Two Misleading Criticisms of Corporate Behavior
The recent request for bailouts by airlines and other companies has brought the subject of stock buybacks as a means of returning investors’ cash to the forefront of the national conversation. Many politicians and media members have criticized buybacks as a means of solely enriching corporate executives by boosting share prices, at the expense of the rest of the company. However, dividends and buybacks are both legitimate means of returning profits to shareholders. In fact, a company buying back its shares can often be a better choice for the majority of its shareholders than returning earnings through a dividend. A more nuanced critique is that buybacks can advantage either the sellers or the remaining shareholders based on the price, unlike a dividend that pays all a flat rate. Companies aggressively pursuing buybacks at high valuations can destroy value for the remaining shareholders. Consider a company that has 10 shares outstanding owned by different investors that...