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The Trillion-Dollar Debate Over Share Buybacks [1]
['Andrew Ross Sorkin', 'Ravi Mattu', 'Bernhard Warner', 'Sarah Kessler', 'Michael J. De La Merced', 'Lauren Hirsch', 'Ephrat Livni']
Date: 2023-03-04
Buyback now, profit later?
Share buybacks provided plenty of big headlines this week.
The Biden administration seems ready to pick a fight with any firm looking to set aside billions for such megapurchases. The White House and some Democrats would rather C.E.O.s use the money to reinvest in their businesses — that would lead to stronger firms, more jobs and better returns for investors, the thinking goes. They also feel buybacks disproportionately enrich managers at the expense of employees. In his State of the Union address, President Biden called for quadrupling the tax on share repurchases.
Warren Buffett isn’t buying that argument. In his annual letter to shareholders, the billionaire C.E.O. of Berkshire Hathaway said to beware the buyback detractor — who is either an “economic illiterate or a silver-tongued demagogue.”
Who’s right? DealBook reviewed the research and spoke to buyback experts. Here’s what we found:
Buybacks can be a boon for investors. According to Savita Subramanian, head of U.S. equity and quantitative strategy at Bank of America, investors tend to reward companies that execute repurchases by, yep, buying more stock. Over the past five years, share prices went up for nearly 55 percent of the 2,997 companies tracked by Bank of America that repurchased shares.
More evidence supporting buybacks:
Repurchases signal to Wall Street that the company has a healthy balance sheet, and that attracts more investor interest, said Luis Garcia-Feijoo, research director at the CFA Institute Research Foundation. Exhibit A: Salesforce’s shares soared on Thursday after the company announced that it would buy back $20 billion worth of shares. Exhibit B: Meta’s stock also spiked when it made a similar announcement last month.
Investors tend to view buybacks more favorably than dividends. One reason: The former tend to carry a relatively light or imperceptible tax hit, Mr. Garcia-Feijoo said.
Buybacks don’t work for all companies. (Even Mr. Buffett admits this.) Shareholders tend to punish companies that repurchase shares that are already too pricey. Subramanian calculates that the 50 biggest companies in the S&P 500 are overvalued. For them, buybacks don’t make as much sense.
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[1] Url:
https://www.nytimes.com/2023/03/04/business/biden-buffett-debate-share-buybacks.html
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