Halting the Share Buybacks

Public CAD vendors commonly spent millions repurchasing their own shares. Daniel Gross explains the two reasons for doing so:

1. Repurchases would compensate for the dilution created when executives and employees exercised stock options.

2. By reducing the number of shares outstanding, repurchases would make profits look more impressive. (One dollar of earnings spread over 10 shares, is 10 cents per share. But $1 of earnings over nine shares is 11.1 cents per share-an 11 percent increase.

A strategy for boom times, but not for today, when it is important to be cash-rich. Giving millions away to buy shares from outsiders -- at inflated prices compared with today -- means millions less in the corporate bank account. The S&P spent $515 billion on buybacks in 2007.

Same goes for dividends. GM spent $844-million over the last 1.5 years on dividends, and now is begging (nay, threatening, if you've seen their YouTube self-ad) for billions in self-salvation.  

Source.

Comments

[Tony]

Share buybacks also show that stock options are not "free" (not when companies spend billions to "buy them back"), and should be accounted for (as is now required IIRC, and caused a lot of whining in Silly-con Valley).