Buybacks – Boosting Returns Or Liquidating Companies?

Asset manager Cliff Asness recently wrote an op-ed piece in the Wall Street Journal wondering if those who decried companies buying back their stock didn’t suffer from “buyback derangement syndrome.”

Asness allowed that net investment, normalized by total assets or total market capitalization, was recently lower for companies in the Russell 3000 Index than it was in the 1990s, “but positive and much higher than during the 2008 financial crisis.”

It seems strange to crow that investment is better now than during the financial crisis.

And Asness offers no opinion or interpretation on why investment should be lower now than in the 1990s, especially given that low interest rates after the financial crisis were supposed to stimulate investment. Granted, his purpose isn’t to comment on Federal Reserve policy, but one might think he’d have something to say about lower investment immediately after a financial crisis – when investment is most needed. Asness also doesn’t say how much lower investment is now. That’s strange, given that he will conclude by asserting the buyback arguments amount to “innumerate nonsense.”

Asness mentions that companies aren’t shrinking away by buying their stock, because they are also borrowing a lot of money. “Think of this as a debt-for-equity swap,” he says – again neutrally or flatly. Is it good or bad – and for whom? — that companies are exchanging equity for debt? Asness doesn’t say. Moreover, later Asness will defend the argument that buybacks are indeed a form of liquidation.

Next, Asness argues that investors do not spend the money paid out in buybacks frivolously. Instead, investors buy other stocks and bonds with their buyback bounty, thereby shifting capital from companies that don’t need it to those that do. But that’s a little too neat. An investor buying stock on the secondary market isn’t giving money to a company in exchange for shares. Rather the investor is buying from another investor a claim to profits on capital already raised by a company previously.