CFOs admit to sacrificing investments to maintain the current dividend level
But they don’t sacrifice investments to engage in share buybacks. They make investment decisions first and repurchase out of the remaining cash, rather than firms making repurchase decisions first and investing out of the remaining cash
Not a single FTSE 350 company successfully used share buybacks to hit a CEO bonus target between 2007 and 2016
There is no link between share buybacks and investment. However there is a negative correlation (not necessarily causal) between investment and the presence of EPS targets in pay schemes
- Responsible businesses have a duty to shareholders, but paying dividends does not increase shareholder returns as doing so reduces capital gains
- Relying on dividends for income encourages investor passivity. Needing to sell shares to generate liquidity encourages investor monitoring
- If dividends were viewed as flexible, like repurchases, companies would never need to turn down value-creating investments to maintain the dividend
- 91% of net income has gone to buybacks and dividends, rather than being used to increase wages or finance investment
- Share buybacks are why ordinary people have not benefited as the US has recovered from the financial crisis
- The Lazonick article makes basic errors. For example, net income is already after subtracting wages and many investments
- Investment is at peak levels, and cash holdings have risen substantially. Buybacks have neither starved firms of cash nor prevented investment.
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