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CATCH THAT NARRATIVE

Do massive stock buybacks signal greed or stagnation? (Or both?)

Tim Fernholz
By Tim Fernholz

Senior reporter

Stock buybacks are big. Are they bad?

After Barclays reported that US companies like Apple, IBM, Exxon-Mobil, and Pfizer spent more than $500 billion in earnings to buy their own stock back from investors in the last 12 months—and that the first six months of 2014 saw the highest volume of purchases since the all-too-heady days of 2007—people have been scratching their heads about what all this could signify.

There are two important schools of thought, which have some distinct overlaps:

It’s corporate greed!

With all the various ways to spend money, why would corporate honchos choose buybacks? The short answer, according to John Gapper and Roger Martin, is sweet greed unfettered by law.

Theodoros Pelecanos
The ouroboros is a key signifier in Wall Street mysticism.

By reducing the available supply of shares on the open market, buybacks increase the price of the stock, at least temporarily. That’s not lost on executives, many of whom receive significant stock-based compensation, and it’s helpful in juicing the all-important “earnings per share” metric, which is used as a yardstick for executive performance in a way that paying out dividends isn’t. In this sense, stock-based compensation doesn’t really align the interests of shareholders and management over the long term—it just gives management a way to strip value away from investors’ holdings. But shareholders eventually will wise up to this, according to Barclays analyst Jonathan Glionna, who suggests that buybacks can’t mask a lack of earnings growth for long.

We’re all out of investment opportunities

The reason that corporations are buying back shares instead of investing in research, lowering their prices, or acquiring competitors (or paying higher salaries to employees, although this option rarely is included in such conversations) is that there just aren’t enough gains to be had from these alternatives. You might cite some combination of economist Larry Summers’ secular stagnation theories or the end-of-innovation musings of Robert Gordon and Tyler Cowen. It’s not worth it to spend money trying to expand the business, so just protect the stock price.

This view implies trouble ahead for society, with slow growth spelling trouble for economic equality and the social safety net. But in some sense, this prophecy is self-fulfilling: Summers’ theories begin with shrinking investment, and there won’t be any innovation if no one is willing to pay for it.

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