Why is everyone talking about buybacks?

As a potential bailout looms for the airline industry, critics are starting to reconsider the benefits of stock buybacks.

March 17, 2020

Yesterday, China’s JD.com made news when it announced it would buy back $2B in stocks.

This past weekend, a consortium of 8 big banks — including Goldman Sachs and Bank of America — teamed up to halt stock buybacks at their own companies.

And recently the airline industry has faced huge criticism — even as it falls out of the sky — for investing big bucks in big buybacks over the past decade. 

So… why’s everyone bickering over buybacks?

They’re a good deal for investors

When cash-rich companies repurchase their own shares, the supply of outstanding shares shrinks — increasing stock values for existing investors. 

Many of the world’s richest companies are known for their big buyback programs: Apple recently spent $234.7B over a 5-year period buying back its shares.

But buybacks can be a bad deal

Since buybacks still cost companies real cash, some critics argue that buybacks aren’t worth it because they merely manipulate stock prices without adding any real value for the company’s customers

Apple’s buyback budget, for example, was $234.7B the company didn’t spend improving its products or driving down costs for customers. 

And the corona-chaos is highlighting Big Buyback issues

In the last decade, the biggest US airlines spent 96% of their free cash flow on stock buybacks. A big focus on buybacks helped American Airlines increase its profits from >$250m in 2006 to $7.6B in 2015. 

With the airline industry on the brink of a bailout, some observers point to the buybacks as one reason why American is now $30B of debt (~5x the company’s valuation).

Even Goldman Sachs and the other 7 members of the Financial Services Forum agree, saying halting buybacks “is consistent with our collective objective to use our significant capital and liquidity to provide maximum support to individuals, small businesses, and the broader economy.” 

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