Question

Read one of the following articles on Stock Buybacks:

Alsin, Arne. (April 27, 2017) “McDonald’s: Burgers, Fries and Stock Buybacks.”   Retrieved from  https://www.forbes.com/sites/aalsin/2017/04/27/mcdonalds-burgers-fries-and-stock-buybacks/#1f6e9d1c4626 (Links to an external site.)Links to an external site.    

Levisohn, Ben. (Mat 6, 2017) “The Stock Buyback Jig is Up” Barron’s. Retrieved from http://www.barrons.com/articles/the-stock-buyback-jig-is-up-1494047627 (Links to an external site.)Links to an external site.

Please Address the following questions.

1. Are there any ethical issues relating to stock buybacks or income smoothing? Explain your response.

2. Should these practices should be permitted? Why or Why not?

Answer 1

1) On the ethical front, I partly agree with the author. I totally agree with the notion that a company like McDonald’s that has a continuous decrease in its revenue and shooting up debt levels, using funds for buyback is neither wise nor justifiable. A company experiencing such troubles hitting its financial books must primarily use these funds to improve its business position and drive positive growth in its top line & bottom line. If, in a worst case scenario, the company doesn’t have any plans/blueprints to gauge such positivity, it must go for debt repayments rather than buying back its own shares. So, I totally agree that McDonald’s buyback in recent years is not an acceptable & justifiable practice and it is surely to please the interest of company’s executives on the cost of shareholders.

On the other hand, when author says that in buyback, cash is never returned to shareholders and it’s just lost in stock market, I don’t really buy this point. When a company buys its shares back, the money does change hands and goes to the retail investors’ hands. There may be a scenario that few professional traders make some profits out of these transactions and the end investor receives a smaller chunk of company’s spending on buyback, but he/she definitely receives cash. So, it’s cash returned to shareholders, though to some specific ones who choose to part ways with the company.

2) Yes. The practice must be allowed. However, there should be some restrictions as to when and why a company can go for buybacks. There must be a requirement of clear justification on why a company’s executives are going for buyback. A company such as McDonalds should not be allowed for a buyback. However, company’s having a strong financial health with satisfactory business outlook should be allowed.