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Invest in the Future

The Huffington Post The Huffington Post 31/03/2016 Peter A. Georgescu

I was greatly encouraged on Sunday to read in Gretchen Morgenson's New York Times column that Domini Funds has issued a resolution to limit the way companies use stock buybacks to boost performance metrics. The reasoning for stock buybacks is simple: reduce the number of shares available and thus engineer a higher stock price by creating a lower supply of shares and the illusion of higher earnings. The Domini resolution would hobble firms ability to do this as a way to boost executive pay packages. Much excessive executive pay these days comes in the form of shares: and stock buybacks are primarily a way to spike share prices, short-term, to give sellers a quick, easy profit.
Some media called the stock buybacks, now at the highest level ever seen, a fad. It isn't. It is in fact a conspiracy to deceive. Companies do it because the financial community lets them get away with it. It has become something like an addiction. If the practice ever stops, the company get pummeled by the market and the financial community. So firms keep on buying back their own shares. Top management is fully engaged in this deceit, and it benefits undeservedly from it.
To be fair, there are times when stock buybacks are worthy. When the market consistently undervalues a company's worth, it's wise to invest in its own future. The alternative is a distinction with a huge difference. It isn't hard to spot when the context is right. The sad reality is that the vast majority of buybacks aren't meant to invest in undervalued shares. They are deceptive, a sleight of hand.
Long-term shareholders, those who want to see an enterprise grow for decades, are left in the cold: the money used to buy back shares could have been invested in actual growth as well as the generation of real market value in the form of new products and services. But that would require hard, creative work involving genuine risk and competitive discipline.
Morgenson lays out the numbers clearly and simply:

Yahoo . . . bought back shares worth $6.6 billion from 2008 to 2014. These purchases helped increase Yahoo's earnings per share about 16 percent annually, on average. Growth in Yahoo's overall net profits came in at about 11 percent annually. (If Yahoo) had invested that same amount of money in its operations, would have had to generate only a 3.2 percent after-tax return to produce overall net profit growth of 16 percent annually over those years.

The same goes for McDonalds:
Since 2008, McDonald's has allocated almost $18 billion to buybacks. This has helped produce 4.4 percent increases in annual earnings per share over the period. To equal that growth in overall earnings, the company would have had to generate just a 2.3 percent return on the money it spent buying back stock . . .

Indeed. A Wall Street Journal story last year quoted Ben Silverman, a VP at an institutional research firm that tracks buybacks who said, of the companies that fall back on them: "They're either not creative or not growth-oriented. There's always something to invest in, no matter what kind of company you are." In general, that is the case.
This gets to the heart of the matter. First, these buybacks are a red flag. They signal the exhaustion and stagnation of our economy in general. Buybacks hide the fact that our system now directs profit toward the very top without recycling it back into the economy in the form of fresh investment: in new business, new jobs, and higher wages. In other words, stock buybacks are just part of a system that now generates profit for the few without genuine growth that benefits the many.
At a deeper level, they are the fruit of more than three decades of shareholder primacy, which puts the maximization of short-term shareholder value at the top of an executive committee's priorities. It's put us on a road to collapse or upheaval. Most of the American population is left out of the illusory boom on Wall Street, and as Main Street circles the drain, stock buybacks are yet another way to line the pockets of those who aren't yet touched by the decline of the middle class. It can't go on forever. We need companies run by people who are thinking seriously of the long-term future for their companies, their employees and their customers. Without that kind of leadership, our system of free enterprise capitalism won't survive.
Peter Georgescu is the author of The Constant Choice. He can be found at Good Reads.

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