The Virtues of Stock Buybacks

Source: Wall Street Journal.

The writers lament that stock buybacks are misunderstood and unfairly criticized. Also, the new tax on stock repurchasing will harm shareholders and the economy.

Stock buybacks are a topic I have never learned anything about. As an investor who has sold parts of my portfolio from time to time, I just assumed that companies repurchasing their own shares merely added to the number of buyers that made it easier for me to sell what I wanted to sell. I found a helpful explainer in Forbes that presents a more sophisticated view of the topic.

If I understand the WSJ piece, the writers take a macro — or market-wide — view of stock buybacks. That is, a particular company’s repurchase program might well reflect evil, capitalist greed, but taking all corporate repurchases into account allows a new picture to emerge. For one thing, despite stock buybacks by some companies, significant stock issues by other companies occur. For another, even with stock repurchases, companies in general saw their cash balances increase dramatically over the most recent 10-year period.

Given this larger perspective, the virtues of stock buyback programs become easier to see. One of the general patterns you can see is that stock buybacks push cash back into the investment marketplace, which then gets reinvested and used for process improvement and innovation, which are the life blood of any material economy.

2 thoughts on “The Virtues of Stock Buybacks

  1. My impression of stock buy backs has always been a sign of great company health and success. Too much cash can cause stagnant share growth thus less investor ROI. Buy backs typically increase share value vs reverse splits which are a sign of poor performance.

    Liked by 1 person

    1. As someone whose food and cigarettes are paid for by stock dividends, I’m fascinated by the concept that stock buybacks are indirectly beneficial to me. One or two stocks I own are shares in companies that have repurchased big chunks of their own equities, yet their dividends remain among the best among my meager holdings.

      Those who complain about stock buybacks need to up their game in economic analysis.

      Like

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