The Stock Buyback Panic

Repurchases reallocate under-utilized capital to more efficient purposes

WSJ editorial. Excerpts:

"capital expenditures by S&P 500 companies grew about $75 billion in 2018, the fourth-biggest annual gain since 1991. Average wages are growing by at least 3.4% year over year, the fastest rate in a decade."

"The Senators criticize Walmart for announcing “plans to spend $20 billion on a share repurchase program while laying off thousands of workers and closing dozens of Sam’s Club stores.”

This is economically illiterate. Sam’s Club CEO John Furnersaid last year “it was clear that a certain number of the clubs were not going to be successful” and “some of those clubs were a financial drain.” Is Mr. Furner supposed to prop up unprofitable stores indefinitely and jeopardize other operations with the losses? Some of the closed stores were turned into distribution hubs, helping Sam’s Club compete against Amazon by offering free two-day shipping."

"An investor who sells stock into a buyback will save or reinvest the proceeds. Walmart gives shareholders cash, and capital markets redirect it to some other useful end.

Banning buybacks won’t create better investment options inside companies. Instead CEOs may spend more on corporate jets or pet projects with marginal economic returns."