If you invest in stocks, you should prefer companies with either falling counts of shares outstanding or at least no increase in the number of shares outstanding, all other things being equal. Such stocks have outperformed by a big margin, with annualized gains of 17.5% and 16.6% based on data from Dartmouth professor Kenneth French’s data library for the period of 1964 through 2018. You also want to avoid the companies with the largest increases in share counts; such companies have annualized returns of just 4.4%.
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1 Reply to “Some Perspective on Buybacks Given Recent Criticism”

  1. Regarding your opinion of stock buybacks:
    “our slice of the ownership pie gets a little bigger”
    I would suggest using finance.yahoo.com’s bottom/last line of Financials > Balance Sheet data, because of the negative trending over recent years of a company’s total of “Net Tangible Assets”, as the primary indicator of what any company’s stock is really a “share of”! Initially take a look at AT&T (T) or Boeing (BA) and then check Apple (AAPL). Or you can use SI Pro, as I have, to see that only 43 (!!) of the S&P500 have had “Net Tangible Assets” which increased each year for the past 6 years (and the count only increases to 81, if you change the parameters to ask if NTAs are greater this year than 3 years ago, as well as being at least 95% of the previous year’s for the last 6 years).

     

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