Most debates about pros and cons misses the point: buy-backs are an
ineffective way to 'return' capital to shareholders. Managements have as
much insight about future share prices as the average investor, be it
Joe Blogs or a 'Professional'. If shares are bought at too high a level
it is obvious value destruction. One might as well have given
shareholders cash and let them make a decision about whether to buy more
of the company's shares at a certain level or deploy the returned
capital elsewhere. The same applies to situations where management
considers the shares to be undervalued ((and this does not even mention
the aspect of executives playing a
somewhat conflicted game of boosting the value of their share or option
packages).
So basically all the buy-back activity is nothing but guesswork and
punting on the share price that should not be the task of management. It
should just do the job of running the business.
Of course, there is an element of price manipulation - and that seems to
be the major factor behind all the buy-back activity. But the sad
example of General Electric demonstrates that management should not be
able to roll the dice in the stock market casino.
Returning money to shareholders should not mean that some sellers get a
(manipulated) exit price while those shareholders that don't sell get no
cash - and may or may not benefit from a short-term boost to the stock
price. For when buy-backs stop the share price may rapidly drop to the
undisturbed neutral price it would trade were there not buy-back
activity
(31-July-2020)
