UPDATED: March 2022
Do Share Buybacks Really Destroy Long-Term Value? – One of the most controversial corporate decisions under fire today is share buybacks. Politicians have claimed that share buybacks tend to create a ‘sugar high‘ for corporations as it helps boost prices up in the short-term. However, the best way to boost a corporation’s value is through investment in the company’s future, and most corporations aren’t doing that today.
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The main reason why share buybacks are under fire from all quarters is that they prevent investment in new products and on employees. They are conveniently held up as a positive thing for investors and shareholders, while the general public suffers. Share repurchases also help increase the stock price in the short term, allowing opportunistic CEOs to cash out their shares. The accusation that CEOs enrich themselves through stock buybacks isn’t a new one and has been around for some time. In addition to the concern for people isn’t that CEOs are enriching themselves, it is important to ask do share buybacks really destroy long-term value?
This question can be answered by looking at the market dynamics and studying the current trends in the market. The evidence clearly suggests that money invested in a buyback can’t be invested anywhere else. But is it always suitable for a company? When a company decides to repurchase its shares, it is actively choosing not to invest in its future, which isn’t great for its long-term value. However, the other end of the argument is that CEOs decide between good and bad investments for the betterment of their corporations. If they think that a share repurchase makes sense and will help the company, they must stand by their decision no matter how unpopular it may be.
Numerous studies have found that share buybacks occur when companies have excess capital and lack growth opportunities. That suggests that companies decide what investment decisions make sense and then decide to buy back any shares. That makes sense and goes against the general opinion surrounding share buybacks. However, in some cases, buybacks can destroy long-term value for a company. A company that isn’t focused on its long-term goals and wants to profit in the short-term with a buyback will not consider its impact on employees and their future products. That is where the negative press from share buybacks comes. It is also one of the main reasons investors ask do share buybacks really destroy long-term value?
So, does it make sense for a company to repurchase its shares? Yes, it does, but it shouldn’t come at the expense of their long-term growth. If a company isn’t investing in its future and is only focused on short-term gains, it will not succeed in the long-term. There must be a healthy balance between how a company decides to use the excess cash. It could either be used to train employees and invest in new products or can be used for share buybacks.
About the Author & How YOU Can Profit: This article is the copyrighted product of the team at BuybackAnalytics.com .
Buyback Analytics is a Top Tier Investing Platform to help investors find, analyze, and profit from investing opportunities not found through traditional investment tools. We specialize in this simple concept: Follow the trades of Insiders – CONSISTENTLY PROFITABLE Traders, Investors, and Institutions because THEY get Inside Information that YOU don’t:
LEGAL Insider Trading / Inside Traders (CEOs, CFOs, Corporation’s Accountants & Attorneys, Politicians, etc.)
Stock Buybacks (Share Repurchases) by Public Corporations (ie. Apple, Tesla, Netflix, Meta (Facebook), Microsoft, etc.)
Market Moving Institutions (Examples: Market Makers, Investment Banks, Stock Brokerages, Hedge Funds, etc.)
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