Question

(1) Are share buybacks ethical, in your opinion?

Answer 1

Share buybacks by companies tend to boost the share price because they signal confidence of the management in the company's growth prospects. Share buybacks also increase the EPS because the outstanding shares are reduced.

This leads to the ethical question - are share buybacks ethically wrong? Do they artificially inflate the share price, and do they go against shareholder values?

In my opinion, share buybacks are not ethically wrong because :

• If the company has sufficient retained earnings and cash, but not adequate opportunities to invest, share buybacks are a good way to reward shareholders. This is in alignment with shareholder values because the company is returning cash to shareholders which they can invest for a better return elsewhere.
• Cash dividends and stock dividends may be tax inefficient. In such cases, share buybacks are a tax-efficient way to distribute earnings/cash to shareholders
• In markets that are mostly efficient, shares will be mostly correctly priced. The information contained in share buybacks will be processed by the market, and the shares will be priced correctly after taking into consideration all the information, including the share buyback.