What's Up With All These Share Buybacks?

In this segment from MarketFoolery, host Chris Hill and his guest, Motley Fool Director of Small-Cap Research Bill Mann, discuss a trend that some watchers see as becoming excessive: big stock repurchases. The twin drivers of that concern are that share buybacks signal that a company can't think of any smarter use for its money, and that President Trump's corporate tax cuts -- sold to the public as a tool for boosting businesses' investment in growth and raising wages -- are simply being routed into the pockets of investors. But according to Mann, to frame it that way ignores what's really happening on businesses' balance sheets, and the impetus behind the choices those companies are making when they repurchase shares.

A full transcript follows the video.

This video was recorded on July 31, 2018.

Chris Hill: Inexplicably... With PayPal (PYPL 0.64%), it's the continued drumbeat, the increasingly loud drumbeat, of share repurchases.

I kind of get it in the case of Chevron. They hadn't done anything for a few years, so they're coming out, and for as big as Chevron is, a $3 billion repurchase plan is not insane. The PayPal one still has me scratching my head. As we've talked about before, a lot of times, the signal that's being sent when company X says, "We're buying back shares, here's our plan," is, "We don't have a better idea of what to do with this money."

Bill Mann: Right. I think that a lot of the drumbeat about the share buybacks -- in fact, I don't think, I know this to be true -- has to do with the fact that this is happening after the Trump tax cuts. So, people are saying, "Companies are buying back shares rather than increasing their investments in new products, increasing their investments in any number of things, including giving people raises." Fair point.

But, keep in mind, when you buy back shares, generally speaking, what you're doing is making a capital decision. You're taking the difference between equity or debt. It's almost somewhat irrelevant. I think people are banging the drum about the wrong thing. If you think about it, the other story that's going around this year is that corporate debt is at all-time highs, and people are wondering if they should be nervous about it. Companies aren't really pulling back at all.

Now, there are a lot of conversations you could have about the political ramifications, are the tax cuts going to do what they said they were going to do, but that's not really what this show is about. We could make a lot of people angry about that. I just see this drumbeat about share buybacks being basically a battle between a gift to the shareholders and something for the workers, and that's not the relationship that actually matters.

Hill: Did you see the PayPal announcement last week? Just for context, PayPal is a $100 billion company. They announced a $10 billion share buyback plan. I'm still scratching my head. I think it's the size of it. If they had come out and said, "Here's a $1 billion plan," or something like that, it would be slightly odd to me, just because I still think of PayPal as a dynamic, innovative company with good ideas, particularly on the acquisition side.

Mann: I don't want to be sitting here sounding like I'm defending share buybacks. I don't like them. I don't think they're a great use of capital, for a couple of reasons. I think in the case of PayPal, this might be really illustrative. That $10 billion in share buybacks isn't necessarily going to benefit shareholders. What it's going to benefit are the option holders, which are insiders. That company has grown very rapidly, with a huge number of options being given out over time to employees. We can argue whether that's good or bad. But, when you're buying back shares, in a case like PayPal, primarily, it's happening so they can undo the dilution from options. So, it's a big payola to the insiders who hold those options.