The Conventional Wisdom About Stock Buybacks Is Wrong
Stock repurchases may not be the best use of a company’s money, but not because they benefit shareholders over everyone else.
An 80 billlion-share mystery.
Photographer: Nikada/iStockphotoHere’s a simple math problem for you: If the companies in the S&P 500 Index have 289 billion shares outstanding, and they repurchase 82 billion in a decade, how many shares will they have at the end of those 10 years? The answer, of course, is 294 billion, 5 billion more than what they started with. I’m guessing that’s not the answer you came up with, right? But those are the real numbers for the past decade, and they point to the fact that investors, long thought to be the chief beneficiaries of buybacks, may not be.
There has been a lot of debate recently about the worth of stock buybacks, sparked by the fact that it appears companies plowed a good deal of the money that they saved from Donald Trump’s corporate tax cut into repurchasing their shares. Buybacks, which have been rising for much of the past decade, jumped about 50 percent last year to nearly $800 billion for the companies in the S&P 500, a new annual high, according to S&P Global Inc.