Saw this about corporate buybacks...3 Nov 2024 16:30
Saw this and thought I'd share as there is often a vigorous discussion about buybacks here...
Source: zerohedge dot com /markets/corporate-buybacks-wolf-sheeps-clothing
Article:
Corporate buybacks have become a hot topic, drawing criticism from regulators and policymakers. In recent years, Washington, D.C., has considered proposals to tax or limit them. Historically, buybacks were banned as a form of market manipulation, but in 1982, the SEC legalized open-market repurchases through Rule 10b-18. Although intended to offer companies flexibility in managing capital, buybacks have evolved into tools often serving executive interests over broader shareholder value.
This article explores the mechanics of buybacks, how they impact markets, and whether they truly return capital to shareholders—or merely enrich insiders.
The Rise of Corporate Buybacks: By the Numbers
Since 2003, U.S. corporations have spent over $11 trillion on share repurchases. Corporate buyback activity has surged in recent years, even in volatile markets:
2021: $881 billion
2023: $795 billion
2024 (Projected): Expected to exceed $988 billion
Introducing a 1% excise tax on corporate buybacks in 2023 has barely slowed the trend. Companies prioritize repurchases over reinvesting in business growth, raising wages, or developing new technologies. Apple and Meta, among others, regularly allocate billions toward buybacks, supporting their stock prices and meeting shareholder expectations.
How Buybacks Affect Markets
The impact of buybacks extends beyond individual companies. Since 2000, net corporate buybacks have accounted for 100% of the equity market’s net asset purchases—a reflection of the diminished participation from pensions, mutual funds, and individual investors:
Pensions & Mutual Funds: –$2.7 trillion
Households & Foreign Investors: +$2.4 trillion
Corporations (Buybacks): +$5.5 trillion
Net Flow: +$5.2 trillion
There are often statements made that corporate buybacks have only a limited impact on stock prices. However, the evidence is pretty overwhelming to the contrary since 2012, when corporations became very aggressive about buybacks.
This trend raises important concerns. While buybacks temporarily support share prices, they can crowd out investments in innovation, capital expenditures, and employee compensation, contributing to long-term economic stagnation and inequality.
Who Benefits Most from Stock Buybacks?
Many analysts argue that buybacks return excess capital to shareholders. However, the reality is more complicated. Buybacks primarily benefit insiders through carefully timed stock sales, inflated earnings metrics, and compensation triggers:
Timing Insider Sales with Buybacks
Insiders, aware of buyback schedules, can sell shares during repurchase periods when prices are temporarily elevated.
This practice boosts insider profits without triggering price declines or regul
Sign In
Follow the stocks
