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Share Buybacks: Corporate Cannibalism
December 31, 2015
Share buybacks are not about returning cash to shareholders. Repurchases continue to be influenced by many external forces but the decision to buy back shares is ultimately determined by executive managements who are very often remunerated in their own stock. Option issuance, which effectively gives management all the potential upside and none of the downside of stock ownership, means that share buybacks have become to symbolise greater wealth for an elite group in an esoteric manner. Many corporates are not even attempting to justify huge buybacks - and the debt issuance to fund them - with any reference to value, with the end game being that shareholders ultimately find themselves owning a smaller proportion of a more highly indebted company. What worries us is that cash dividends are increasingly accounting for a smaller portion of capital allocation, killing off the effects of compounding, boosting volatility and embedding too much value in the fortunes of the prevailing share price. The basics of a reinvested and compounding dividend stream for long-term returns seems lost to many and that's a real shame.