Share buybacks are just a more efficient way of returning profits back to investors than dividends [0].
> Why can't corporations find anything better to do with that money? Why is capital spending relatively muted while productivity growth has been subdued for years
Most companies are demand limited which limits their investment opportunities. Also, you want to move capital where it can get the highest return. If a companies best investment opportunity gives a return of a measly 2% a year when the market is doing 7%, than you should not do it and instead return that money to investors so they can divert their investments to companies with higher returns.
[0]: https://en.wikipedia.org/wiki/Share_repurchase#Tax-efficient...
Saying they are just a more tax efficient alternative to dividends assumes that they are exactly substituted for dividend payments in amount and timing, but I don't think that's the case in practice.
Something that I've wondered is, if a company has excess capital why not, instead of acquisitions, dividends, or buybacks, just buy an S&P 500 index fund?
Because that would tie the value and riskiness of your company to the sp 500 which is inefficient as that effectively forces anyone who wants to invest in your company to also invest in the sp 500. Not everyone has a risk/reward preference that matches the sp 500. It's better to instead return profits to investors and let them reinvest into whatever they want.
However, the S&P 500 is approximately the same as the stock market, and so I think it's arguable that "everyone" together does have about the same risk/reward preference.
Buybacks, even if better in the best of all possible worlds, make it difficult to change your mind, whereas an index fund could simply be sold, rather than having to issue more stock. It seems like a lower-friction alternative to accomplish something economically similar.
True, but the effect on share prices is very different. If you compare the S&P 500 with an index (a price index, not a total return index) comprising companies that use dividends instead of buybacks, you get a distorted picture of relative economic success.
>Most companies are demand limited which limits their investment opportunities.
How do you reconcile lack of demand with the historically tight labor market?
>If a companies best investment opportunity gives a return of a measly 2% a year when the market is doing 7%, than you should not do it and instead return that money to investors so they can divert their investments to companies with higher returns.
I do agree with that in principle (provided you account for risk as well), but I'm starting to wonder if there is a self reinforcing element at play that's driving buybacks right now. Shareholders see stock markets rise. They demand buybacks based on your (fundamentally sound) logic. Management feels pressured to buy back stocks, which makes markets rise even more...
Look at employment to population ratio, labor share of income, birth rates.
Not historically tight.
People anticipate a recession because timing wise one should be due, they actually plan for it and reduce capital investment and just do buy backs instead?
So instead of a blowoff followed by recession, we sort of get a leveling off while everyone waits for the next shoe to drop?
But if corporations expect a recession, why would they increase debt and weaken their balance sheets? Aren't they supposed to do the exact opposite?
Perhaps management compensation and shareholder activism explains some of it.
In financial markets it's easy to see behaviour driven by fear and by greed, but this might simply be behaviour driven by confusion.
Recessions do not have a schedule. Moreover, the much bemoaned "slow recovery" during the Obama administration would totally change any hypothetical boom-bust cycle with its unprecedented policy moves.
Of course that wouldn't have been possible if corporate balance sheets hadn't been better in the US than elsewhere (especially in Europe). So it's still a sign of strength.
But it also raises a couple of questions: Is it sustainable? Why can't corporations find anything better to do with that money? Why is capital spending relatively muted while productivity growth has been subdued for years (both indicators have improved somewhat only very recently)?
I think low interest rates explain some of that. It makes sense to move funding from equity to debt in a low interest rate environment. But when buybacks run out of steam, I think we may well see a negative stock market reaction.