The Dangers of Companies Trying to Buy Back Investors Love

By Alyce

A conciliatory bouquet of flowers can be a nice gesture during tough times, but it doesn't solve underlying problems. In our marketplace, the "share buyback" trend could be viewed as a similarly charming move -- one that shouldn't distract from the true issues at hand.

Share buybacks have become a popular financial button to push when corporate management teams attempt to assuage or attract investors dismayed by disappointing earnings and sagging stock prices.

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However, it's high time we scrutinize them as signs of what's going wrong at certain companies, not what may feel "right" in the moment. Even worse, they may steal from the future in more ways than we realize.

The repurchase routineCorporate share repurchases have resonated with investors over recent years for several reasons: among others, it may indicate management's opinion that its stock is undervalued, and it boosts per-share earnings. Here's a full definition of share buybacks.

Short-term investors' perceptions of what constitutes positive corporate plans are by no means always accurate, though, and the drive to maximize "shareholder value" has influenced management teams' tendency to resort to short-term thinking like financial engineering.

Lately, the share buyback trend feels like it has bubbled up to a fever pitch, but it's been brewing as a popular thing to do for quite some time.

Reuters recently released an in-depth investigative piece about the trend. According to its analysis of nearly 3,000 companies, since 2010 60% have utilized the share buyback routine. In the last reporting year alone, companies have shelled out $520 billion repurchasing their own shares.

Temporarily boosting the bottom line -- and worse, sometimes even bogging down balance sheets with debt to do so -- is a dangerous game many companies are playing. Meanwhile, if core businesses aren't growing organically, corporate buybacks can add up to nothing more than a "buying high" -- along with a failure to invest in areas that will provide real business growth.

Planting seeds for real growthA robust economy includes healthy growth and opportunity for all stakeholders, not just investors.

How should companies use resources to build the greatest, most lasting businesses; the kind that merge "excellence" and "expansion"? Here's one great idea that isn't rocket science: innovation. Of course, R&D costs money, and can be risky if it isn't executed well, but we investors should try to remember that in many cases, it's money well spent to gain strength into the future.

Shouldn't shareholders view R&D expenditures as a beautiful thing? I do. When the companies we own constantly work to create superior products, better technology, and otherwise higher-level solutions, it takes us all a lot closer to creating all kinds of growth, including economic growth, rather than temporary bottom-line and share-price boosting.

Employees are often viewed as costs -- and too often, one of the first costs to cut when times get tough -- but instead, they should be viewed as investments; this sometimes means spending more to treat them respectfully so they feel jazzed about doing the best work possible and use their energy to innovate. The real economy does better when more individuals have spending power, too.

Conversely, companies that conduct massive layoffs in connection with conciliatory buybacks could be viewed as utilizing an extremely damaging, short-term, and even irresponsible "strategy."

Really, this is all about how capital is used, and if we're looking for strong long-term businesses, buybacks could be viewed as more "costly" -- and potentially wasteful -- than expenditures designed to foster the far loftier and ultimately more lucrative goal of building strong, competitive businesses.

Buyback overkillNot surprisingly, we investors have barely been able to turn around during earnings season without getting smacked by buyback news.

Last month, Google's parent Alphabet announced its first buyback in its history, saying that it will repurchase up to $5 billion worth of its shares. That may arguably be one of the least-troubling examples these days; Google has plenty of cash, its business is doing just fine, and it doesn't shirk on big ideas or employees. Still, it's interesting that it's joining the buyback frenzy.

In September, Northrop Grumman announced authorization to repurchase up to $4 billion worth of its own shares. It's worthwhile to note that since 2010, it's already repurchased $12 billion of its own stock while its revenue has declinedover the same timeframe.

What about companies that are laying off employees pretty much at the same time as their stock buybacks? There are quite a few of those as well, and unfortunately one hits close to home.

One of my own personal favorite companies, Whole Foods Market , gave me pause when it joined the buyback contingent, announcing that it would repurchase up to $1 billion of its own stock and take on debt to do so.

As a shareholder, I can get behind its plans to develop the 365 by Whole Foods Market concept -- and I'm not cheering debt-financed buybacks coming on the heels of employee layoffs earlier this year. I'm keeping an eye on it going forward for any signs it's losing its priorities or principles after falling in with the buyback pack.

Rethinking the nature of good investingWhen corporations act responsibly and ethically, strategically considering impacts on many stakeholders and aiming for quality and innovation, they can truly change the world for the better.

Short-term strategies of any kind, on the other hand, can leave them poised on the slippery slope to weakness and even worse outcomes that bruise our economy instead of boosting it. The share buyback trend strikes me as a woefully short-sighted way to use capital, and often not a truly good corporate investment in the grand scheme of things.

Of course, we need to act responsibly as investors, too, and work to think about how important long-term growth strategies are for all of us -- and how truly productive, business-boosting growth is ultimately far more valuable than mere financial engineering. That could very well include applying a healthy dose of criticism to the share buyback trend.

Check back at for Alyce Lomax's columns on environmental, social, and governance topics.

The article The Dangers of Companies Trying to Buy Back Investors Love originally appeared on

John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Alyce Lomax owns shares of Whole Foods Market. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Whole Foods Market. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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