Rewarding CEOs for Share Buybacks

Felix Salmon writes that CEOs should be rewarded for share buybacks. Leaving aside the issue of compensation, I’m not a fan of companies buying back their own shares, although I do admire a few that truly lower their outstanding shares.

I have a few issues here. One is that too many firms use share repurchases to mask their options grants. From what I see, the buybacks routinely go to executives anyway.

Felix writes, “stock buybacks are a very efficient way of returning money to shareholders,” I disagree. In theory, yes, that money goes to shareholders. But the problem is that the volatility of your average stock easily swallows up any gain an investor would see. The daily standard deviation of the Dow, which are blue chip stocks, is 45 times its daily average gain. A generous share repurchase of, say, 4% over the course of a year is a teeny blip in that kind of market action.

Felix writes:

Safeway is faced with a choice right now: it can burn billions of dollars in what would probably be a fruitless attempt to compete with Walmart, or it can return those billions to shareholders, to be reinvested in more promising areas. Safeway’s CEO should choose between those options dispassionately, rather than simply assuming that more investment is always better — and his board should compensate him in such a way that he’s incentivized to make the best decision, rather than always going for growth.

I would say that choice is for the board, with the CEO’s input, and once the strategic decision has been made, the CEO should be in charge of implementation with, of course, a fair degree of latitude.

Felix presents Safeway as having two options. As an investor (though not in Safeway), I have a third: Write me a darn dividend check! After all, who the heck is a board anyway? They work for investors. That profit is mine. Gimme gimme gimme.

Don’t worry about me, I’ll find a use for my own money. I’m pretty good at that, and if I want to buy more stock, that’s my decision, and the same for my fellow shareholders. I only wish our tax system was better aligned to help these investor-friendly decisions.

How absurd is it that Apple, a company with $145 billion in the bank, is borrowing money? It’s a crazy move but math says, do it.

A back-of-the-envelope calculation shows that Apple’s net cost of capital will be roughly just over 1.5 percent per year — pretty cheap long-term money if you can get it. But you can’t. This is a privilege reserved for the largest Silicon Valley powers only.

Apple will have a total outlay of $19.5 billion vs. the $22.95 billion it would have cost the company to bring in the $17 billion from its overseas stash, saving the company more than $3.4 billion.

Posted by on May 6th, 2013 at 2:45 pm


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