4.11 BuyBack


Whenever a public company generates profit, it is left with an important decision- what to do with the additional cash. Companies have three major options available:
1. Retain earnings
2. Issue a dividend
3. Share repurchases

Regardless of the reason, companies ultimately increase
the value of each share by reducing the total amount of outstanding shares. At first glance this seems entirely beneficial to shareholders; however, share repurchases have another less altruistic effect. When a company buys back shares, many popular fundamental ratios are affected, even though the underlying fundamentals remain unchanged. By distorting these ratios, year-to-year comparisons become a lot less meaningful.

In America, there are growing concerns that buybacks are fueling inequality. Recent data tracking Russell 1000 companies (index), shows that when companies look to spend their Tax savings, shareholders are by far the biggest beneficiaries.

Pro Case:
Proponents of buybacks say that if they are done rationally, buybacks (like dividends) are just another way to return cash to shareholders. Stock prices for companies that have bought back shares are also higher, in general than other companies on major indices like the S&P500.

Con Case:
Opponents of stock buybacks say that they increase inequality and that executives make short-term-oriented decisions around buybacks that allow them to maximize personal gain. In other words, when a company probably should be investing in its people or its business, the company is instead giving money back to the owners and only they benefit.