As a means of returning capital to shareholders, share repurchases offer greater flexibility.  Compared to dividends, which generally require a stable and long-term commitment to distributing cash flow, buybacks are more variable and can be executed at management’s discretion.  According to data from S&P Dow Jones Indices, S&P 500 companies repurchased shares during the first three quarters of 2018 amounting to $583.5 billion in aggregate, a 52.6% increase compared to the first three quarters of 2017 when share repurchases amounted to $382.4 billion.  On a full-year basis, share buybacks amounted to $517.4 billion in 2017 and $536.4 billion in 2016.

Share repurchases promote managerial discipline.  Proponents believe that returning capital to shareholders promotes management discipline and dissuades them from wasting money on poor investments or transacting ill-conceived acquisitions. 

Share repurchases are tax efficient.  Corporate buybacks are a tax efficient means of returning cash to shareholders because unlike dividends, a buy-back is tax-free to investors who don’t sell their shares. 

Corporate buybacks are manipulated by management.  Critics often view share repurchases as a way for managements to manipulate EPS to boost performance and justify incentive compensation.  Additionally, some believe buybacks are a means to offset dilution from equity awards to executives.  

Share repurchases are often poorly timed.  There is a risk that managements will repurchase shares when the company is doing well, and the shares are not undervalued.  Through the September quarter, Apple Inc. spent $62.9 billion on share repurchases through open market and privately negotiated purchases, acquiring 342.3 million shares at an average price of $183.90 per share.  The company paid as high as an average $222.07 per share during the September 2 through September 29, 2018 period.  The acquired shares were worth $54 billion at year-end 2018 when the shares closed at $157.74 per share.     

Corporate repurchases have opportunity costs.  Some worry that returning capital to shareholders is often at the expense of investment in capital equipment, research or other activities that promote long-term growth and contribute to the economy.  Theoretically, managements should weigh the benefit of returning capital to shareholders against returns from other investments. 

It’s their money. In the end, it is the shareholders’ money and they entrust managements and boards of directors to be good stewards of corporate resources.  If not, shareowners can always sell their stock and invest elsewhere.  Warren Buffett, the Oracle of Omaha, is a fan of corporate share repurchases, especially if the shares are undervalued.  Ironically, it was Berkshire Hathaway from whom Phillips 66 repurchased 35 million shares of stock during the first quarter of 2018 for $3.3 billion, or $93.725 per share.  The shares finished 2018 at $86.15 per share.  In a 2018 open letter to CEOs, Larry Fink, CEO of investment manager Blackrock, encouraged managements to guard against short-term thinking and explain how the changes to the tax law fit into their long-term strategy, including the use of after-tax cash flow to create long-term value.  While there is little doubt that the lowering of the corporate tax rate to 21% from 35% and an incentive to repatriate foreign earnings to the U.S. contributed to the increase in stock repurchases, these programs could taper off over time.  However, while bills such as the Accountable Capitalism Act proposed by Senator Warren would likely face opposition, the recent surge in buyback activity could stir more discussion and dial up the sound on corporate governance.

Sources:

“S&P 500 Q3 2018 Buybacks Surpass $200 Billion Mark for the First Time Ever” Howard Silverblatt, S&P Dow Jones Indices, December 18, 2018

“S&P 500 Q2 2018 Buybacks Increase 58.7% Year-Over-Year to Record $190.6 Billion” Howard Silverblatt, S&P Dow Jones Indices, September 24, 2018

“S&P 500 Q1 2018 Buybacks Rose 38% to Record $189.1 Billion” Howard Silverblatt, S&P Dow Jones Indices, June 25, 2018

“S&P 500 Q4 2017 Buybacks Rose 6.0% to $137.0 Billion; Full Year 2017 Fell 3.2% to $519.4 Billion” Howard Silverblatt, S&P 500 Dow Jones Indices, March 21, 2018

Apple Inc. (2018). Form 10-K. Retrieved from

     https://www.sec.gov/Archives/edgar/data/320193/000032019318000145/a10-k20189292018.htm

Apple Inc. (2018) Form 10-Q. Retrieved from

     https://www.sec.gov/Archives/edgar/data/320193/000032019318000100/a10-q320186302018.htm

Apple Inc. (2018) Form 10-Q. Retrieved from

     https://www.sec.gov/Archives/edgar/data/320193/000032019318000070/a10-q220183312018.htm

“Dems offering bill aimed at curbing stock buybacks” Naomi Jagoda, The Hill, March 21, 2018

“Warren decries stock buybacks, high CEO pay” Michael Kranish, Boston Globe, June 4, 2015

“Warren Introduces Accountable Capitalism Act”, Retrieved from

      https://www.warren.senate.gov/newsroom/press-releases/warren-introduces-accountable-capitalism-act

“Warren Buffett explains the enduring power of stock buybacks for long-term investors” Eric Rosenbaum, CNBC, September 1, 2018

“Phillips 66 and Berkshire Hathaway Announce Share Repurchase Agreement” Philips 66 Press Release, February 13, 2018

“Larry Fink’s Annual Letter to CEOs: A Sense of Purpose” BlackRock, Larry Fink, January 2018