Here’s why CEOs love buybacks
In the past nine years, more money has flowed into the stock market from so-called stock buybacks ($3.8 trillion) than from individuals, mutual funds, pension funds, and foreign investors combined, said Jerry Useem. Corporations justify the practice as “an efficient way to return money to shareholders,” but that spike is often short-lived. “Five years out, the stocks of companies that engaged in heavy buybacks performed worse” than those of firms that didn’t. Yet, the managers make out handsomely. Last February, on the same day his team announced plans to repurchase $4 billion in shares, Home Depot CEO Craig Menear sold shares worth $18 million. Then the company gave him even more stock. This is common: “In the eight days following a buyback announcement, executives on average sold five times as much stock as they had on an ordinary day.” Many companies also rewarded their CEO for higher earnings per share, or EPS. That goes up when a company makes money—but also when it buys back stock and reduces the number of shares. Applied Materials, a maker of semiconductor equipment, reported a decline in earnings by 3.5 percent last year, but its EPS actually grew 1.9 percent through the magic of stock buybacks. That feels like a swindle, even to the staunchest free-market capitalist.