Brett Arends, financial reporter for The Wall Street Journal, has written an article regarding the dismal dividend yields offered by stocks currently. Arends proceeds to debunk one of the myths justifying the pathetic yields; that stock buybacks compensate investors for the measly payouts.
The most recent news on stock buybacks sounds pretty bullish. Standard & Poor’s reports that in the third quarter, members of the S&P 500 index increased the amount they spent on stock buybacks by 128% from a year earlier.
In total, they spent a thumping $80 billion. That’s the fifth straight quarter in a row that they increased buybacks. (We await fourth-quarter data.) Two hundred and sixty-one companies bought back stock in the quarter, up from 195 a year earlier.
But there’s just one problem.
While companies are buying back their stock, they are also issuing new shares. Many of those are new stock and options for executives and senior staff
For stockholders, what the corporate treasury department giveth, the executive compensation committee taketh away.
Bottom line? While the companies were buying in stock, the number of shares outstanding actually went up. So stockholders got diluted. Each share was worth proportionately less, not more.
According to Standard & Poor’s, between Oct. 31, 2009, and Oct. 31, 2010, the outstanding, fully-diluted share capital of the S&P 500 rose 7.6%.
SMA Comment: Arends proves the grifter class, deftly documented in Matt Taibbi’s book ”Griftopia,” is alive and well post-crisis.
Source: The Wall Street Journal
***