Why Stock Buybacks Do Not Help You At All - Mike Swanson (12/02/2016)
The Center for Study of Responsive Law held its second four-day conference on securing long-overdue democratic solutions in Washington, D.C. from September 26-28, 2016.
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William Lazonick gave a talk on Stock Buybacks and Executive Pay at this conference.
He is the author of one of the most important economic papers of the year: Profits without Prosperity published by the Harvard Business Review.
CNBC talking heads have promoted stock buybacks as being good for shareholders with the idea that when a company buys shares that are trading as part of the float that they make the stock go up by reducing the number of shares outstanding.
So the rise in the stock price benefits shareholders.
In reality though if you look at the data in order to accomplish this most companies are putting themselves deeper in debt by issuing junk bonds to finance the buybacks.
They also are not using the money to invest in their own operations and business expansion which is bad for the long-term health of the company and puts it at future risk of competition.
But CNBC people say that does not matter if you own the stock.
Well I have followed stock buybacks closely and many CEO's are using the rise in share price to dump their own holdings.
This has happened over the past year and a half with Apple for instance, because Apple board members have dumped over 16% of their own personal holdings while spending BILLIONS on buybacks.
Here is the real reason why buybacks do not help you if you are a shareholder:
All they really do is create short-term buying of a stock.
Yes this can help a stock over the course of a few weeks as the company does the buybacks.
But they have ABSOLUTELY NO IMPACT on where a stock is going to trade at 12 months later much less three or four years later.
So if you are a short-term trader yes it is true that buybacks can be your friend.
But if you are a long-term investor who is holding a stock they actually work against you!
Because they harm the long-term prospects of a company.
This is why CEO's use them for their own short-term selling purposes!
When buybacks happen all to often the CEO's SELL!!!!
They almost never buy more themselves!
Buybacks harm long-term investors even though CNBC talking heads praise them!
So what do you do?
When you see a company engage in massive buybacks it actually degrades itself as a long-term investment prospect.
So keep that in mind when you buy it or hold it.
What you need to do is focus then on the stock price action and use technical analysis charts and trends to decide when to buy and when to sell.
If the stock breaks down just get out.
Insiders are dumping these buyback debt operations and you should also be willing to sell too.
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