talzara wrote:Because companies are poor allocators of capital, outside of their core business. That includes the financial business -- i.e., their own stock. Just as most acquisitions actually destroy shareholder value, most buybacks are done in a way that destroys shareholder value.
There were plenty of cash-rich companies that bought back stock in 2007 -- but not in March 2009, when the market was at a bottom.
Netflix did even worse. Not only did they buy high, but they also sold low. They bought back shares when NFLX was trading at 300, at a triple-digit P/E ratio. The stock then crashed to the 80s, whereupon Netflix discovered that they were low on cash, and proceeded to issue more stock!!!
My feeling is that a lot of buybacks are done at the peak because the CEO and the Board members have stock options, and want to artificially increase the price of the stock so that they can exercise them. There are companies that do use buybacks to increase shareholder value -- but they are not in the majority.
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