March 27, 2023
We’re led to believe that shareholders benefit from corporate stock buybacks – when publicly-traded companies buy their own shares on the open market. However, despite Warren Buffett’s claims, firms’ own executives are the ones who really seem to gain.
In the past decade, American firms have raked in profits. On a quarterly basis, profits have surged by 80% over the last two years alone, despite 40-year high inflation and possible recession:
When companies have cash, they can grow through research and development, acquiring new technology or equipment, hiring, or buying other firms. But in recent times, public corporations have been reinvesting in their own stocks.
According to a report from Yardeni Research, annual spending on buybacks has quadrupled since 2010, rising to more than $900 billion per year. There was a record $6.4 trillion spent on buybacks in the last decade.
Some companies lead the way. Since 2012, Apple bought $582 billion of its shares, which is more than the entire market capitalization of most Fortune 500 firms. Other buyback devotees include Microsoft ($172 billion), Google ($163 billion), and Procter and Gamble ($142 billion).
Proponents say buybacks increase shareholder value. However, many companies simultaneously issue the same number of new shares they repurchase, keeping the total number of shares the same.
Buybacks also seemingly make companies more profitable by increasing earnings per share. Of course, firms can increase this metric by making more money. But some do it by reducing the number of available shares through buybacks.
Critics suggest greed is behind such moves because executives stand to benefit from stock performance more than the average worker. In fact, stock-based awards comprise a greater portion of executive compensation than ever before.
Two recent examples shed some light.
First, the four major U.S. airline carriers collectively spent $39 billion on buybacks from 2014-19. COVID-19 then tanked the industry. But “rainy day” cash was already deployed. So, the firms needed a $54 billion bailout from the government, repaying only $14 billion.
Second is Facebook parent Meta. From July 2021-June 2022, it bought $48 billion of its own stock. The price then plummeted, resulting in huge losses and more than 11,000 employees being laid off.
Well-timed repurchases may help shareholders. But there’s ample proof that many corporate share buybacks only benefit executives. It’s corporate greed at its finest.