18 years in Wall Street, left after finding out it was all horseshit. Founder/ Master and Commander: iBankCoin, finance news and commentary from the future.
Joined Nov 10, 2007
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Share Buybacks Fuel Executive Decadence and Sloth

A lot of people think buybacks are great for stocks. The truth is buybacks are nothing more than fuckery on behalf of the laziest slobs to ever walk the planet.

Imagine yourself to be a C-level exec at a large U.S. firm, like IBM. You have no idea how to scale or innovate; but you’re sitting on billions in cash.

You have a few options.

1. Vacate the golf course and try to invest the money to seek a return that will increase shareholder value.

2. Remain on the golf course and buy back shares, in order to increase earnings to trigger bonuses that will permit you to make 303x what everyone else at the company is making.

Share buybacks by U.S. non-financial companies reached a record $520 billion in the most recent reporting year. A Reuters analysis of 3,300 non-financial companies found that together, buybacks and dividends have surpassed total capital expenditures and are more than double research and development spending.

Companies buy back their shares for various reasons. They do it when they believe their shares are undervalued, or to make use of cash or cheap debt financing when business conditions don’t justify capital or R&D spending. They also do it to meet the expectations of increasingly demanding investors.

Lately, the sheer volume of buybacks has prompted complaints among academics, politicians and investors that massive stock repurchases are stifling innovation and hurting U.S. competitiveness – and contributing to widening income inequality by rewarding executives with ever higher pay, often divorced from a company’s underlying performance.

“There’s been an over-focus on buybacks and raising EPS to hit share option targets, and we know that those are concentrated in the hands of the few, and that the few is in the top 1 percent,” said James Montier, a member of the asset allocation team at global investment firm GMO in London, which manages more than $100 billion in assets.

The introduction of performance targets has been a driver of surging executive pay, helping to widen the gap between the richest in America and the rest of the country. Median CEO pay among companies in the S&P 500 increased to a record $10.3 million last year, up from $8.6 million in 2010, according to data firm Equilar.

At those levels, CEOs last year were paid 303 times what workers in their industries earned, compared with a ratio of 59 times in 1989, according to the Economic Policy Institute, a Washington-based nonprofit.

This is financial engineering at its worst. There’s a reason why people like Carl Icahn and Nelson Pelz have made a magnificent living by pressing the faces of CEOs onto panini presses. American CEOs, more or less, are decadent sloths, galivanting about acres of greenery, living like Caesars, ordering mid-level clerks to initiate share buybacks to ingratiate themselves to no end.

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  1. BlueStar: Contrarian Investor
    BlueStar: Contrarian Investor


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  2. gorby

    Ackman is gonna be mad at you again.

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