Vox Misleads on Share Buybacks

There’s been a lot of criticism lately of share buybacks. Some politicians even want to ban them.

I think there’s some confusion as to what buybacks are and what they can do. Some folks think buybacks are sinister and that they’re responsible for all sorts of terrible things. This isn’t the case. Ultimately, buybacks act very much like dividends. Buybacks are an odd scapegoat.

Vox recently put out this video on share buybacks and there were a few misleading statements.

Let me run through them.

0:22. The video seems to suggest that share buybacks were started after the market crash in 1929. That’s not right. Share buybacks are as old at the NYSE. Jason Zweig gives the example of the Germantown & Reading Turnpike Road Co. In 1798, its charter specified share buybacks.

0:46. The video says of buybacks, “But with this, corporations had discovered a kind of magic trick. They could jack up their stock price without really doing anything.” The corporation had already done something. It had earned the profit to fund the buyback. It would be like saying a company could pay out a dividend without doing anything.

This one may be nitpicking but at 3:12, the video quotes Ronald Reagan saying, “government is not the solution to our problem; government is the problem.” The video leaves out the first four words, “In this present crisis.” Reagan was talking about inflation.

3:43. “For the first time since the 1930s, companies could buy back shares of their own stock from investors.” You’ll often hear people say that buybacks were illegal prior to 1982. Again, this is misleading.

Buybacks were legal but there were restrictions and the rules were somewhat vague. As a result, many companies avoided them, but not all. Teledyne, Crown, Cork and Seal and Dairy Queen all used share buybacks and were known to do so.

In his 1980 shareholder letter, Warren Buffett extolled the virtues of buybacks (although he later criticized companies paying too much for the shares.) In 1982, the SEC ditched the rules.

The video also blames share buybacks for the growth of inequality. That seems to be a stretch. I think the video confuses a tool with how it can be used.

Posted by on October 16th, 2019 at 9:03 pm


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