{"id":9135,"date":"2020-12-18T14:57:15","date_gmt":"2020-12-18T14:57:15","guid":{"rendered":"https:\/\/zackspcg.com\/blog\/?p=9135"},"modified":"2022-02-26T13:05:59","modified_gmt":"2022-02-26T13:05:59","slug":"what-investors-should-know-about-stock-buybacks","status":"publish","type":"post","link":"https:\/\/zacksim.com\/blog\/what-investors-should-know-about-stock-buybacks\/","title":{"rendered":"What Investors Should Know About Stock Buybacks"},"content":{"rendered":"\n

Jerry C. from\nMurfreesboro, TN asks: <\/em>Seasons Greetings, Mitch. I\u2019ve read a few articles\nrecently about stock buybacks, which to date I have seen as a good thing for\nstock owners. Seems like a new administration may try to pull the reins on the\npractice. What are your thoughts here? Would changing buyback rules hurt stock\nprices?<\/p>\n\n\n\n

Mitch\u2019s Response:<\/strong><\/p>\n\n\n\n

That\u2019s a great under-the-radar question, Jerry, and one that\nI do think could have some impact going forward. <\/p>\n\n\n\n

For readers who may be unfamiliar with stock buybacks or\nshare repurchases, it\u2019s when a corporation uses capital to buy its own shares,\nthereby reducing share count and effectively boosting shareholder equity value\nat once. Companies can use their cash in a variety of ways: research and\ndevelopment, investing in a new plant or product, pay increases, new hiring,\ndividends, or share repurchases \u2013 just to name a handful. <\/p>\n\n\n\n

Stock buybacks have been around since 1982, when they were\nlegalized by the Reagan administration. But they really took off in the early\n90\u2019s, when a 1992 tax bill capped corporate tax deductions for executive pay\nover $1 million. Corporations increasingly shifted to stocks and options to\nincrease executive pay, and today\u2019s buybacks are often used to offset some of\nthe new stock issues paid to CEOs and the like.1<\/sup><\/p>\n\n\n\n

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The fresh scrutiny being given to stock buybacks is a result\nof the most recent Tax Cuts and Jobs Act of 2017, when corporations were given\na tax break to repatriate billions of overseas profits. The thinking was that\nthe repatriated money would be deployed to investment, pay increases, and\nsurging economic growth. A lot of capital was indeed used for investment, but stock\nbuybacks also soared. Companies repurchases of their shares jumped 55%, to a\nrecord $806 billion. Much of the new positive cash flow from the tax break was\nshifted to shareholders. As an equity investor, this is generally good news. <\/p>\n\n\n\n

In regards to your question, I do think there is quite a bit\nof interest in adjusting stock buyback practices. But the range of proposals to\ndate is all over the map, and trying to game the outcome from where we sit\ntoday is virtually impossible. While I do think share repurchases boost\nshareholder equity and are generally good for stock prices \u2013 which is our\nconcern here at Zacks Investment Management \u2013 I am not fully convinced that\nreining them in will be a net negative for stocks. <\/p>\n\n\n\n

That being said, I think a big piece of investor due\ndiligence is to closely scrutinize how and why companies are using stock\nbuybacks. In some cases, a company may be repurchasing shares to make up for lack\nof innovation and new growth. In a sense, it\u2019s an \u2018artificial\u2019 way to boost\nshareholder value. I\u2019ve also seen companies taking advantage of the low\ninterest rate environment to take on more debt for the express purpose of buying\nback stock. Investors should raise an eyebrow to this practice. <\/p>\n\n\n\n

A recent MSCI study found that as buybacks have soared over\nthe past 30 years or so, dividends have held relatively steady but capital\nspending has fallen by nearly 50% and spending for research and development is\nalso down considerably. That\u2019s not a great trend in aggregate, and investors\nshould take this into consideration when making decisions. Companies that are\ninnovating, investing in new plants and products, hiring more workers, and\nspending in an effort to grow and lead may have a stronger future than\ncompanies borrowing and using capital simply to buy back stock. <\/p>\n\n\n\n

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Corporate stock buybacks are common\u2014but investors should focus on why a company is repurchasing shares<\/p>\n","protected":false},"author":3,"featured_media":7436,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[66,71],"tags":[],"class_list":["post-9135","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-mitchs-mailbox","category-private-client-group"],"acf":[],"_links":{"self":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/9135","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/comments?post=9135"}],"version-history":[{"count":1,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/9135\/revisions"}],"predecessor-version":[{"id":10490,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/9135\/revisions\/10490"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/"}],"wp:attachment":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/media?parent=9135"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/categories?post=9135"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/tags?post=9135"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}