WaveNet Pharma

Share Buybacks and Dividends: The Missing Fine Print

This is a very interesting article providing a fresh insight on a very questionable practice : share buybacks.

The smarter and more responsible companies simply dividend out their excess cash to their shareholders, spend it on R&D and new business development or, if it makes sense, indulge in M&A. Microsoft, Intel and Pfizer are just recent examples of all three, in that order.

Unfortunately too many companies which are run as if they were "hedge funds" ( thanks to our dysfunctional corporate governance system) attempt to manipulate their share price with buybacks. Don't believe for a second that share buybacks improve EPS ; because if you were to look over a longer period ( over 2 years) all companies engaged in buybacks had weaker earnings to show !!! Thinking that "by buying back their shares they will be putting a floor against downward selling pressure", is their untold rationale. The EPS improvement argument is the dumbest thing told to shareholders since buybacks have been legalized.

Any company that does not know anything better to do with its excess cash than buying its own shares is comparable to a person who doesn't know how to save and spends the money on self gratification. Just like the average consumer in America. Sounds familiar ??