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Corporate behavior regarding stock buybacks and dividends seems to be changing.
Will these changes stick? That is the question.
- The Federal Reserve Flow of Funds Accounts for Q2 2009 showed a positive net issuance of Non-farm Non-financial Corporate Equities at an annual rate of $88 billion (Table F.102).
- At the same time, cash dividends of this sector fell 22.5%, from the annual rate of $465.8 billion in 2006, to only $360.7 billion in Q2 2009.
This is a reversal of behavior observed until Q1 2009, when it seemed that the Stock Buyback Era might not be dead, after all.
Q2 2009 provided the first flow-of-funds statistical indication that the Stock Buyback Era may be over.
The SEC hasn’t revoked Rule 10b-18
The stock buyback era started in 1983 with SEC Rule 10b-18.
This rule gave safe harbor to corporate executives to use equity repurchases to fraudulently manipulate stock prices upwards to give value to their stock options.
The US government supports stock buybacks
The US Security and Exchange Commission has not yet revoked Rule 10b-18, but it has published a Q&A page on its web site indicating that it seems to be at least vaguely aware of the unfair impact of this rule on ordinary investors.
There is more criticism of stock buybacks today, than ten years ago.
However, public opinion is still far from rejecting the practice as being fraudulent.
Many still support buybacks
Academic support for stock buybacks is still strong.
MBA candidates are not yet being taught that the practice is unethical.
A recent New York Times article asked, ’Are Buyback Stocks Still Good for Investors?‘, giving an apology for the practice.
The permanent demise of stock buybacks will depend upon investors are no longer distracted by the false promise of “total returns” (mainly unrealized capital gains) and begin to focus on real returns in the form of cash-in-the-bank dividends.
What do you think? Will stock buybacks continue to dominate the equity market?
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