posted: May 18, 2019
tl;dr: A lack of stock buybacks and a lack of dividends is actually the real evil...
Companies buying back their own stock is not evil.
The primary goal of a business is to generate returns to shareholders. There are plenty of other institutions that don't generate returns for the institution's owners or controllers: charities, universities, churches, other non-profits, etc., and they all serve a purpose. But a business is supposed to return money to shareholders. If it is never going to do so, it should close its doors or convert to a non-profit.
Companies have two primary ways they can return money to shareholders: dividends and share buybacks. One is not holier than the other. It's pretty obvious how dividends return cash to shareholders: the shareholders get sent a check. But many people, including apparently some politicians, don't understand how stock buybacks return cash to shareholders.
The way it works is as follows: the stock buyback removes some shares from circulation, while the company's value stays the same, as this is a pure paperwork exercise that doesn't create any real economic value. With fewer shares in circulation and the company's value the same, the value of each of the remaining shares rises. The shareholders, at any point in time thereafter, have the option of selling some or all of their company stock. The shareholders will receive more money than they would have received if the stock buyback had not happened.
This process is often derogatorily referred to as "artificially boosting the price of the stock!", or when applied to the market as a whole, "the market is 19% higher than it would otherwise be if companies weren't buying back stock!".
Company boards of directors make the decision on when and how to return cash to shareholders. I've been in the room when this has happened. Why the preference for share buybacks? The main reason is that the U.S. government taxes this money when received by the shareholders differently. Dividends are taxes as ordinary income, which means the federal government takes up to 37% (the current top marginal tax bracket) of the cash. By contrast the money returned to shareholders via a stock buyback is taxed as a long-term capital gain with a top rate of 20%, if the shareholder has held the stock for a year. (For short-term shareholders there is no difference as both are taxed as ordinary income.) Boards of directors have a fiduciary duty to do what is best for the shareholders, so they often vote in favor of doing a stock buyback. Sometimes, however, they declare a one-time dividend, or boost the recurring dividend.
There's one other reason boards may be biased in favor of stock buybacks: by boosting the price-per-share, it boosts the returns company executives will receive from stock option grants, which often have a fixed exercise price. Some companies have shifted away from handing out stock options in favor of granting executives restricted shares of stock, in which case the executives receive returns both from dividends and any appreciation in the price of the stock. This eliminates the insiders' bias towards share buybacks.
Could the U.S. government change its bias towards stock buybacks? Absolutely: all the government would have to do is tax dividends at 20% and long-term capital gains at 37% and companies would quickly switch to doing dividends.
There is far too much emphasis on the price of a company's stock, or the various stock market indices. What really matters to shareholders is the total after-tax return over time, which is the sum of both the dividends received and any appreciation in the price of the stock, minus taxes paid. If the stock market never went up at all but every company was paying a 10% dividend every year that would be a fine situation for shareholders, although the talking heads on CNBC would have a lot less to discuss.
Aside from the executive stock option issue, share buybacks are no more or less evil than dividends. They don't remove cash from the economy: they just give it to shareholders, who get to decide what to do with it. Many will reinvest it in something else, or buy something with it; few bury it in a hole in the ground.
What is "bad" or "evil" is not share buybacks: it is companies that never generate a return for shareholders. These companies (looking at you, Uber, although maybe they will make a profit at some point) never pay any corporate income taxes, never produce any real, lasting economic value, and ultimately fleece investors, although early investors may profit if they unload their shares on the suckers who get fleeced in the end. If you want to rail against corporations, rail against the corporations which aren't likely to make any money and which will never return any cash to shareholders, although this is only known with certainty in retrospect.