Are They in Shareholders’ Interests?
Buyback authorizations by U.S. companies have soared to new highs in 2021, driven by low-interest rates that allow many managements to lever corporate balance sheets to accommodate share repurchases.
Thus, one of the most cynical corporate practices of recent times continues unabated. That no better use of company funds could be found rather than buying shares in a market at valuation extremes defies credulity. In addition to deferring investment in long-term assets, many companies will labour under levered balance sheets when interest rates eventually return to more normal levels.
The motivation for such behaviour can be found in compensation packages that reward management based on EPS growth. Shrinking shares outstanding is an expedient means to boost EPS.
Corporate governance is also an issue, as company boards should prevent actions that are more likely to diminish, rather than enhance shareholder values.
It is sad to note that the lowest levels of buybacks this century occurred in 2009 when share prices were most attractively priced.
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