Loading...
Bless all of our hearts. This town needs a recovery period. Hopefully Murphy and Allen aren't vicious in their attack...

Are repurchases really so bad?

Beierlein  Picture.JPG

Jaclyn Beierlein

Loading…

By Jaclyn Beierlein

Sunday, April 14, 2019

Repurchases seems to be a dirty word in Washington, but are they really so bad?

In a New York Times “Dealbook Briefing” dated March 27, 2019, the author Andrew Ross Sorkin noted that stock repurchases, also known as buybacks, hit a new high last year as a result of the corporate tax cuts  That it came “despite opposition from Congress, with lawmakers from Senator Bernie Sanders to Senator Marco Rubio arguing in favor of limits on the practice.

Elsewhere in the article, he said the companies chose “to use their savings to repurchase shares and bolster their stock prices, rather than issue dividends or make new investments.”

His wording suggested to me that he believed paying dividends to investors and reinvesting in the firm were both valid uses of a company’s earnings but that repurchasing shares was not. And if two Senators with such different political views as Sanders and Rubio are agreeing that limits should be imposed on repurchases, then it is likely that they also think dividends and new investments are better uses of a company’s earnings.

This seems to me a rather odd opinion which must be fueled by a fundamental misunderstanding of what repurchases are. Certainly, it is odd to group dividends and reinvestment together and to contrast them with repurchases, since dividends and repurchases are both ways to distribute company earnings to shareholders while reinvestment is the retention of company earnings.

In a stock repurchase, a company buys its own shares either on the market, as any investor would buy shares, or through a tender offer. A tender offer is essentially a letter to shareholders that notifies them of the company’s intention regarding the number of shares sought and a suggested price range.

Shareholders who want to participate send back how many shares they are willing to sell and the price they want for them. The company gathers responses and buys the desired number of shares at the lowest prices offered.

In either type of repurchase transaction, the company makes the offer, but the shareholder chooses whether to participate. Those that want a cash distribution and are prepared to face the tax implications will participate. Those that prefer to retain their shares and put off the tax consequences will not.

This is an important advantage of repurchases. Dividends, in contrast, are distributed to all shareholders whether they want the cash and tax consequences at that time or not. However, both repurchases and dividends are essentially the opposite of reinvestment. They both involve cash leaving the firm instead of being used by the firm to expand.

Does that mean that we should limit both dividends and repurchases and force companies to reinvest more of their earnings in order to spur economic growth? Absolutely not.

A company should only reinvest its earnings if there appears to be demand for the new products or services the reinvestment would create. Otherwise, that investment will be wasted. It is far better that a company with no good investment opportunities return available cash to shareholders so that they can choose how to use it.

Perhaps they will invest it in other companies that do have good investment opportunities but need financing. Or perhaps they will spend it, which can also benefit the economy.

Then can we say all dividend payments and repurchases are good uses of a company’s cash? Again, the answer is absolutely not.

There are many motives for paying dividends and repurchases, more than I can explain in this article, and some of them are selfish or short-sighted and eventually value-destroying.

So, what can we say about repurchases? Nothing, unequivocally. Some repurchases are good for the companies who do them and by extension, good for its shareholders, employees and the economy, and some are not.

Can Congress create a law that is nuanced enough to promote good repurchases while preventing bad ones? I rather doubt it, no matter which party is in control.

Jaclyn Beierlein is an associate professor of finance in the College of Business at East Carolina University.

Loading…

Humans of Greenville

@HumansofGville

Local photographer Joe Pellegrino explores Greenville to create a photographic census of its people.

Business

May 05, 2019

Spring is here — and for many of us, that means it’s time for some spring cleaning. This year, why not try brightening your financial environment?

Consider these suggestions:

■ Get rid of clutter. When you go through your closets, you may find many items you no longer need. As you…

Speight_Rocky.jpg.jpg

April 14, 2019

Repurchases seems to be a dirty word in Washington, but are they really so bad?

In a New York Times “Dealbook Briefing” dated March 27, 2019, the author Andrew Ross Sorkin noted that stock repurchases, also known as buybacks, hit a new high last year as a result of the corporate tax…

Beierlein  Picture.JPG

March 24, 2019

Why is business credit important?

For business owners, having a separate legal entity, such as a corporation or limited liability company, provides the opportunity to create a credit identity with business credit reporting agencies, also known as a business credit profile. A credit profile is…

Frohman-Mark-WEB-jpg-jpg.jpg

March 24, 2019

My artist husband likes to say that if I were in charge of our spending, we’d be sitting on milk crates instead of furniture and that if he were in charge, we’d have no retirement accounts.

The fact that we have both nice furniture and retirement funds is a testament to compromise…

NerdWallet Liz Weston Move Abroad Health Care
4 stories in Business. Viewing 1 through 4.
«First Page   «Previous Page        
Page 1 of 1
        Next Page»   Last Page»