The big four US airlines – Delta, United, American, and Southwest – have together spent $43.7 billion in cash (cheap deabt funded) on share buybacks since 2012 for the sole purpose of enriching the very shareholders that will now may well be bailed out by the taxpayer.
The S&P 500 companies have together incinerated $4.5 trillion in cash to buy back their own shares just since 2012:
There's zero productivity growth associated with these buy-backs (i.e., no re-rating catalyst). When the history books get written. And they talk about banning short selling . . . . The greatest to lose - those that have made the most. But the ask is on those that haven't made a cent. Seriously?? And the Care Factor is probably not high -
Worth reading the below. But Dear Fundies, the take away - if you're looking for marketing leverage -we, the younger demo, seethe - the anger is palpable - be the solution, not part problem - no investing in bailed out companies!!!!! Better still., ban share buybacks!!!! (they used to be).
"When companies do these buybacks, they deprive themselves of the liquidity that might help them cope when sales and profits decline in an economic downturn.
Making matters worse, the proportion of buybacks funded by corporate bonds reached as high as 30% in both 2016 and 2017, according to JPMorgan Chase. The International Monetary Fund’s Global Financial Stability Report, issued in October, highlights “debt-funded payouts” as a form of financial risk-taking by U.S. companies that “can considerably weaken a firm’s credit quality.”
It can make sense for a company to leverage retained earnings with debt to finance investment in productive capabilities that may eventually yield product revenues and corporate profits. Taking on debt to finance buybacks, however, is bad management, given that no revenue-generating investments are made that can allow the company to pay off the debt. In addition to plant and equipment, a company needs to invest in expanding the knowledge and skills of its employees, and it needs to reward them for their contributions to the company’s productivity. These
investments in the company’s knowledge base fuel innovations in products and processes that enable it to gain and sustain an advantage over other firms in its industry.
The investment in the knowledge base that makes a company competitive goes far beyond R&D expenditures. In fact, in 2018, only 43% of companies in the S&P 500 Index recorded any R&D expenses, with just 38 companies accounting for 75% of the R&D spending of all 500 companies. Whether or not a firm spends on R&D, all companies have to invest broadly and deeply in the productive capabilities of their employees in order to remain competitive in global markets.
Stock buybacks made as open-market repurchases make no contribution to the productive capabilities of the firm. Indeed, these distributions to shareholders, which generally come on top of dividends, disrupt the growth dynamic that links the productivity and pay of the labor force. The results are increased income inequity, employment instability, and anemic productivity."
I have lots of sympathy for the view that bailouts should be for the employees and customers but not the management, shareholders and debtholders. So keep fighting the good fight on moral hazard! For my part, however, I don't really care whether it was buybacks or excessive dividends or just poor risk management that got the company into that position. If a company is hellbent on increasing its gearing, then if it didn't do a buyback it probably would have wasted it on acquisitions that achieved the same goal... I'd prefer an overzealous buyback to a dud acquisition any day of the week.
DK, completely agree. We have the most egregious of all the capitalist countries - all paid out by way of franked dividends and no re-investment (productivity / wage growoth. Care? Not high - that’s the young). It should be illegal - seriously - Feudalism spelt with a C -
If companies require a government bailout, surely it makes sense to issue new shares at whatever price is necessary. If there are no other competing sources of funding, this will be very low, ensuring shareholders pay the price of past management decisions, as they should, but giving the company the chance of survival. If the company goes on to prosper, the government gets to sell the shares at a much higher price and recoup the cost to the taxpayers. I know I'm not an expert, so I'd love to know why it isn't this simple!