What likely follow-on consequences will arise from the trend of stock buybacks by companies?
Trends can give rise to other follow-on trends. For instance, lots of sub-prime debt repackaging can result in lots of sub-prime lending, can result in lots of insolvencies later on. It would be useful to see the pro's and cons, and overall follow-on consequences of the recent prevalent trend of stock buybacks.
https://www.ntu.org/foundation/detail/what-do-stock-buybacks-mean-for-the-economy
That article basically says stock buybacks are good for stock market valuations, which is good for investors' portfolio valuations. Arguably, those investors would have more money to spend into the economy. Okay, so that's a trickledown effect, but is there any downside?
https://www.investopedia.com/ask/answers/042015/why-would-company-buyback-its-own-shares.asp
Since companies raise equity capital through the sale of common and preferred shares, it may seem counter-intuitive that a business might choose to give that money back. However, there are numerous reasons why it may be beneficial to a company to repurchase its shares, including ownership consolidation, undervaluation, and boosting its key financial ratios.
So companies buying back their own equity at terms more favorable to them can potentially regain more control over their own sovereignty and decision-making, by being less under the control of shareholders. Didn't Dell go private in order to gain more control over itself for restructuring purposes?
Unused Cash Is Costly
So buybacks are a more efficient use of capital - meaning that capital is better off in the hands of companies/sellers than in the hands of shareholders/buyers.
The Stock Is Undervalued
Who's the best judge of whether a stock is undervalued - the company/share-offerer or the shareholder? Wouldn't shareholders be more objective about a company's valuation?
Isn't there a risk of flaccid companies buying back their stocks to artificially boost or prop up their share price without creating any real value?
Will we see more companies using buybacks to consolidate more control over their equity to embark on radical restructuring, like Dell? Which companies might do this?
Would there be a greater likelihood of companies suffering reduced cash flow, and thus resorting to other means to compensate for that? If so, then by what means?
Can anyone name an example of a company whose stock buyback has significantly impacted their current or future prospects?
Submitted July 13, 2019 at 10:51PM by sanman https://ift.tt/2jNbqet
