Corporate Buy Backs

Dr. Craig Callahan, ICON Advisers – Founder & President

May 15, 2019

The activity of public corporations repurchasing previously issued shares has become a topic of controversy lately as two U.S. senators have proposed restricting those transactions.  Others have argued that repurchases enrich a few at the expense of others.  ICON first addressed this activity in 2012, not from the perspective of its impact on society, but from an investment posture.   At the time, it was a year of record buy backs, and investors, in general, were selling stocks and buying bonds.  ICON was bullish and believed the stock market could move higher.  We pointed out that corporations, in general, were issuing bonds and buying their stocks back.  Advocating for investors to purchase equities, we pointed out that the two groups were behaving contrary to each other.  We thought the corporations, with their managements having knowledge of their businesses’ prospects, would be proven right by selling bonds and buying stocks.

In another paper in 2016, which we will relate to buy backs in the next paragraph, we showed how the stock market helps allocate society’s limited resources of land, labor and capital.  Stock prices set the terms for companies to get capital. An efficient allocation of resources promotes low unemployment and low inflation, whereas an inefficient, wasteful allocation does the opposite.     

As time passes, society’s demands for goods and services change due to technology, inventions, demographics, and many other influences.  Therefore, the allocation of our limited resources must be fluid.  Initial public offerings (IPOs) and buy backs are just part of the ebb and flow of the free market system.  Some companies may have needed and obtained capital a few decades ago to produce what society wanted then, but now they don’t need the capital.  They can buy back shares.  The investors selling the stock can use the proceeds to invest in a new IPO, a company producing some new good or service that society wants and is willing to pay for.  For example, tobacco and coal companies can repurchase their shares while Uber, Facebook and Netflix go public and receive capital.

In contrast to our system, in China a central committee allocates resources and determines what goods and services will be produced, from blue jeans to desks, from toys to dog leashes.  We reject that philosophy and believe the marketplace should allocate resources based on full information and disclosure.  In this particular case, we believe restricting corporate buy backs would be detrimental to our country’s free market system.

Opinions and forecasts are subject to change at any time, based on market and other conditions, and should not be construed as a recommendation of any specific security, industry, or sector.

Investing in securities involves risks, including the risk that you can lose the value of your investment. There is no assurance that the investment process will consistently lead to successful results.

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