because it uses free cash to increase share price in order to increase executive compensation based on said share price, instead of using said free cash flow to compensate actual workers/employees
Exactly. When your company buys shares back (or issue a dividend) you're basically telling shareholders "We have all this cash but we have no idea what to do with it that will provide a return greater than our Hurdle Rate, so we're just going to give it back to you." It doesn't exactly inspire confidence to me as an investor that the company is creative and forward-looking, but apparently most investors love this signal.
Isn't a company supposed to make a profit though? At some point aren't a lot of companies pretty much at their functional maximum? Investing in 'growth' isn't always practical. Example: All-Clad makes great cookware, but they last a long time and the number of people who need new pans are finite -- why should they invest more money into the company when they are operating optimallly?
Absolutely. If you're the water utility or an energy company or some other company not positioned as a "growth" company, sure, hand back your extra cash to investors. But if you're a tech company, a stock buyback just says "we're out of ideas but still want the stock price to go up".
> We belive out stock is undervalued, so we will buy it ourselves. This will reduce our cost of capital and generate value for our shareholders in the long term.
this phrase makes no sense because it's an executive buzzword: the value of a stock is what someone will pay for it
no stock is undervalued, it's at exactly the correct value. Executives conducting buybacks thus simply want the stock to be valued more than it is (so they can make more stock-priced-based-compensation money)
that an executive from a company like Shopify has options for cash like creating value via growth, or paying their workers better, but instead chooses to just increase their personal wealth (and, incidentally, that of shareholders as well), is precisely the leadership failure being pointing out here
Sure, but why does the profit have to go to the shareholders? Companies are expected to enrich their shareholders before they enrich the talent actually making the product they sell and I think people are right to question that. Asking why someone who makes a company 200k profit per year is being paid 50k is a fair question to ask.
>Sure, but why does the profit have to go to the shareholders?
Because that's how companies are supposed to operate? Broadly speaking, companies are generally expected to pay their gross revenue three groups of people:
1. shareholders
2. bondholders/creditors
3. employees
Employees get first dibs on the cash, but the amount they're expected to earn is capped. Bondholders comes next, and shareholders come last. If there isn't any money left over, they get nothing. In exchange, they also get all of the returns, should the enterprise succeed, as well as control over it.
Hmm, yeah I think I grok the argument. But if excess cash flow can go to employees, would you also expect employees to inject their savings when the company has a shortfall?
I always considered employment a fairly simple exchange of my services for a fairly set rate, and investors/owners/funders to be the risk takers for ups & downs?
why on earth would they do that? It's not like the executives or shareholders would. I'm certainly not throwing any additional cash at a single company I'm invested in if it's on hard times.
It's not only to increase executive compensation, executive compensation is a tiny amount compared to everyone else who own the company (the shareholders). That 40B belonged to the shareholders and they decided to distribute it to themselves by doing a stock buyback. What's wrong with that? It is their own money.
I never claimed "only": executives do it to increase their compensation, they don't care about other shareholders unless caring puts more money in the executives' pockets
if you think that executives don't value that, or don't receive any additional compensation from it, feel free to rebut the claim that they do, but the point is that the money went into executive pockets (among others) instead of worker pockets
also, "it's their money" is a morally bankrupt argument that could be used to justify anything money can buy, and ignores that it isn't: it's their shares, the money belongs to the company, who can choose to spend it on value creation vs compensation bumps
