Stock buybacks and stock manipulation / by kevin murray

In 1982, the Reagan administration basically legalized stock buybacks by corporations which previously were held to be illegal and considered to be a form of stock market manipulation.  The wording of the Securities Exchange Commission (SEC) Rule 10b-18 was obviously constructed specifically so that companies wishing to repurchase their common shares would have an obvious and clear roadmap to do so, and by following those conditions, have an implicit safe harbor to do so.  As in many instances, the proof of the pudding is in the eating, and, states its estimate that: "S&P 500 companies will buy back a record $800 billion of their own shares in 2018."  So too,, states that: "Over the years 2006-2015, Lazonick’s research shows that the 459 companies in the S&P 500 Index that were publicly listed over the ten-year period expended $3.9 trillion on share buybacks."  This indicates, for better or for worse, that many companies have fundamentally made it their policy to buy back their common shares hand over fist. 


There are rather obvious reasons as to why companies are so eager to buy back their shares, during this bull market run up in stock prices.  The first reason is that one of metrics that measures the value of a given stock is that stocks' Price-to-earnings (PE) ratio, of which the amount of common stock outstanding is one of the components that is necessary to correctly calculate the PE ratio of a given stock, and when there is a reduction in the amount of common shares, but, for instance, the same amount of earnings, than the PE ratio will go down, indicating that the perceived value of the company will typically go up, because that company is "growing" its earnings per share, and hence can expect to get a premium for having done so.  Another reason, is that the executive office, in particular, as well as all those other valued employees that have common share stock options, have a vested interest in seeing that the stock price of a given company, goes up, so as to make their bonus and/or to exercise their options, of which, buybacks of common stock, are an easy avenue for doing just that, because buying back common shares, doesn't necessitate increasing the company's sales, or increasing the company's gross margin, or increasing the company's R&D expenses, but simply is a way to manipulate the price to earnings ratio, as well as the return on equity ratio, to make the company appear to be more dynamic and successful than what it really is.


There is another reason, why over the past ten years, an unprecedented amount of stock buybacks has occurred, and it isn't because companies are somehow correctly perceiving that their shares are undervalued, nor is it because these companies have nowhere to utilize their cash, but to a very large extent, it is because since the financial crisis of 2007-2008, interest rates to borrow money for corporations has never been cheaper, and those interest rates have been super cheap.  This has meant, that certain geniuses in the corporate office has seen the last decade as their opportunity to borrow money cheaply, and thereby to use that money to buy back common shares, to thereby boost earnings per share, and juice the price of the stock, while believing that in the future, that they will still be able to generate enough cash flow, in good times or bad, to successfully pay back that debt.


If this country believes that corporations should be allowed to spend their money on stock buybacks, then it need not do anything, for that is being done, every single day; primarily for the financial betterment of the superrich.  On the other hand, stock buybacks are not beneficial for the common man and they are not beneficial for the economy, because the billions upon billions of dollars that has been spent on purchasing common stock by that management, could have been money spent on innovation, R&D, and long term investment, as opposed to adding more easy riches to the already privileged superrich.