Friday, January 9, 2009

The Problem with Stock Buybacks

Yves Smith at Naked Capitalism has commentary on an article, "Easy Loans Financed Dividends", by Floyd Norris in the New York Times today.

The article points out that from 2004-06, S&P 500 companies bought back about twice as much stock as they paid out in dividends, $1.7 Trillion vs. $900 Million.

The buybacks were done under the guise of "creating shareholder value". In truth, they were means of pumping up reported earnings per share while at the same time weakening the cash position of the company. The "value" supposedly created by the buyback ONLY went to the seller of the stock. The ongoing holders of the stock saw no increase in value.

This is a sort of abuse of the system. The corporations and their enablers in the analytic and sell-side community foisted onto the public the half-truth that the buybacks were good for them. At best they were stock speculation, at worst stock manipulation. To the extent that they were stock speculation, one can't say that the stock was in general an especially good investment.

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