The thing to understand about buybacks is that they serve no legitimate economic purpose. They're pure transfer; no surplus.https://twitter.com/froomkin/status/1029000777459802112 …
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First, understand that investors provide their capital to businesses in the hopes that mangers will use it wisely to create a return on that investment. That is, they entrust money to others to invest.
Some managers believe they won't be able to grow their businesses further; can't find a good way to spend what they've got and no prospects to invest it well. The usual solution is a dividend: https://www.investopedia.com/terms/d/dividend.asp …
Dividends do not affect the ownership structure of the firm. The same set of owners retain the same % interest in the firm before and after a dividend.
Buybacks, on the other hand, serve to shrink the pool of public owners (shares are bought from public owners and "taken private"). *IN THEORY* buybacks shouldn't affect the price of the stock more than a dividend of equivalent size would.
...except the tax treatment is different: https://www.investopedia.com/articles/active-trading/073015/dividend-versus-buyback-which-better.asp …
Further, in the very short term, buybacks look like demand for the stock ("information"), but do not reflect a material change in the prospects for the business. They're old news that looks like new-news. They game the market's information-gathering and pricing system.
...all while concentrating ownership, giving managers greater power, and depriving the firm of ways to invest in growth. Buybacks should be a red flag, and yet: https://us.spindices.com/indices/strategy/sp-500-buyback-index …
It should also be disturbing to work at a firm that engages in this sort of thing. It means management is spending time engineering share price increases rather than using cash-on-hand to invest in future growth.
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