Do share buybacks exist to support stock grants or do stock grants exist to support share buybacks?

New jam12
Dec 7, 2019 10 Comments

Do companies buy shares to unload them on employees to prop up share prices or do they want to incentivize employees by paying them with stock which can only be accomplished with share buyback programs?

Or is it a mix of both?

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TOP 10 Comments
  • Google AC/TC
    They are not tied to each other. I think the conventional way to think of it, is that shareholder value is a resource the company can either use up or contribute to for later. Usually a company would choose to buyback shares when they think they are cheap, to have a resource for later.

    Ex 1: a company can choose to create new shares to pay employees and not buy back shares (or buy back less than they create). This will typically impact share prices negatively, since there are more shares in circulation. However, it lowered the company's cash expenses vs. paying employees all cash. This makes the companies overall finances look better (cash flow, margins, etc...), But per share finances (revenue per share, etc...) May look worse. This makes sense to do when the company is struggling with profitability. They're likely taking a hit on share price, but they're using that resource to help the company finances in the short term.

    Ex 2: The company can choose to buyback more shares than they create to pay employees. This will consume cash, but likely increase their share price, which can be used as a resource later if needed.

    However, more recently, executives are increasingly paid in stock for a variety of reasons (tax changes, globalization, mergers and acquisitions, etc...). This trend has created a conflict of interest for executives and board members, since the best way to increase their pay is to increase the share price. This has led to a surge in buybacks, and it certainly doesn't seem like companies aren't calling a bottom on their share price, because executives are selling into the buybacks.
    Dec 7, 2019 2
    • New jam12
      OP
      Very detailed insight, thank you
      Dec 7, 2019
    • Google AC/TC
      Glad that's helpful.

      I think the decisions companies make between investing in their business, aquisitions, dividends, and stock buybacks is fairly interesting.
      Dec 7, 2019
  • Walmart plantsalad
    Stock grants would decrease share price, because it lowers book value and earnings per share.
    Dec 7, 2019 3
    • Kaiser Permanente / Data mzlO62
      They are SOLD by employees on open market, increasing market supply, decreasing price.
      Dec 7, 2019
    • New jam12
      OP
      I was talking about buybacks
      Dec 7, 2019
  • Microsoft
    Tier 1

    Microsoft

    BIO
    #1 in Prestige
    Tier 1more
    Buybacks theoretically don’t raise the price, they just get rid of excess cash. Think of them as the equivalent to dividends.
    Dec 7, 2019 0
  • Microsoft Teslanos
    Neither. But corporate debt issuance does support stock buybacks, and that’s why we have a corporate debt bubble that cannot sustain normal interest rates.
    Dec 7, 2019 0
  • OpenTable Meliodas
    Neither. Share buy backs are to raise share prices for all investors. Employees are a small fraction of shareholders.

    The board is far more interested in maximizing value for large institutional investors than employees.
    Dec 7, 2019 0

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