Why companies rather invest in stock repurchases?
Hi I am a new grad getting into the cooperate world :) My question is simply: why do so many companies like Boeing, eBay, Cisco rather spend billions to buyback their own stock than spend money on tech upgrades, marketing, hiring etc, like actions which can actually add real values to the company? #e-commerce #tech #stockmarket #newgrad
buying back stock gives money to investors(the people who own the company)
For a growth company it makes sense to invest in itself, but the companies that you mentioned are fairly mature, investing more in tech upgrade won't give enough ROI to shareholders better to return that money so that shareholders can decide where to invest. And stock purchase is just a better way to return the money to shareholders than dividends.
The only reason is to inflate the value of the stock. It usually happens when there’s a sudden dip in value to try and make it flat. That being said, they should distribute more of that to employees because they are also having a vested interest in the company and not just to the big shareholders.
If they were going to grow by acquisition they wouldn’t buy back shares.
I think the simplest answer is most of c lvl comp are stock based (like 90% ish). So if the company is ex growth easiest way to raise share price is to buy back shares.
Because generating actual profit and boosting stock is harder
Interest rate is low, money is free. You borrow at 1% interest rate and buy back 10 billion dollars stock, the CEO gets one billion rewards, the investors get 100 billion return, everyone is happy for getting rich from doing absolutely nothing. The cost is only 100 million profit, for large corporation, their profit can gain from inflation more than that.
Spending money the way OP suggests reduces the profits. That’s how accounting works. Using cash to buy back stock has no negative impact on absolute profits. And it does increase earnings per share. Companies that buy back stock do so because they see no paths to grow by acquisition.
Eh, it’s also just a way corporations can increase stock price for shareholders using their own profits. I’d hardly say “grow by acquisition” is the default route for companies considering share buy backs. Stock price = market cap/#outstanding shares. If they buy their own shares, #outstanding gets smaller and stock price gets larger.