Buybacks

I'm puzzled by the handwringing over stock buybacks. Buybacks are just a means of returning profits to shareholders. They are slightly more tax efficient than dividends, but serve pretty much the same purpose.

There are two arguments against stock buybacks: 1) they waste corporate capital and 2) they inflate stock prices, mostly to help management and their lush stock option packages. The first argument falls completely flat and the second mostly flat.

If buybacks were banned, dividends would rise significantly. After all, the whole purpose of owning part of a company is to get your share of the profits. Are people really suggesting to never pay out profits to shareholders? Ban buybacks and watch companies pay higher dividends causing most stock owners to pay more tax (dividends are taxed at the recipient).

Does a company buying back its own stock cause extra demand for its shares and therefore help push stock prices a little higher? Yes, probably to a small extent. But wouldn't a higher dividend so the same? Yes, of course. Executive compensation is distorted and problematic, but it is not addressed by this issue at all. People need to focus on things that matter, not this issue.