Deep into this earnings season and the one consistent theme that persists thanks to our retarded tax code is that companies would rather perform stock buybacks than enhance shareholder value via long term expansion or growth plans.
Considering the instability of our political system and the randomness of how tax policy is applied, I can not say that I blame them. While many offer a jaded view that this is designed to juice shareholder value, especially for corporate officers being partially paid via stock options, unless compensation and capital investment taxation policies change, there’s no reason for this to end or be dialed back.
Just a casual search on Google, not sorted, produced page after page of results like this:
$500 billion share buyback spree. Sometimes, it can help support an equity, even in a bear market where fundamentals show that a stock should be kneecapped. Right Mr. Cook?
Historically however, just because one reads about “buybacks” and thinks that’s super bullish, that isn’t always true. Let’s take a quick scan of the old internet and look at some historical examples of how spending money like that sometimes is just putting cash into a burning barrel.
It was the future of .com mortgage financing. But all that mattered was juicing the stock price during the recession of 2001. How did that turn out?
Maybe this one did better:
That worked for a whole five years until people actually started reading what the hell they were doing and understanding the financial consequences.
Maybe the big boys did better, right?
Ok, maybe not. It lasted exactly 7 months after that buyback was announced in the midst of multiple problems with their hedge funds that were heavily invested in MBS and the derivative variants.
I’m not saying that buybacks are bad, especially since the government’s antiquated compensation rules and taxation system encourages this. It is advisable however for investors to actually read the 10Qs and understand the “why” behind them however and see if a company’s announced buyback is to cover the stench of something else the pump and dump financial media doesn’t want the masses to see.
