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On June 12, 2006, the Wall Street Journal lead front page headline was, “Big Companies Put Record Sums Into Buybacks — Repurchases Aim to Bolster Shares but Come at Expense Of Investments in Growth“.

The mildest of reprimands

For capital flow analysts, this is hardly news, but for the Wall Street Journal to at long last acknowledge the real purpose of buybacks (to boost share prices) and even suggest that the practice may have negative connotations and “come at the expense of investments for growth” — now, that is real news!

Mild criticism of buybacks

Some negative comments about buybacks that appeared in the WSJ article follow:

” … by buying their own shares, companies are signaling that they don’t see any better investments.”

” … When buying back your own stock is the best use of capital, where are the long-term growth opportunities? [Byron Wien]“

“… a big part of the investment community is pushing for buybacks as a short-term boost … [Tim Fidler]“

“… if corporate managers believe the best use of shareholder money is buying shares, that is an implicit indication that they see limited growth opportunities from investing in new projects — not the hallmark of a thriving economy.”

“…A company that aggressively buys its own shares can give investors a skewed picture of its earnings growth.”

” … It doesn’t help shareholders if a company buys back its own shares at steep prices.”

Investor fraud still unreported

The buyback phenomenon is important because it is the reason that stock prices have risen faster than corporate profits for over a generation.

The WSJ article does not mention the full extent of the depravity of stock buybacks:

• Money that belongs to all investors goes only to a few that sell out;
• The purpose of buybacks is not just to boost prices, but to do so in order to give value to executive options;
• For executives to suggest that short-term improvements in earnings per share and stock prices are to the benefit of long-term investors, while hiding the real motive for buybacks, is fraud and a serious breach of fiduciary responsibility to permanent shareholders.

The Wall Street Journal article, however, is important as a sociological artifact — evidence that there is a tiny breach in the support for the buyback-option movement brought about by the current level of corporate excess.

See: Essays on Buybacks and Options.