Question

STOCK BUYBACKS

Share buybacks are not ethically wrong.

Because if the company has sufficient retained earnings and cash, but no adequate opportunities to invest, share buybacks are a good way to reward shareholder. Also, the information contained in share buybacks will be processed by the market, and the shares will be priced correctly after taking into consideration all the information, including the share buybacks.

Companies don't have any obligations to use the money to grow the company, pay employees more etc instead of doing buybacks. The performance of the company is majorly dependent on the vision of the owners and the management and if the company is creating huge cash inflows and they lack proper vision on what to do with the money, they spend it on buy back and paying dividend in an expectation that investors will be satisfied.

Some would argue that the capitalist system rewards shareholders only at the expense of others, like employees. The same people might say that in doing so, the company contributes to the growing gap between rich and poor. Do you buy this?

Answer 1

Buyback is generally done to use the unutilised cash of the company. So therefore, there is no harm in investing in the company by own. Generally buy back happens at the higher price then the market. Buy backs are more tax effective means for rewarding the sharholders. Also buyback will lead to increase the valuation of the company.It is an indirect means to return the unutilised cash of the company to the shareholders,. So ultimately shareholders are the ones who enjoy the benefits of the buy back.