The whole concept of buybacks is ethically bankrupt and rooted in extreme greed, but it has probably done more for the bulls than anything the Trump tax cut has and will do. Why do I think buybacks are evil? Because you are essentially mortgaging the future. Instead of spending money in R&D and long-term projects, public companies buy their own shares to artificially prop up the price of their stock. And most are borrowing loads of cash to do it. But they do get to boost their EPS, the only metric that matters on Wall Street. It’s also how CEOs and senior executives get fat bonuses even when the company is underperforming.
Take the infamous case of Activision’s Robert Kotick. This guy got a $22 million bonus for hitting EPS goals despite net income dropping by more than 17 percent. But in 2013 he spent $8.2 billion buying back shares, sending the stock higher to the delight of Wall Street. Then there’s the case of American Airlines, a company that, fresh out of bankruptcy, spent billions buying its own stock. It’s actually laughable because the growth story is an illusion, a fairy tale based on financial voodoo and debt.
Buybacks were actually illegal and regulators viewed the practice as a form of market manipulation, but then came Reagan and buybacks got a second life in the 1980s. In 2018, corporate America spent $1 trillion dollars in buybacks. Even Apple Inc. went on a binge of its own, though clearly they have more money than they know what to do with. But many view the move as a huge mistake, perhaps signaling the end of an era.
We are basically in the late stages of a credit cycle, with huge amounts of corporate debt and jittery investors asking themselves how this is going to end as if we didn’t know the answer.