Friday, February 12, 2016

Massive stock buybacks: it’s a shame

Big companies are squandering their cash reserves to prop up their stock prices.

The stock market dropped almost 9.5% in January, its worst start of any year on record.
Of course, every time a stock is traded, there’s a buyer and a seller. So, who was buying in January when the sellers were pushing prices down?

Goldman Sachs Group says U.S. companies were buying their own shares with corporate cash reserves, accounting for about 20 percent of market volume last month.

That’s stunning. American companies have a couple trillion dollars sitting in their cash accounts, and they can’t think of anything better to do with it. The money could have been used for new product development, expansion and job creation, training and productivity enhancements or other productive purposes.

Yahoo Finance says hundreds of S&P 500 companies have lost $126 billion in the past three years by investing in their own shares and then watching the share price go down. Some of these firms actually borrowed money to cover their share repurchases. By the way, the stock market overall was up 39 percent in the same period.

Why are all these companies using their cash with such awful results? The standard wisdom is that companies buy their own shares when the stock price is “cheap,” below their actual value as determined by the company. This reduces cash outflow for dividends, and makes more shares available for stock grants and options as part of executive compensation plans.

Another result is that earnings per share (EPS) are increased when there are fewer outstanding shares, and this looks good in corporate reports and also may boost executive compensation.

Let’s call the spade a spade, here. Corporate directors and CEOs are spending their hoarded cash to try to prop up share prices—often for their own benefit—instead of using the money for constructive corporate purposes that would preserve and expand jobs.

Shame on them.

Copyright © Richard Carl Subber 2016 All rights reserved.

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