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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 ??

Don't Buy Into Share Buybacks

The rationale for buybacks is to improve earnings per share (EPS). That goal is only meaningful to the extent that a company can sustain its profitability. In our current environment how many do ?

Even with companies having an unassailable market position with essential products and services, buybacks send 2 signals to shareholders :
a) we have excess cash which we have decided NOT to share directly with you in the form of dividends ( because your BoD knows better than you the shareholder how to use these funds.)
b) we think that of all the uses of cash we can make , buying our own shares is the best approach ( if that is not arrogant and self-centered what is it ?)

The truth is that buybacks are really a protective mechanism to put a floor on a plummeting share price. It seldom does. If that is the case, why do companies do it ? More importantly, because it is paramount to manipulating a stock's price ,why is it legal to do ??