It’s important to remember, I
think, that stock shares aren’t just representative of an ownership position in
the company; they are also sold by the company to raise money. Buying them back
does cost money; potentially a lot of money. But as a result, the remaining
stockholders effectively end up owning a larger share of the company, because
the repurchased shares are now owned by the company, which is to say, by them.
Even in the case of an overvalued stock, the share price is likely to rise
because the shares themselves are now actually worth more than they were
before. Naturally, this will make the stockholders happy, which will in turn
make them more likely to retain (continue employing) the current board and
management team, who can in term continue to collect their (sometimes
ridiculously) large salaries…
This isn’t really a difficult
concept. In fact, it’s somewhat simpler than a normal stock price increase.
Most of the time, when the market price of a stock rises, it is because the
people buying it believe that the company is or shortly will be worth more than
the total value of the stock price indicates. This may have no connection to
reality whatsoever, particularly in the cases where investors are speculating
about things that haven’t happened yet. This is one of the factors that makes picking
stocks that will increase in value so maddening; in addition to all of the
economic, financial, political, and social factors involved, you’re also trying
to predict buying decisions that may be completely irrational. Even people who
are very good at picking stocks are only correct a relatively small percentage
of the time…
From where I’m sitting, the
question here is really why anybody would expect the companies who were in a
position to do this to do anything else. The people responsible for the changes
in the tax codes keep insisting that businesses will use the extra funds made
available by the lower tax rates to expand their operations and create
additional new jobs, but why should they? If any of those corporations want to
use their own money to expand they probably could, but their stronger stock
position means (among other things) that they can borrow money at a much better
rate, and they can use the repurchased stock shares as collateral if they need
to. And if a company is already profitable, and they have just become
considerably more profitable, why would they or their ownership group want to
mess with a good thing?
Now, I would be the first to
admit that finance can be intimidating if you’ve never studied it. But this isn’t
really a question of finance, or even of economics. Anybody who can grasp the
idea of making the people who own your company happy being a good way to keep
your job can understand why repurchase programs would happen, and anybody who
can imagine that a time when people who are clearly driven by political
advantage over any practical concern are making irresponsible changes to both
our tax codes and our international trade status would make people cautious about
expanding their operations can understand why these companies aren’t, in fact,
expanding their operations…
I’ve heard a lot of people
insisting that finance and/or money is too complicated for them to understand
over the years – and I’ve annoyed a number of them by replying that the subject
is entirely within their abilities, and refusing to learn about it means
turning control of every part of our civilization that runs on money over to
people who have no particular reason to act in the public interest. Let’s hope
that somebody starts paying attention – to the economy, if not to me – before things
get any worse…
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