[lbo-talk] Corporate cocaine

[Marv Gandall]

Share buybacks. Another example of wasteful spending by the private sector as corporations find fewer opportunities for profitable investment in the productive economy. The latest Economist describes the epidemic of listed firms purchasing their own shares as “corporate cocaine…a symptom of the rich world’s feeble growth prospects”. In the US alone last year, corporations soaked up a record half trillion dollars worth of their own stock, driving up their share prices and enriching their managers but doing little to add to economic growth, employment, or living standards. IBM, for example, spent twice as much on a buyback scheme as on its research and development. For the Economist, the trend is worrisome both because it discourages long-term investment and has all the hallmarks of a bubble destined to result in a crash. Nearly 40% of the firms which bought back stock last year did so by borrowing more than their cash flows could support. When their inflated stock prices tumble and their loans come due, the repercussions could be costly.

http://www.economist.com/news/leaders/21616950-companies-are-spending-record-amounts-buying-back-their-own-shares-investors-should-be