Tuesday, February 12, 2019

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Good morning. Two more days till chocolate is on sale!

Dividends and buybacks - Fact and Fiction by Aswath Damodaran (Link)
I believe that the shift to buybacks reflects fundamental shifts in competition and earnings risk, but I don't wear rose colored glasses, when looking at the phenomenon. There are clearly some firms that are buying back stock, when they clearly should not be, paying out cash that could be better used on paying down debt, especially in the aftermath of the reduction of tax benefits of debt, or taking investments that can generate returns that exceed their hurdle rates. You may consider me naive, but I believe that the market, while it may be fooled for the moment, will catch on and punish these firms. Also, the data suggests that these bad players are more the exception than the rule, and banning all buybacks or writing in restrictions on buybacks for all companies strikes me as overkill, especially since the promised benefits of higher capital investment and wages are likely to be illusory or transitory. If you are tempted to back these restrictions, because you believe they are well intention-ed, it is worth remembering that history is full of well intention-ed legislation delivering perverse results. 

Share buybacks
There is an argument that stock buybacks reduce the amount companies invest.  This chart shows the actual investments done by companies dating back to the 1940s. It's not obvious there is a problem.

The chart below adds "intellectual property" to the mix.  The world has changed and it's weird to not add spending on life-saving drugs or new apps and software that improves your life.  There is no obvious problem here.