Fans and Foes of Buybacks Aren’t in Disagreement
As a group, companies that repurchase shares are good investments even as individual companies squander their money.
Bloomberg, November 30, 2018
So yesterday, I vented at what I find to be some pretty god-awful buybacks from companies that either have poor management, made some terrible decisions, or are resting on their laurels.
Today, we take a much more objective look at the issue of Buybacks, from both the pro and con perspectives. The bottom line seems to be that both camps are talking past each other (I plead guilty as well):
There is an inherent tension between those favoring and opposing corporate stock buybacks. Today let’s see if we can reconcile the views of the two groups, finding a middle ground.
Those who favor share repurchases point out that they are no different from dividends from a balance-sheet perspective — it is a way to return cash to shareholders. Those buybacks reduce the total number of shares used in earnings per share calculations. Companies that buy back shares find their way into equity screens that outperform as a group. Anywhere you can find market-beating alpha is a win.
Thus, there really is no disagreement — collectively, buybacks enhance performance. But on a company-by-company basis, investors need to be on the lookout for buybacks that substitute for good decision-making by management.