Share buybacks usually attract a lot of positive attention. When a company announces a program to buy back its own shares, it signals that it has confidence that it will generate a lot of extra cash. Plus, share buybacks reduce the number of outstanding shares, potentially driving up per-share earnings. What's not to love?
Eddy Elfenbein at Crossing Wall Street has come up with an answer to this question. He loathes share buybacks and far prefers the extra cash be spent on higher dividends.
"In theory, it's all the same money - share buyback or dividend - so it shouldn't make a difference how shareholders are paid," he said. "The problem is that the stock market is far too volatile for investors to accurately see the results of a share repurchase."
He uses Cisco Systems Inc. as an example. The technology company has spent billions of dollars buying its own stock, but he can't say for sure that the share price would be worse off without the buybacks. However, he is sure that investors would be wealthier if they had received quarterly dividends instead.
Mr. Elfenbein's argument would be a lot stronger if he could show that companies are notoriously bad at timing share buybacks - that is, buying their own stocks at high prices and therefore wasting their money.
According to Standard & Poor's, companies in the S&P 500 bought $47.8-billion (U.S.) worth of shares in the fourth quarter of 2009, up more than 37 per cent from the previous quarter. However, this is still well below the frenzy of buyback activity in 2007, a year that coincided with a peak in the S&P 500 before the onslaught of the financial crisis.
Companies, it seems, like their own shares when they're pricey.