Stock Buybacks: Good Or Bad For Investors?

Abstract

A recent news flash announced that Warren Buffet’s Berkshire Hathaway would buy back $1.2 billion worth of its own Class A stock.  In recent times, such stock buybacks are happening in rapid succession among companies all over the world.  There are many advantages to investors of a company when the company buys back its own stock, generally known as treasury stock.  Stock buybacks result in higher earnings per share (EPS), theoretically resulting in higher stock prices.  Companies also resort to stock buybacks when they happen to have excessive cash balance.  Cash rich companies are generally considered attractive targets for takeover possibilities.  During times such as the present ones when returns on cash money market accounts do not yield attractive returns, companies usually implement stock buyback policies, thus earning better returns on excess cash while at the same time avoiding takeover possibilities.  There are also some hidden advantages to senior management resulting from stock buybacks because of higher prices for their substantial stock options.  There are also some disadvantages to investors resulting from stock buybacks.

This paper presents some of the main reasons for stock buybacks, and the consequential advantages and disadvantages to investors and other stakeholders.