Question

What are share buybacks and how do they affect a company's stock price? From the article, critics of buybacks say that executives place a higher priority on rewarding shareholders than on helping workers, investing for the long run, or maintaining a financial cushion in the case of an emergency. What should executives prioritize and how should they do so?

Answer 1

Buyback occurs when a company repurchases its shares from the marketplace. Generally, the buyback is done to boost financial ratios such as EPS, ROA, ROE, P/E, etc and the market takes this buyback as a positive sign due to which stock prices of the company improve. The buyback is a way to return wealth to the investor but there are other ways to maximize the return for shareholders such as capital appreciation and dividend payout.

Companies should buy back shares when they think there are no credible value-creating opportunities available in the market. But this is not always the case. Buying back the shares reduce the no. of outstanding shares from the marketplace and thus reduces cash and improving financial ratios of the company. Mostly this is done when the market has discounted the company's share price steeply and thus reduces its stock price in the market. At that time, buyback is done only to improve the stock price of the company in the short term. But it won't help in the long run for the company to improve its position in the market.

" Critics of buybacks say that executives place a higher priority on rewarding shareholders than on helping workers, investing for the long run, or maintaining a financial cushion in the case of an emergency"

Buyback is done to reward shareholders of the company in the short term and improving the company's financial ratios and balance sheet. But if the executives do not take strict action to improve or bailout companies from the distressed position, then the buyback won't help the shareholders to maximize their returns in the long run. Instead of investing capital surplus or cash in buying back the shares, companies should invest in the future of the company, make some strategic decision, invest the money to improve the distressed position of the company by purchasing new equipment, building plants, creating more units, increasing production and distribution network, incentivize their employees and improving their brand position in the market.

Buying back should be done when the company's growth is stable and they have a very prosperous future and then it is good for the company also to reward their shareholders but if it is done solely to improve the balance sheet of the company then the buyback is a false positive sign thrown in the market and will only aid the company in the short term but will fail company in the long run.