Corporate America is spending more on buybacks than anything else
Corporate America is hardly known for being an altruistic enterprise. For decades, CEOs have prioritized their bottom line over the wellbeing of their workers. But with the rise of stock buybacks, Corporate America’s decisions are becoming increasingly self-serving. Recent reports show that, rather than investing in workers or infrastructure, Corporate America is overwhelmingly choosing to buy back its own stock – but at what cost? Dive into this article to find out more about stock buybacks and their implications.
1. Corporate America Bets Big on Buybacks
Despite its detractors, corporate America bets big on share buybacks as a way to boost profits. Buybacks rose to record levels in 2018, with some $1.1 trillion spent on stock repurchases that year. This figure is predicted to further grow in 2019. What exactly are these share buybacks, and why are corporations so keen to undertake them?
Share buybacks are when companies purchase their own shares and thus reducing the number of publicly traded stock. When demand increases in these companies, the remaining shares will go up in value, thus increasing the value of the market capitalization of the company, as well as drawing investor attention. In turn, this can boost profits for shareholders through increased dividends, or for executives with stock-option plans.
- Pros: Boosts the value of the company, attracts investors, increases profits for shareholders and executives.
- Cons: Companies might use buybacks to manipulate the performance of stocks.
2. A Closer Look at Corporate Buyback Spending
For many businesses, corporate buyback spending is a key part of their financial arsenal. At its core, corporate buyback spending seeks to increase a company’s stock market value by reducing the number of available shares. As a result, each remaining share ends up being worth more and investors may benefit from increased dividends. But what exactly is corporate buyback spending, and how does it work?
The buyback process begins when a company uses its funds to buy back its own stock, thus reducing the number of available shares. In turn, the proportion of ownership for the remaining shareholders increases and the company’s market value may increase as a result. It’s important to note that, in the U.S., buyback activities are heavily regulated and companies must adhere to a variety of regulations. Here are a few:
- Need a Good Reason – Companies can’t simply buy and sell indiscriminately unless it’s with the intention of increasing market value. Companies have to provide a clear rationale behind their buyback activities.
- Impose Limitations – Companies can’t repurchase more than 25% of their outstanding shares, and all repurchases must stay within specified budget limits.
- Declare in Advance – Companies must inform their stockholders and the public ahead of any buyback activity.
By understanding the various regulations, businesses can make the most of their corporate buyback spending activities to ultimately increase their market value. This eagerness to use corporate buyback spending has become popular in recent years and looks to be a trend that’s here to stay.
3. The Pros & Cons of Investing in Buybacks
- Buybacks can be an attractive, low-risk investment opportunity – especially for short-term investors.
- The stock that is being bought back often stays at a higher market value, allowing investors to generate significant returns.
- The process also can provide a boost to a company’s stock price as the number of shares on the market decreases.
- A company could be limiting its potential for long-term success by investing in buybacks.
- Due to the large sums of money needed to repurchase the stock, the company could be losing out on opportunities for new product or services development.
- With fewer shares in the market, the liquidity of the organization’s securities may be reduced, making it more difficult for investors to find buyers or sellers.
4. What Changes Should be Made?
Going green is an important part of making sure our environment is healthy and safe. While some steps have been taken to reduce our carbon footprints, much more work needs to be done. Here are 4 important changes that should be made:
- Reduce greenhouse gas emissions – Emissions from vehicles and other sources of pollution contribute to climate change. We should reduce these emissions by transitioning to greener alternatives in transportation, such as electric cars and public transit.
- Support renewable energy – Renewable energy sources such as solar, wind and hydropower should be encouraged and used more frequently to reduce our reliance on fossil fuels.
- Reduce waste – We should do our best to reduce our waste by recycling, composting, and minimizing the use of disposable items.
- Protect natural resources – Our planet’s natural resources, such as freshwater, forests, and wildlife, should be protected from overuse and exploitation.
Making these changes would be great steps towards a more sustainable future and would help ensure our environment remains healthy and safe for generations to come.
Corporate America is spending more on buybacks than on anything else – and the implications are far-reaching. It shifts the focus of money away from research, education and other long-term investments that drive innovation, while also increasing inequality and hampering real economic growth. So while shareholders may be reaping the rewards in the short-term, the long-term consequences of this buyback trend remain to be seen.