Markets

Share buybacks: The case for and against a company repurchasing its own stock

Key Points
  • Share buybacks are coming under scrutiny as more companies call for federal assistance. 
  • While mainly an American phenomenon, buyback activity in Japan is at record highs, particularly with SoftBank Group.
  • Corporations that have shelved buyback plans include airlines like Europe's Ryanair and Australia's Qantas and companies like Royal Dutch Shell, HSBC and Barclays.
VIDEO6:4606:46
Why are stock buybacks controversial?

Financial regulators and central banks around the world are allocating hundreds of billions of dollars to businesses and lenders, in an effort to boost the deteriorating global economy during the coronavirus pandemic

Corporations flush with excess cash sometimes opt for share buybacks, which involves a company repurchasing its own shares at market value, and reducing the number of shares that are being traded. This can result in driving up the price of its stock and may increase overall demand for it.

Others, however, may shelve their plans to repurchase their stocks — so as to ensure they have sufficient cash for emergencies, for example.

To buy back shares or not?

Detractors have long argued the case against buybacks.

They say that companies that engage in the practice are inflating their stock prices artificially. Critics also highlight the fact that companies using their excess cash for stock buybacks would be diverting cash from other important investments, such as higher employee wages, building more factories, creating more jobs, and innovation. 

Earlier in March, President Donald Trump said he was not happy with companies using money from the 2018 tax cut to buy back shares. He said he would not oppose placing restrictions on companies that benefit from the coronavirus stimulus, and bar them from conducting stock buybacks. 

Stock buybacks do not help workers and they do not help with the unemployment.
Emir Hrnjic
National University of Singapore Business School

On the other hand, buyback supporters maintain that the money gained by shareholders is usually reinvested in other companies, and thus, stimulating economic growth. 

However, this is also contentious. "Stock buybacks do not invest in the economy and create positive externalities and additional benefits," Emir Hrnjic, an adjunct assistant professor from the National University of Singapore (NUS) Business School, told CNBC in an interview. "They only help maximize shareholders' wealth and perhaps, they may help with the market sentiment."

Externalities are a cost or benefit that impacts a third party when an economic transaction takes place — the third party has no control over that transaction.

The general debate surrounding stock buybacks has always been present.

During a U.S. Securities and Exchange Commission ruling in 1982, rules were established to ensure that stock buybacks were only done by companies if they fulfilled certain conditions. The need for these conditions in the first place, meant that the risk of market manipulation on the part of the companies existed.

Buyback activity outside the U.S.

While mainly a U.S. phenomenon, share buyback activity in other countries are also prevalent, particularly in Japan.

In Japan, $52.5 billion of buybacks were recorded in 2018. Notably, Softbank Group recently announced it will sell up to 4.5 trillion yen ($41 billion) in assets to repurchase 2 trillion yen of its shares. 

As buybacks become more common in Europe, the European Banking Authority published a statement to appeal to banks receiving capital relief to stop dividends and share buybacks. Eiopa, the European Union's insurance regulator, has also called for insurance companies to halt dividends and share buybacks. This will affect a big companies like Allianz and AXA, both of which have share buyback programs. 

In the wake of the global coronavirus pandemic, the sharp declines in stock markets around the world have resulted in historic losses and widespread uncertainty for the future. That has in turn triggered a ripple effect that's seen increased unemployment in major economies in the world, including China and the United States.

"Stock buybacks do not help workers and they do not help with the unemployment," said Hrnjic from NUS. "If companies are calling for emergency bailout assistance, then lawmakers around the world should be calling for strings and conditions attached to buybacks." 

Corporations that have shelved buyback plans include air carriers like Europe's Ryanair and Australia's Qantas. Other companies that have scrapped their plans for buybacks and dividend payouts include Royal Dutch Shell, HSBC and Barclays.