Why Stock Buybacks Are Great For Our Clients

allan rothCorporate America is buying back its own shares at a near record pace, despite a new one percent buyback excise tax instituted in 2023. While buybacks are often criticized, they are wonderful for investors – though probably not in the way most people think. Let’s dig deeper into what they are and aren’t, and then look at how you can produce tax-advantaged income for your clients.

Goldman Sachs estimates that S&P 500 companies will buy back $0.93 trillion of its own stock this year and a record $1.08 trillion next year. That’s significant given the roughly $44 trillion total value of the S&P 500 companies. In fact, between 2010 and 2023, these companies have bought back an estimated $8.77 trillion of their own stock, which represents roughly 20 percent of the current U.S. stock market capitalization.

Buybacks – the myth and the math

Many, like Senator Elizabeth Warren, argue that stock buybacks are “nothing but paper manipulation.” She claims they “line the pockets of corporate executives.” Others claim they are done to increase the earnings per share since they reduce the number of outstanding shares. As someone who has been involved in stock buybacks since the late ‘80s, let me explain both the logic and the math.

At that time, I worked in the treasury department of one of the baby Bell telephone company spinoffs from AT&T. We were printing money and buying businesses we had no core competency in running, such as a real estate business. I pointed out to the Board some of the lessons from the energy business when Mobil Oil bought the retailer Montgomery Wards and Exxon bought companies to create an information systems business. They were epic failures because of the aforementioned lack of a core competency in running those businesses.