Stock Buybacks

I don’t like stock buyback. This is why.

1) Buybacks pay the wrong people. They reward those who sell the stock.
2) Buybacks, when they work, increase multiples, making the stock less attractive. Consider what happens when one half of the dividend funds are spent on stock buybacks. This is not nearly enough to come close to buying the shares outstanding. Any price advantage comes by price appreciation from buyers attracted to rising prices.
3) Buybacks reward self serving management. They make pay for performance price goals easier to achieve. Managers cash stock option bonuses.

Buybacks can serve legitimate purposes.

1) Sometimes, buyback stocks are purchased bargain prices. More often, they are not.
2) Stock buybacks allow management to buy other corporations via stock-only purchases. Most companies being bought out prefer cash.

Have fun.

John Walter Russell
November 16, 2008