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08/28/2014

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On most of these equity-based issues - I always feel like what I know would just about fill a thimble.

On the assumption that a company is profitable, and it has excess cash, I thought that companies principally undertook stock repurchase programs to achieve one (or more) of maybe three goals.
■ when a company's stock price is low, a buyback is an opportunity to retire the shares permanently, or retain the shares as treasury stock - both of which increases earnings per share.
■ a company will also initiate a stock buyback, in order to keep excess cash off its books, to avoid becoming a takeover target

However, I've never heard of initiating a buyback, simply to bolster the existing stock price - to benefit organizational insiders. Thi s also may be where the "needle" showing empty on my thimble of knowledge begins to glow red.

That said, I would agree that depending on the business, some amount of profits necessarily need to be invested in new products and innovation for the future. Usually (but that may be Jacque's point . . .).

Chris ---- I think the industries affected are the ones that are needed to fuel our competitiveness for the future. Buybacks may make companies look profitable with increased stock price and EPS --- but if you peel the layers back these companies may not be as healthy as they seem. The short-term focus on stock price and EPS satisfies analysts/shareholders ---- but does nothing to ensure continued investment in innovation/R&D that will fuel both company growth and our economy. And I think most people acknowledge that using stock price/EPS as criteria for judging CEO performance --- emphasizes the short-term at the expense of the long-term.

Jacque,
What is your take on the part that the government is playing in corporations investment strategies? Seems to me that a lot of the policies and tax regulations that are in place are leading employers to invest less in it's employee's. My experience with equity and the stock market is limited. Is there a tax benefit to companies to follow a more agressive stock buyback strategy vs. investing in R&D?

Scott thanks for your comment. I'm not a tax expert and the short answer is I don't know. But with all the talk government is doing about needing to be competitive in the future and for businesses to grow ---- it would be unlikely there would be laws to benefit companies that buyback rather than invest in innovation.

Buybacks have exploded in the past few years and it is understandable due to low interest rates. However company debt has also increased and some analysts worry about that.

If you look at Apple for example (and this is just one company and my opinion) since Tim Allen has taken the reins there have been several large buybacks and Icahn has battered Allen to do more. Look at their technology innovation since he took control. Not much . . .

China/Korea on the other hand pour money into companies/industries they have identified as key. That makes it easier to innovate and grow. I was talking to a friend yesterday about her new SMART phone. She purchased a Samsung and commented that we wouldn't even be talking about Samsung as a competitor to iPhone 5 years ago. So who as innovated and who has not?

Now I don't think our country would stomach government getting involved in investing in key industries to help them. That is why it is up to industries/companies themselves to take this up. And apparently reinvestment in company R&D, etc. meant more before the advent of stock based awards. And tax legislation was partly responsible for that.

And by by increasing the percentage of stock in CEO pay packages to align closer to shareholder interests, we have ended up with a classic example of "Be careful what you wish for".

Yes we have stock price increases due to buybacks and shareholders are thrilled, but should that be the primary responsibility of CEOs? My opinion is that if should not.

Sorry for the lengthy response. I've almost written another post!

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