It’s true. Corporate insiders exploit company share buyback programs.
SEC Commissioner Robert J. Jackson Jr. in a speech given in June 2018, confirmed that his research shows that corporate insiders enrich themselves when share buybacks are announced.
I raised this question in a post in January of 2018, Research Wanted: Stock Buybacks and Insider Selling.
In his speech Commissioner Jackson shows that stock sales by insiders spikes in the first few days immediately following a buyback announcement. Research by his staff found that “twice as many companies have insiders selling in the eight days after a buyback announcement as sell on an ordinary day.” The dollar amount of those sales are between 2-1/2 to ten times an average day.
Furthermore, “On an average day, between 3 and 4 percent of corporate insiders trade in the company’s stock, but [it was] found that, during the eight days following a buyback announcement, more than 8 percent do.”
Based on rules formulated in 1982 and updated in 2003, share buybacks were permitted if they met certain criteria. What has happened is that since then share buybacks has exploded. Prior to 1982, share buybacks were highly regulated and often considered illegal.
The practice of using share buybacks by companies has grown so much, that in many cases more money is used to purchase a company’s own shares than for many other purposes.
A report by the Roosevelt Institute found many disturbing patterns.
— “On average, companies used to reinvest 20 cents of each dollar of their operating returns into their businesses; that amount has dropped by half—to just 10 cents of each dollar since 2002″
— In many cases, companies spend more than half their profits on share buybacks. In general, publicly traded companies in the U.S. spent 58.6 percent of their profits on buybacks between 2015 and 2017.
Between 2015 and 2017, the following companies spent their noted amount of profits on share buybacks:
| Company | Percent of Profits Spent on Share Buybacks |
| McDonald’s | 152% |
| Yum Brands | 201% |
| Starbucks | 65% |
| Restaurant Brands Intl | 135% |
| Domino’s Pizza | 307% |
| Home Depot | 93% |
| Walmart | 54% |
| CVS Health | 80% |
| Lowe’s | 118% |
| Target | 91% |
| Pepsico | 60.2% |
| Mondelez | 70.9% |
| Kraft Heinz | 80.2% |
| Tyson Foods | 69.3% |
Just consider this: some companies spend more money on share buybacks than they receive in profits! (This is [to me] mind-boggling.)
And in all cases except two, more money was spent on share buybacks than on dividends during those years.
Forty percent of fast food workers live in poverty, and nearly 52 percent must rely on public assistance programs. As has been noted, such low wages push the needs of these employees onto public assistance which strains local governments.
Wages for employees could substantially increase if funds used for share buybacks were instead directed to wages.
If all share buyback funds were redirected for wages, the following increases could have occurred:
— McDonald’s could pay all of its 1.9 million workers almost $4,000 more a year.
— Starbucks could pay all of its workers $7,000 more a year.
— Lowe’s, CVS, and Home Depot could pay all of its workers $18,000 more per year.
— Domino’s Pizza and Restaurant Brands International could pay each of their workers over $2,000 more annually.
— PepsiCo, Mondelez, Kraft Heinz, Archer Daniels Midland, and Tyson Foods could pay the median worker in their respective companies an average of 79 percent more each year using the money spent on buybacks.
What’s you take on this? Have share buybacks skewed reality? Comment here.
The illustration “Imperial shoe, with lace, gold embroidery, beadwork, and knot of gold lace and tassels; Algiers slipper with covering of patterned gold; evening ‘Oxford’ shoe” is from the collection “Ladies’ dress shoes of the nineteenth century” by T. Watson Greig, published in 1900 in Edinburgh, Scotland.
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