mahony

My Reconsideration: Why Share Buybacks Are Pointless

The tax implications of Dividends are supposed to make buybacks the preferred alternative. I buy the dividend stocks in tax deferred accounts and I generally prefer dividends because it prevents management from doing stupid things with your money. However, buybacks make sense when you can no longer create value in your industry. For example: How will Intel get even more market share? Should they diversify into car making, even if they have good ideas? I can buy a car maker if I want growth in the auto business, so why do I want my chip company doing this? Most likely Intel will waste my money investing in markets they are not positioned for, so they should return the profits to me via a dividend or buyback. Eventually (if done right) I am getting more earnings attached to my share so I benefit.

This whole article seems a bit naive. The buyback is abused (duh) just like every other technique to lift stock prices. Companies announce buybacks at outrageously high value (just plain dumb), buy with one hand while borrowing with the other, fail to follow through on announced buybacks, buy back and then issue new shares shortly thereafter, buy back to counter poor perception and the list goes on. Just because it is poorly executed in many cases, doesn't mean it's bad or doesn't work. In the long run people will prefer the company that increases the profits associated with it's doing business. Lower number of shares increases that profit to price ratio (or lowers P/E), which ultimately is the goal of any owner.