Shady Stock Buybacks

James Saft at Reuters highlights an issue that I’ve often discussed. Namely, companies using stock buybacks to mask their executive compensation.

You know those “shareholder-friendly” stock buybacks the market is so excited about? Most of that money is going to offset options granted to executives.

Perhaps even better, much of the funding for this transfer of assets (or just reward for managerial excellence in a competitive marketplace, if you prefer) is being funded by debt.

And what is making this latest debt binge possible? Quantitative easing.

That is pretty much all you need to know as an investor, both about the state of American corporate governance and monetary policy.

Here are the facts about S&P 1500 companies, excluding financials, courtesy of Societe Generale quantitative analyst Andrew Lapthorne:

“In the first quarter of 2013, buybacks done to offset the dilution from executive stock options reached a post-crisis high. Meanwhile, the amount of buybacks done to reduce the overall share count (i.e. for the benefit of shareholders) reached a 32-month low,” he writes in a note to clients.

In other words, companies buying up shares with one hand and handing them out to employees with the other. And, at least in the first quarter, they were handing out so many that more than half of the billions being spent on buybacks was simply going to keep pace with new share issues, much of which is compensation.

Posted by on May 30th, 2013 at 10:57 am

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