Stock Buybacks Destroy Corporations

Stock Buybacks Destroy Corporations by Ted Bauman – Banyan Hill

TDC Note – As we wrote on September 12, 2017The damage corporate stock buybacks has done to the economy can not be over emphasized. If the “C” level executives are simply “recycling” company stock and driving the price higher they are unable to reinvest in the company. This means no new equipment, no new hires, no R&D and the list continues. This is destructive to the economy. Nothing progresses.

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“They made their money despite the government. They should be rewarded for creating so much value with the federal bureaucracy all over them like a cheap suit.”

His eyes fluttered with involuntary uncertainty as he spoke. If he played poker, I wanted in on the game.

“Sheeple” he’d called people like me who disagreed with him. I recalled a South African proverb: Tshwene ga e ipone lekopo. A baboon laughs at another baboon’s face … which, of course, is identical to his own.

We were discussing the stratospheric incomes of top executives at U.S. corporations. My interlocutor felt they earned every penny, and would earn even more were it not for the thieves in Washington, D.C. They were the Masters of the Universe.

“What if I told you that what they’re doing was illegal until 1982?” I replied.

That gave him pause.

I seized it. “And it’s cost the U.S. economy over $7 trillion over the last 15 years,” I replied. “$7 trillion that could have been invested in capital and jobs … and would have been, a generation ago.”

I had his attention now.

Profits Without Prosperity

Some months ago, an unknown author managed to get her debut novella onto the New York Times best-seller list. The problem was that nobody had heard of her book, or had seen it in stores.

She’d been buying all the copies herself to game the system. Once her book was in the Top 10, she schemed people would start buying it just because of its rank.

That’s essentially the same strategy on which U.S. corporate executives spent that $7 trillion.

Starting in the early 1990s, hundreds of publicly traded U.S. corporations have used cash reserves and borrowed funds to purchase their own stock. This does two things:

  1. The large stock repurchases increase the demand for the shares, and thus their price.
  2. By reducing the number of outstanding shares, stock repurchases artificially increase earnings per share, making them more valuable in the stock market … at least temporarily.

Yes, Blame the Bureaucrats

My conversation partner had an almost religious faith that government bureaucrats alwaysintervene to hurt productive capitalists. He blamed it on jealousy.

It’s true that government typically constrains business — for example, by imposing rules against pollution or deceptive advertising, or antitrust actions.

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Banyan Hill

Ted joined The Sovereign Society in 2013. As an expat who lived in South Africa for 25 years, Ted specializes in asset protection and international migration. He is the editor of The Bauman Letter and Plan B Club.