Buybacks: why buy-siders and sell-siders disagree
April 15, 2016 | By Laurie Havelock
Latest IR Magazine
research gathers opinion on the best use for excess corporate cash
than sell-siders believe companies are sacrificing too much to fund
expensive share buybacks, according to IR Magazine research
into what the investment community thinks about the best way to spend
As part of the research for the
Investor Perception Study – US 2016,
buy-side and sell-side respondents were asked some general questions
of interest to the IR community, including: do you think companies are
sacrificing long-term organic growth and increasing wages to do
Forty-one percent of US buy-siders agree with the statement, compared
with just 25 percent of those on the sell side. Correspondingly, the
sell side is far more likely to disagree with the sentiment (65
percent) than respondents on the buy side (41 percent).
The reasons for this split in opinion are not entirely clear, though
looking at the additional comments provided by those surveyed does add
some extra color. One sell-sider, for example, summarizes the
situation fairly briefly: ‘Buybacks are acceptable only for companies
that have a lot of excess cash, which is not always the case at
companies doing them.’
Those who respond negatively often pick out the non-sustainable nature
of excessive buybacks. ‘There is a big gap between corporate margins
and income growth, which is at an all-time high,’ says one buy-sider,
adding that the practice cannot continue, while a sell-sider points
out: ‘It is not a good thing in the long term.’
Those who disagree with the question fall into two camps: those who
believe buybacks are a good use of excess cash and those who don’t see
them in their sector or the companies they cover.
‘This is political bashing: buybacks are being given a bad name,’
notes a buy-side respondent. ‘The anti-buyback message is a red
herring. Within a mix of choices for allocation, buybacks provide good
A third group of respondents – those equivocal about the issue –
generally point out that it depends on the individual industry, sector
or company as to whether buybacks are appropriate.
So if companies should not be spending cash on buybacks, what would be
a better use of the money?
Answers from the buy side and sell side largely align on this: around
a third of each camp picks out investment in long-term organic growth
as the best use of excess cash, with buybacks, acquisitions and
dividends following closely behind.
This question produced only minor differences between buy-side and
sell-side responses, however, with many noting that it’s often a
company-specific question and others suggesting that a combination of
options may be best.
The answer to the question of how to spend excess cash, therefore,
remains dependent on a number of factors. For the majority of our
respondents, a careful mix of returning shareholder value and
investing in a company’s future seems the best approach.
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