$Alphabet-C (GOOG.US)$$Microsoft (MSFT.US)$ Some companies b...
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Some companies buy back shares to raise capital for reinvestment. This is all good and well until the money isn't injected back into the company. In July 2017, the Institute for New Economic Thinking published a paper titled "US Pharma’s Financialized Business Model" on pharmaceutical companies and their share buyback and dividend strategy.
Some companies buy back shares to raise capital for reinvestment. This is all good and well until the money isn't injected back into the company. In July 2017, the Institute for New Economic Thinking published a paper titled "US Pharma’s Financialized Business Model" on pharmaceutical companies and their share buyback and dividend strategy.
The study found that share buybacks weren't being used in ways to grow the company, and in many cases, total share buybacks outnumbered funds spent on research and development (R&D). The report stated:
In the name of 'maximizing shareholder value' (MSV), pharmaceutical companies allocate the profits generated from high drug prices to massive repurchases, or buybacks, of their corporate stock for the sole purpose of giving manipulative boosts to their stock prices. Incentivizing these buybacks is stock-based compensation that rewards senior executives for stock-price 'performance.'
And, as mentioned above, any boost to share price from the buyback seems to be short-lived. Along with Apple, Exxon Mobil, and IBM have made significant share repurchases. A CNBC article in May 2017 said since the turn of the century, total outstanding shares of Exxon Mobil have fallen 40%, and IBM's has decreased by a whopping 60% from its peak in 1995. The article notes that not only does this fit "financial engineering," but it also affects overall stock indexes that are valued on the weightings in these companies.
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