The financial press has been sounding alarms over a trend toward more buybacks of stock by big, publicly traded companies. Stories in the Economist, the Wall Street Journal, and now Bloomberg have warned that corporations may be buying back too much stock with an eye to pushing up the price, at the expense of investment in their businesses.
Michael Mauboussin, head of global financial strategies for Credit Suisse, takes a different view. He doesn’t think more buybacks means less investment.
“When you buy back stock, it’s not like the money disappears,” he says. “It’s going back to investors, who themselves are re-investing it.”
So even if the company isn’t investing in its own business, shareholders can invest in somebody else’s.
That sounds like a great idea to Aswath Damodaran, who teaches corporate finance at NYU’s Stern School of Business. When he looks at the biggest companies buying back the most stock—companies like Microsoft, Hewlett Packard, IBM—he sees a pattern.
“I mean you look at that list,” he says, “and every single one of them, you look at the last decade, have a history of destroying value— of investing in things where they have nothing to show for it 5 years out, 10 years out. I look at that list, and I say: Thank God for buybacks.”
In other words, if a company doesn’t have great ideas to invest in these days, then giving money back to shareholders could be the right thing to do. And the market may thank it with a higher stock price.
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