Let's hope the trend held. As of the end of the third quarter, U.S. companies were on course to buy back $336-billion (U.S.) of their own shares in 2012, according to Dealogic – 28 per cent less than the year before.
One need not think, as some do, that buybacks are pure sleight-of-hand to be encouraged by this slowdown. A buyback gives investors who do not sell an increased claim on a company's future profit stream; that is a legitimate use of corporate cash if said profit stream is attractively priced relative to other options. But boards and bosses like buybacks for several bad reasons.
First, at those unhappy companies where bonuses are determined by fluctuations in earnings per share, management will have reason to buy back shares even when the capital might create more long-term value if invested elsewhere. Second, heavy buybacks, combined with lots of share-based compensation and the terrible sell-side analysts' habit of adding back share comp expenses to earnings, make it conveniently hard to tell when management is giving the store away to the employees.
Most importantly, a buyback is, in effect, a dividend that investors are allowed to spend only on buying more shares in the company. Why eliminate the other options? Because buybacks defer tax liabilities, we are told. But tax planning is surely better left to the people paying the taxes. And then it is argued that buybacks, unlike dividends, can be stopped and started easily without upsetting shareholders (that it is irrational to make this distinction is beside the point). Well, how about this nutty idea: Companies should manage cash carefully, so a payout is sustainable across the cycle. Failing that, special dividends work just fine, thanks.
Cash that a company earns but cannot invest for adequate returns belongs to shareholders. Keep it simple, and send it to them.