Is the Record Stock Buyback a Troubling Sign for Continued Economic Expansion?

The recent research by Olenick and Ayres (“Share Buybacks Are Corporate Suicide”) may support that argument. They examined 1,839 public companies in the US and found “the more money a firm spends on buybacks, the less likely it is to grow over the long-term. In fact, … we discovered that not only do buybacks not lead to growth in a company’s market value, they are strongly correlated to a declining market value.” Share buybacks do not help the companies themselves in the long run.

However, this is only one part of the story. Share repurchases may hurt the long-term growth and shareholder value for the companies that buy back their stocks, but they may not be bad for the economy as a whole. First of all, the companies buying back shares may be mature companies with low growth prospects in the first place. Returning cash to shareholders could be the best use of the corporate money among all the available options. Secondly, if the companies cannot find good investment opportunities for the corporate cash, buybacks could provide resources for shareholders themselves to find better investment opportunities outside the companies.  In this case, share repurchases are not necessarily bad for the economy because they help allocating resources more efficiently. Ultimately, it will depend on how the shareholders who benefit from the buybacks use the extra cash. If those shareholders invest the extra cash in innovations or other growth companies, share buybacks could help the economic expansion in the long run.

Henry Ma is the President & CIO at Julex Capital Management, a participant in the ETF Strategist Channel.

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