I for one would really like to know why the CEO gets paid so much, why are the employees not getting paid proportionally, why RTO is absolutely necessary, why the stock buybacks are necessary when investment in the business is going down, etc.
The business theory answer is that buybacks are used when there is no better investment opportunity.
Let's say the stock trades at 10 times earnings. Can you fund an internal project that's going to return 10% a year? [0] Can you buy another company that will return 10% a year? If not, then a buyback gives the best return to the company's owners (aka shareholders) because they owner larger slices of the same pie.
[0] Plus a small cushion for risk. And not just "we project this will return $HUGE amount" but something that can realistically happen.
Warren Buffet's wealth comes from finding companies who are good at what they do, and moving money from ones with excess cash to those that need more cash.
Would you rather put your money or capital into a company that promised to never do buybacks? To never, ever give you a return on your investment? Why would you buy that stock? Why would anyone ever buy that stock from you?
Boeing is a very recent egregious showcase to how fucked up this behaviour can get.
I'd like to live in a world where shareholders' returns are not the goal, just a side-effect of good business.
I still cannot understand why stock buybacks aren't limited, actually I do not understand why it exists at all but since I'm not educated enough can't really argue with substance against it, it just doesn't sit right that a company (like Boeing) can spend a lot more cash flow on stock buybacks than R&D... R&D creates something of real value, stock buybacks just enrich shareholders (and hence, a company's C-suite), it's so self-serving that I really do not understand how it's even legal.
Even in a well-run company (Apple?) it's reasonable to imagine that cash on hand could exceed the company's present capacity for new research projects. Scaling up an R&D department could take quite a bit of time, and it might not make sense to sit on that cash while they do it.
But while there are some cases that are still able to do stock buybacks while plowing resources into R&D, there are companies that are lagging due to ineffective or underfunded R&D (Intel) or are cutting safety critical corners (Boeing) to maximize shareholder return. These are significant companies that provide critical goods and services that aren't exactly fungible, and it would build a lot more trust in them and market systems as a whole to see them take the initiative to improve their situations over plowing money into buybacks while begging for public funding or regulatory exceptions.
Isn't that what dividends are for though? Stock buybacks distort the valuation detached from what the market is pricing the company, it still does not make sense in my mind.
However, from the shareholder perspective, buybacks are more tax-efficient since those who sell their shares pay taxes on the gains, and those who hold end up with a larger share of the company and no tax.
This is all according to theory. In practice, there does also seem to be a sort of received wisdom among managers that buybacks are better for companies because they can cut them in times of trouble, whereas investors will perceive cuts in dividend as somehow foretelling bankruptcy.
A buyback is a more efficient dividend. It doesn't force a realized gain, and stockholders can choose the size of their cash out whenever they want, instead of the company forcing it.
That goes into financial accounting engineering, something I'm really not fond of, efficiency in dribbling taxes due is not something I consider an advantage, it's a bug of the system.
> You could make the same wrong about claim about dividends distorting market price my making the stock temporarily more valuable shortly before the dividend pays out.
Probably another inherent issue I see in the current system, dividends should be paid out in proportion to the time an investor held the shares, they took higher risk by holding them for longer and deserve the full reward, someone just speculating right before a dividend payout should not have much reward since they had no skin in the game while the company accrued their extra cash in hand to be paid out.
The current incentives reward more speculative and short-term decision making rather than companies generating the most value to society in the longer term. I do not think that's the most efficient way to price companies: return of shareholder value, that should be a consequence of a good company, not an objective in itself (as it's been since the Jack Welch plague over MBAs).
Again, I look at the case of Boeing, a company that gained a lot of value due to producing good products, with quality, and the downfall it's going through from maximising shareholder value with buyback programs, cutting corners, etc. The current incentives do not punish this kind of egregious behaviour enough.
Boeing returning money to shareholders is not what caused MAX to fail. Boeing making money cutting costs on QA and engineering caused MAX to fail.
1)Buybacks can shake out the short term investors. 2)It can also signal that the company thinks its own stock is cheap. 3)It "has no effect assuming the market is perfectly efficient".
And these reasons are repeated ad nauseum. I could see this be a thing if a hostile takeover is on the horizon, but poison puts are common when issuing debt, so no hostile takeovers have happened in a while. Basically I see a buyback as a way to take cheap money accessible by a company for investment, and the company uses it to finance shareholders to get a return elsewhere because the company isn't creative anymore. (Companies hit hard walls regarding physics when they keep r&d over their few cash cows over and over, and r&d is too risky to go to an area that they don't already have internal proficiencies).