Stock buybacks have evolved significantly over time. Once considered a form of stock manipulation and largely prohibited, they are now extensively used by companies to return profits to shareholders. The preference for buybacks over dividends stems from the fact that once a company pays a dividend, shareholders come to expect them annually. Buybacks allow for more selective, non-periodic distributions of corporate profits.
One major advantage of stock buybacks is their ability to reduce shares outstanding and often boost the share price. This has led to favoritism among C-suite executives, who may receive bonuses and have stock options tied to share prices. However, it is crucial to differentiate between tender offers and buybacks, as they serve distinct purposes in corporate finance.
A significant issue with stock buybacks lies in the lack of transparency for investors. Companies are not required to report the amount of a buyback until their quarterly SEC report, Form 10Q. In contrast, the London Stock Exchange (LSE) requires that buybacks be reported by 7:30 a.m. on the business day following the buyback’s occurrence. Similarly, the Hang Seng, Hong Kong’s stock exchange, mandates that share buybacks must be reported no later than 30 minutes prior to the commencement of the pre-opening trading session on the next business day.
Another criticism of buybacks is their association with finance capitalism, where wealth is created through financial transactions rather than industrial capitalism, which focuses on manufacturing and new investments. Some political groups, such as Democrats and certain Republican populists, argue that companies engage in share buybacks to enrich executives and shareholders at the expense of investing in worker training, wages, and other essential areas.
In conclusion, stock buybacks have become a common method for companies to return profits to shareholders while potentially boosting executive bonuses and stock options tied to share prices. However, there is a growing need for increased transparency in reporting buyback amounts, especially given the more stringent requirements in other countries like Britain and Hong Kong. As always, the availability of more information to small investors can lead to better decision-making in the securities markets.