Opinions on stock buybacks vary significantly among investors and analysts. One perspective argues, "Investors frequently think that buybacks are a lot better than they are, while the median voter thinks they’re far worse than reality." Another viewpoint supports their permissibility: "Of course buybacks should be permitted. Surely you don’t think a company should only be allowed to increase the number of shares outstanding and never reduce them?"
Critics argue that buybacks do not enrich shareholders in any meaningful way. "It’s simple math," one critic explained, noting that reducing outstanding shares by buying them back also reduces company cash by an equivalent amount. This view holds that such transactions are effectively break-even and do not increase shareholder wealth.
Furthermore, some see buybacks as indicative of limited growth opportunities within a company. They argue, "Buybacks mean a business has limited opportunity for profitable growth," suggesting management might perceive fewer future prospects for expansion.
However, proponents believe buybacks benefit society by reallocating assets from low-return businesses back to shareholders who can invest in higher-return opportunities elsewhere. They assert, "Stock buybacks are tax-efficient dividends," emphasizing their role in moving cash from less productive investments.
There are risks associated with strategic errors in executing buybacks. For instance, American Airlines' experience during the pandemic highlighted potential pitfalls when companies repurchase shares at high prices only to issue new ones later at lower values.
Concerns about government bailouts influencing airline stocks have also been raised. Delta CEO Ed Bastian noted a perceived implicit guarantee from the government for airlines facing financial difficulties. Some suggest removing such guarantees could involve allowing bankruptcies to redistribute resources more efficiently across stronger competitors and new market entrants.
United Airlines aims to signal its strength post-pandemic restrictions on stock buybacks following government bailouts. However, given current economic uncertainties and potential recession risks in the U.S., timing this significant corporate cash expenditure remains critical.
Alerts Sign-up
