• Discussion Paper
    • EN
Share
Slider-Buybacks-DP-41.png
29.10.2019 25

Buybacks - A multi-perspective review and thoughts on best practices for company buyback policies

Published 

29 October, 2019

> 10 minutes
29.10.2019
25
Buybacks - A multi-perspective review and thoughts on best practices for company buyback policies
Published 

29 October, 2019

> 10 minutes

US share buybacks are near record levels in absolute dollar terms and incrementally the discussion has shifted from academic finance journals to political stump speeches. Given the impact of the 2018 tax cuts and the upcoming 2020 US Presidential election where some are pushing for a reset of the form of American capitalism. Proponents argue that buybacks optimize capital allocation for companies unable to invest at a higher rate of return than its cost of capital, particularly when agency costs exist between corporate management and investors. On the other side of the argument, opponents of buybacks, however, contend that they are shortsighted and lead to less innovation and investment, suppress job growth and exacerbate income equality.

While we acknowledge that companies with large share repurchases do invest less, our findings suggest that the US economy does an efficient job at recycling share repurchase capital into venture capital and private equity that get investment into the most innovative hands that seldom are big, mature megacap firms. Private equity and venture capital firms have raised $2 trillion in this decade, an unprecedented amount in the history of the money management industry. Those firms have made total investments of $5 trillion, an amount that far outweighs the retained earnings of public companies. This has had a meaningful impact on innovation and growth of the US economy as we unambiguously observe that capital works its way into the highest returning public companies across the economy over time, whereas in Europe trapped capital in low return businesses has been a disadvantage to capital allocation, and presumably economic growth.

Beyond ideological posture, the additional agency costs of buybacks are dictated by a company’s leverage, growth opportunities, and capital allocation track record. Companies that have an incremental above cost of capital return opportunity set for investment should indeed invest organically. M&A gets a little trickier as it destroys incremental shareholder value more often than not. However, intrinsically if M&A can achieve a high return, then that would also be an appropriate use of capital; management history of success is very important here. If growth opportunities do not exist, then cash should be returned to shareholders if shares are undervalued and leverage is at a reasonable level. If shares are fair-to overvalued, and leverage is okay, then dividends are the best policy.

Finally, when a company executes a share buyback, the share price paid greatly matters to remaining public shareholders. Companies tend to buy back more shares when profits are at peak levels, which often coincides with peak valuations – this does not serve investors well. We question whether management teams and boards of directors perform or expect the same level of planning and analysis for share repurchases as they do for other forms of capital deployment, such as capex, R&D and M&A.

 

To find out more, download the full paper


This website is solely for informational purposes.
 
This website does not constitute an offer to sell, a solicitation of an offer to buy, or a recommendation of any security or any other product or service. Any securities, products, or services referenced may not be registered for sale with the relevant authority in your jurisdiction and may not be regulated or supervised by any governmental or similar authority in your jurisdiction.
 
Furthermore, nothing in this website is intended to provide tax, legal, or investment advice and nothing in this website should be construed as a recommendation to buy, sell, or hold any investment or security or to engage in any investment strategy or transaction. There is no guarantee that any targeted performance or forecast will be achieved.


This website is solely for informational purposes.
 
This website does not constitute an offer to sell, a solicitation of an offer to buy, or a recommendation of any security or any other product or service. Any securities, products, or services referenced may not be registered for sale with the relevant authority in your jurisdiction and may not be regulated or supervised by any governmental or similar authority in your jurisdiction.
 
Furthermore, nothing in this website is intended to provide tax, legal, or investment advice and nothing in this website should be construed as a recommendation to buy, sell, or hold any investment or security or to engage in any investment strategy or transaction. There is no guarantee that any targeted performance or forecast will be achieved.

Get in touch with us

Our online help service is available to answer your question.

My personal information

If you have a question about our company or one of our products, please complete the form to get in touch. Please do not mention your account numbers or critical data in this form.

Civility*
CAPTCHA This question is for testing whether or not you are a human visitor and to prevent automated spam submissions.

(*) Required fields
All our job offers (Permanent and temporary position, Internship, Apprenticeship or VIE) are available on our dedicated website: https://jobs.amundi.com.

Register and apply directly online.

Amundi on Twitter