Strictly Business
Stock buybacks can help grow short-term share price, but they leave firms without funds to invest in future
Stock buybacks could lead corporate giants further afield
orporate giants on the S&P 500 have spent more than $720 billion during the past year on stock buybacks. Media and entertainment firms account for only a fraction of that spending, but even $1 million spent on share repurchases seems a foolhardy expenditure at this transformational moment for the industry.
The record level of spending on buybacks has drawn increasing scrutiny from investors, who question whether the practice is an effective use of corporate funds. Traditional media giants have no business plowing resources into stock buybacks at a time when the need for investment in R&D, infrastructure, IP and creative talent has never been greater.
As showbiz leaders adjust to a new world order and the competitive threat from Netflix, et al., surely the largest media companies can find better ways to invest profits than buying up their own shares. Diverting even a small portion of the buyback billions to wage and salary increases for rank-andfile employees would undoubtedly pay off over the long run in terms of increased productivity and better morale.
Buybacks have been positioned as being good for shareholders because they can buoy a company’s stock price and increase earnings per share. That plumps the value of a shareholder’s portfolio and theoretically increases the potential for dividends. By taking shares off the market in significant numbers, earnings per share will naturally increase for the remaining stockholders because those profits are split among a smaller pool of shares. Buybacks also have tax advantages for companies and shareholders as compared with quarterly dividends.
But detractors say buybacks can become a numbers game that gives the illusion of increased profits. Because so many senior executives have their compensation tied to earnings-per-share growth and stock-price gains, management at times has a counterproductive incentive to spend money on share repurchases rather than directing funds back into the company in long-termgrowth initiatives. In some cases, companies have relied on short-term loans to fund buy-