Share repurchases, or stock buybacks, have appeared repeatedly in tech companies’ earnings this year. But according to Cornell University assistant professor Nick Guest, they may be misunderstood.
“Our main conclusion is that share buybacks don’t create or destroy a lot of wealth,” Guest told Yahoo Finance Live (video above). “So you might wonder, ‘Well, why are companies doing repurchases on track for more than $1 trillion this year?’ Appears to be an opportunity for Profit Management to signal that they believe the stock is undervalued.”
There are many criticisms of buybacks, including that companies use them to manipulate their share prices. But according to Guest, those criticisms haven’t necessarily been substantiated by the data.
“Some argue that they are linked to excessive executive compensation and that companies that buy back do not have as much cash available to take advantage of investment opportunities, thereby sacrificing growth and ultimately profitability,” he said. Said. “But our evidence comparing both companies that repurchase and companies that do not repurchase shares does not, by and large, find evidence of those things.”
Some of the biggest buyback news this earnings cycle came from Alphabet (GOOG, GOOGL). If Google’s $70 billion buyback announcement sounds big, it is — said VerityData analyst Ali Ragheeh.
“$70 billion is a bit big for them, but when you compare and adjust to the whole market,” he said. “The best way to think about $70 billion is to compare it with market cap because you can normalize better market-wide. $70 billion equals 5.2% of Google’s market cap.”
Similarly, Apple (AAPL) also announced that it will buy back $90 billion worth of stock this week.
Why companies buy back stock – and when should they
So why do these companies do stock buybacks?
“There is more flexibility in buybacks than dividends,” Guest said. “It’s easier to cut back temporarily during downtime, and repurchasing shares reduces the amount of cash that can be misused on management’s pet projects.”
Another reason, Guest added, is that “managers and others — boards, for example — can use repurchased shares to compensate employees. So they appear to be benefits, which improve long-term profitability or add additional value.” are the opposite of creating investment opportunities.”
Ragih said that when the management feels that the valuation of the company is low, then it is worth buying back.
“The best time to do buybacks is when valuations are low because companies get the most bang for their buyback,” he told Yahoo Finance. “If Google spends $15 billion, they will want to get as many shares as possible for that $15 billion – the lower the stock price the more shares they will get for the same overall dollar value spent.”
Ragih said it’s even more worthwhile if the company has cash, which Alphabet has.
The Google logo is seen on a balloon at the Google office in a historic building at the Main Square in Krakow, Poland, on November 29, 2022. (Photo by Beata Zwarzel/NurPhoto via Getty Images)
“Google has an enormous amount of free cash flow and nothing else to spend it on, so it makes sense to return the cash to shareholders,” he added. “To boil it down to, even when they pay for the organic investments, they still have a lot of cash left over each quarter. The cash balance is about $100 billion, so they hold off on buybacks.”
However, the buyback backlash has increased in recent years. Critics say they enrich companies and executives without improving the overall economy. So over time, shareholders may see fewer buybacks if this trend continues.
“If discontent grows – for example, if we get this 4% tax or other limits on what managers can do in terms of selling their own shares after the company buys back shares and other potential restrictions – then Some companies may decide instead to retain cash or switch to dividends, both of which could have negative consequences,” Guest said. “For example, dividends, as we know, are taxed as income tax, … whereas buybacks generally generate capital gains. So that may create some additional costs for shareholders.”
elle garfinkel is the Senior Tech Reporter at Yahoo Finance. follow him on twitter @agarfinks and on LinkedIn,
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