3 Reasons Why Mark Cuban Thinks Buybacks Are Bad for Employees

The billionaire investor has some big problems with big share buybacks.

According to The Wall Street Journal, S&P 500 companies returned $11 trillion to shareholders in the form of dividends and stock buybacks, with the latter consuming the bulk of the spending.

In a Twitter thread responding to a WSJ opinion piece praising stock buybacks, Cuban expressed some of the reasons he's not a big fan.

The short version is that Cuban argues that if stock buybacks are so good for employees, why not simply use the money to buy shares directly from their employees? And he also believes stock buybacks encourage short-term thinking. As he said, "Why should a company reward shareholders who want to sell all, or reduce their holdings?" Management teams and boards of directors are supposed to be acting in the long-term best interests of their investors.

He also used the term "financial engineering," which is one of the biggest arguments against share buybacks. Think of it this way: if a company has 10 million outstanding shares of stock and earned $10 million last year, its earnings per share would be $1.00. If the company buys back 1 million shares, leaving 9 million, that exact same $10 million profit would result in $1.11 in earnings per share. In other words, the buybacks make it look like the company grew its earnings, but in reality, it is still earning the same amount of profit.

Cuban isn't the only one

Mark Cuban isn't alone in his opinion -- many people, including some powerful politicians, aren't big fans of stock buybacks, and for similar reasons. The general argument is that instead of using their profits to buy back shares, companies should be using that money to increase employee earnings, reinvest in their business, or to improve their financial flexibility.

As one example, there was serious resistance to bailing out the airlines in the early days of the COVID-19 pandemic after it came to light that these companies spent $45 billion buying back their stock in the five years leading up to it. Instead, airlines could have held onto some of that cash in case times got tough.

In fact, the recently passed Inflation Reduction Act contained a tax provision that imposes a 1% excise tax on share buybacks in order to encourage companies to use their profits in other ways.

Are stock buybacks good or bad for employees?

To be fair, there are arguments for and against stock buybacks. While some stock buybacks are certainly done for "financial engineering" reasons like Cuban points out, and there's a valid argument to be made that as a whole, American businesses may be spending a little too much of their profits in this manner, there are some good reasons to buy back stock as well.

For example, Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) has a stock buyback program, but shares can only be repurchased if both CEO Warren Buffett and Vice Chairman Charlie Munger agree that the stock is worth considerably more than its current market value. In other words, if they see an opportunity to buy back $1 worth of assets for $0.90, that can be a better return on investment than they'll find elsewhere. Many other companies have similar programs, increasing and decreasing buybacks in accordance with management's perceived intrinsic value of the stock. Since employees often own significant amounts of stock in their own companies, there's a solid argument to be made that taking advantage of "cheap" stock prices in this way is a great way to create long-term value for employees.

There's also an argument that companies aren't spending too much at all, as evidenced by the fact that corporate cash balances increased by nearly 80% in the 10-year period through 2021. And there's also an argument that a tax on buybacks will simply motivate companies to hoard cash, not to reinvest it in their employees or business.

The bottom line is that Cuban certainly has a good point. Why not buy back stock directly from employees? Why encourage short-term stock price gains? And why artificially pump up a company's earnings instead of conserving capital? But the question of whether stock buybacks are good or bad for employees isn't as easy to answer as it may seem.