Finance: Stock Buybacks
Stock buybacks occur when a public company decides to buy back their own shares that they issued. These buybacks, also known as share buybacks, could be done by any public company, but are usually done by more stable and larger corporations, known as blue-chip companies. Buybacks are generally bought in bulk and can purchase stocks off of the public market or even right between corporations and shareholders. Owning a stock means that one owns a small part of a company and that they can vote on certain decisions that may be needed. Common thoughts around stocks are that a company wants to make money, so they sell stocks for people to buy them. Others may wonder why a company would spend money on buying stocks rather than using their money on capital like new production centers. However, various companies now see that purchasing their own stocks for more than people originally bought it, is a safe and smart move.
High-end companies end up with a good amount of profit which they need to see what to do with. As previously stated, smaller companies usually do not buyback. The reason why is that they use their profits for expansion because they often have more opportunities to grow than larger corporations. On the other hand, blue-chip companies decide to spend their money on buying stocks from shareholders, thus giving those shareholders more money, which keeps them satisfied. Another reason why companies would buyback stocks is that the company may feel that they are not being valued correctly. If a company has a lot of their stocks bought, the value of the shares increases. So if a company feels that they are valued too low, they could buy back their stocks to bring up their value. Having a higher value could interest more people to invest in a company. This could be a strong motivation for these companies. Over the last few years, buybacks have become more and more popular due to lower interest rates. An example of a company that has done this is Disney who bought about 74 million shares of their own stocks in 2016. 74 million shares would have been worth near 7.5 billion dollars at that time. According to a study done by Goldman Sachs, $3.8 trillion has been spent on buybacks over the last 9 years. Even more impressive is that this statistic shows that more money has been spent on buybacks than all other investors combined (pension funds, mutual funds, individuals). All in all, stock buybacks have proved to be a successful method in increasing equity, keeping shareholders satisfied, and making a company appear more financially stable and better.
Nevertheless, there has been debate over whether stock buybacks are ethical or not. Some people argue that companies are manipulating people by boosting the value of a company. This can be a severe impact as boosted trends tend to give people more reason to buy a stock. Those people feel that these are false trends and the value of a company should be shown without the influence of buybacks. Others believe that companies which buyback stocks, are not acting morally, and that these buybacks are not in the best interest of shareholders. For example, if a company wants to make a decision that a few shareholders are not in favor of, companies could buyback stocks from them, leading them to not have the ability to vote on issues.
In conclusion, stock buybacks are a controversial topic that each person has their own view on. The role they play in the future is something that no one knows, but one thing is for sure, they are not going away anytime soon.
Works Cited
Segal, Troy. “Why Would a Company Buy Back Its Own Shares?” Investopedia, 8 Sept. 2019, www.investopedia.com/ask/answers/042015/why-would-company-buyback-its-own-shares.asp.
Useem, Jerry. “The Stock-Buyback Swindle.” The Atlantic, Atlantic Media Company, 26 July 2019, www.theatlantic.com/magazine/archive/2019/08/the-stock-buyback-swindle/592774/.