By Don Schreiber, Jr. – WBI Founder and CEO
New York State Representative Chuck Schumer and U.S. Senator Bernie Sanders have heralded the need to cut down on corporate stock buybacks — when a company purchases its outstanding shares. Schumer and Sanders argue that excess profits should be passed to employees first through increased minimum wage or improved benefits packages before profiting shareholders. U.S. corporations spent a record $1 trillion on buybacks in 2018, according to TrimTabs Investment Research. Companies generally use buybacks as a way to boost stock prices during market volatility and increase earnings per share by reducing the number of outstanding shares in the market.
I believe when executives take all the profit and pour it into stock buybacks without investing in the future of their company, this is a risky business practice. Executives that turn to buybacks are not being innovative in terms of acquiring the best talent, launching a new product, or expanding plants and equipment. I feel that these companies are throwing away trillions of dollars in profit on stock buybacks just so they can make it look like earnings are actually rising. This is a secret trick executives tend to hide up their sleeves. The act of repurchasing shares makes it look like earnings per share are rising, this is actually financial engineering. Long-term this doesn’t benefit the companies, but since the market bids up stocks because of this earnings effect and there are fewer shares outstanding, there is more demand for the fewer shares out there. I think this is the largest steal in terms of wealth in U.S. history.
Instead of turning to stocks growing through buybacks, investors should look at dividend-paying stocks. Return in the form of dividends can return excess profits to shareholders on a continuous basis. Most investors don’t realize that dividends account for 43% of the S&P 500’s historical average rate of return.¹ Dividends can help to provide rising income, price appreciation, compounding, less volatility, and dollar-cost averaging.
Overall, stock buybacks are like smoke and mirrors and not an ideal corporate policy. It is merely concealing the “wealth effect”. The “wealth effect” suggests that when the value of equity portfolios are on the rise because of accelerating stock prices, individuals feel more confident about their wealth, which causes them to spend more. It’s time to wipe the mirror clean from the superabundance of corporate buybacks.
Important Information
Past performance does not guarantee future results. The views presented are those of Don Schreiber, Jr. and should not be construed as investment advice. Don
Although a company may pay a dividend, prices of equity securities – including those that pay dividends – fluctuate. Investing on the basis of dividends alone may cause an investor to buy or sell certain securities when circumstances may or may not be favorable.
Dollar-Cost Averaging: A way to buy more of an investment when it’s cheaper and less when it’s expensive.
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SOURCES
¹ Ervin, Eric. “Q1 Market Update: Dividend Growth Outpaced the S&P 500.” Forbes. Forbes Magazine, 14 Apr. 2017. Web. 12 June 2017
