Ray Wollney

Are Share Buybacks Actually Good For Investors?

It depends on the reason for the buy back.

If a company is buying back the stock that reduces the share count that benefits the shareholders.

However if a company is buying back shares that it issued to it's executives and employees due to the exercising of employee stock options (ESOs), at lower prices than the company is paying to buy the shares back, then that is not beneficial to shareholders. Quite to the contrary. In other words if the executive or employee was granted ESOs to buy the stock at say 20 and the stock rises to say 40 and he exercises the options and the company wants to avoid dilution so it buys the stock back at 40 this is not good for shareholders.

According to Albert Meyer a CPA and former accounting professor and the head of Bastiat Capital the difference between 20 that the company was obligated to sell the stock for and the 40 it paid to get it back is in reality a deferred compensation expense.

A good example of this according to Mr. Meyer is Dell which had a net income of 19 billion over the past ten years. However shareholder equity only increased by 3 billion. What happened to the other 16 billion? It was spent buying the stock back that it had issued to executives and employees. This was cash out the window.

I would suggest that anyone interested in this subject to go to google and look up Albert Meyer interview-Bastiat Capital. It is quite revealing