STOCK BUYBACKS DO NOT HELP ORDINARY PEOPLE OR EVEN SMALL INVESTORS

STOCK BUYBACKS ARE NOT IN THE INTEREST OF ORDINARY PEOPLE I have long argued as a corporate executive and as a teacher in Business School that stock buybacks are a fraud on the small shareholder and mostly a waste of the shareholders cash . Their main effect is to distort genuine earnings per share and enrich institutional shareholders . I have not been alone in this criticism, but I have felt like voice crying in the wilderness in the face of vested interest. It is delightful to see Bernie attacking them though his agenda is even deeper than mine. Let me summaries some things worth thinking about Firstly, Stock Buy Backs use up cash . Duh I hear you saying but pause and think a little bit longer. Cash is the life blood of a business or indeed any enterprise including a human being . Enterprises die of lack of cash in the same way bodies die from lack of oxygen. My teaching mantra requires me to pedantically point out that it is operating cash that is the lifeblood of an enterprise , but all cash is good. By Buying Back Stock the company is saying that it has no better ideas for investing the stock . Think about that . This s what is at the heart of the Schumer/Sanders drive . Cash is being wasted by going to rich people and not to new investments in decent jobs and wages The next myth to put to bed is that a stock buyback returns cash to the shareholder , whose asset it actually is, in the same way as dividend payment does . This argument is the laughable triumph of math over observed reality . When a dividend is paid cash is returned to the shareholder in a check . In a stock buyback cash only returns to a shareholder if they sell stock and this is where the fraud is perpetrated on the small shareholder – see next point Now consider this , for all their massive size stock buybacks are a very small percentage of the outstanding shares. Let’s assume they are as much as 2 percent of outstanding shares. To return cash to a shareholder and hold the shareholder equal the shareholder needs to sell 2 percent of their holding . A small shareholder may only hold 300 shares – do you think she is going to sell 6 shares ? Now a hedge fund may own a million shares – selling 2 per cent of this is easy . Does this not sound like cheat the small shareholder to you ? One last thought on the topic , who pays tax ? On a dividend the shareholder is liable for tax including an institutional shareholder . On a stock buy back for a hedge fund the gain goes in to the trading miasma that allows it to balance against losses such that tax is most likely never paid . In capital gains the small shareholder can do this too but they don’t usually have a massive portfolio with which to juggle. Guess which institutional shareholders want and because they control boards this is what they get .I content that this is a fraud on small shareholders – what do you think ?