Are Stock Buybacks Good For Dividend Investors?

As I review 2021’s first-quarter earnings results, I have been struck by how company after company announced new or increased share buyback programs.

Companies describe buybacks as “returning cash to shareholders.” I think that is a load of crap, and I have several thoughts on why widespread stock buybacks are a terrible idea.

Alphabet Inc. (GOOG) made big news with its earnings release when it announced a $50 billion share buyback plan. $50 billion! I am amazed that any company has $50 billion of cash lying around.

Alphabet is not alone in its plans, and companies large and small have announced plans to buy in common shares in 2021. The logic behind a buyback is to reduce the number of shares outstanding. With fewer shares across which to spread net income, future earnings per share will automatically be higher. Since most stock valuation derives from EPS and EPS growth, the theory is that buybacks will help drive share prices higher… which leads to reason one why I am not a buyback fan.

In reality, it is impossible to tell if a buyback program helps boost a share price. Prices are too volatile over a year or two to definitively show whether or how a share repurchase program helped investors earn greater profits.

My second reason to not like buybacks is that they show a lack of creativity by a companies’ boards of directors and management. Is buying shares the best idea they can come up with in order to put some money to work in growing the business or boosting the profits? Or maybe it is just a lazy way to make future income statements look better.

Up at number three, I love (not) the “returning cash to shareholders” description that often accompanies buybacks. I have never had a company send me cash as part of a share repurchase program. By definition, buying in shares takes them out of the hands of investors, so investors who sell don’t get the benefit of a buyback. If I want to sell my shares, I can—whether or not the company or another investor buys them. When you look at the results for investors, it’s clear the promise of returning cash to shareholders through a share buyback just…doesn’t.

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Disclaimer: The information contained in this article is neither an offer nor a recommendation to buy or sell any security, options on equities, or cryptocurrency. Investors Alley Corp. and its ...

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