Lesson: 11 | 12| 13 | 14 | 15 | 16 | 17 | 18 | 19 | 20

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Stock buybacks, dividends, and Capital Flows Stock Buybacks, Dividends, and Capital Flows

Stock Buybacks and Dividends

Can Buybacks Go On Forever?

The end may also come when companies no longer can generate cash to buy back enough stocks to continue to force prices upwards.

The chart shows that American corporations since 1980 have been distributing an increasing percentage of profits as dividends and buybacks, reversing the earlier trend of reinvesting in the future.

Obviously, the higher the price-earnings ratio, the more buyback money it takes to force prices upwards.

Eventually a point is reached when corporations are simply not generating enough cash to continue effective manipulation of their stock prices.

Eventually, corporations cannot generate enough cash to continue manipulating the market

The end to buyback pressure on prices may also come through new issues floated by foreign corporations.

As the chart in Lesson 14 shows, high price-earnings ratios attracted a greater volume of foreign offerings, offsetting to some degree the effect of domestic buybacks.

In fact, in 2000, foreign issues reached the point that an extremely high volume of corporate buybacks was effectively neutralized.

This is part of the explanation why the Great Bubble burst in that year.

The Analyst's Advantage

Perhaps the most interesting aspect of the buyback / option movement is that the macro-economic effects passed almost unperceived throughout the 1980s and the 1990s, although the trend could clearly be read from the Federal Reserve flow of funds accounts.

Rising foreign issues and withdrawal of sophisticated investors signaled the end of the Great Bubble.

Wall Street was simply making too much money off the practice to raise any questions, the SEC was asleep, and ordinary investors were lost in the dream world of the Common Stock Legend.

A Capital Flow Analyst following the flow of funds accounts in the year 2000 might have understood the implications of the rise in foreign stock offerings and the withdrawal of state and local pension fund investment from equities in that year.

The fact that so few were looking in this direction indicates the potential of Capital Flow Analysis in helping those who want to get a jump on the market.


Before proceeding, check your progress:


During the last quarter of the 20th century, American corporations:
Built up reserves by cutting dividends.
Spent $1 trillion on stock buybacks.
Increased dividend yields.
Focused on long-term goals.
Buybacks are unfair because:
Earnings are not distributed equitably.
Executives are not adequately rewarded.
The SEC bans buybacks as manipulative.
Stockbrokers don't earn fair commissions.
The primary beneficiaries of stock buybacks are:
Long-term investors.
Stockbrokers and corporate executives.
401(k) plan holders.
SEC officials.

Capital Flow Analysis: Investment Theory  learning module : continued >

Lesson: 11 | 12| 13 | 14 | 15 | 16 | 17 | 18 | 19 | 20

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Suggested Reading on stock buybacks, dividends, and capital flows.
"Is a Share Buyback Right for Your Company?", e-book, Justin Pettit, Harvard Business School Press

The popular justifications for corporate buybacks.

"The Brainwashing of the American Investor: The Book that Wall Street Does Not Want You To Read", Paperback, Steven R. Selengut

About Wall Street conflicts of interests and problems with buy and hold investing.

"Really Bad Business Advice: A Management Handbook for the Ethically Challenged", Paperback, Arlen Foote, Dave Dallas

A funny book by the Man from Nipple Butte that makes the bad boss in Dilbert look like Joan of Ark.

"Consider Your Options: Get the Most from your Executive Compensation, 2004 Edition", Paperback, Kaye A. Thomas

The basics of how executive stock options work. Essential to the understanding of the buyback movement.

"The Transformation of Wall Street: A History of the Securities and Exchange Commission and Modern Corporate Finance", Hardcover, Joel Seligman

An authoritative inside view of the workings and philosophy of the SEC, with in depth historical perspective.

"Moral Mazes: The World of Corporate Managers", Paperback, Robert Jackall

Today's corporate ethics compared to the Protestant Ethic of earlier America.

"The Business Judgment Rule: Fiduciary Duties of Corporate Directors", Hardcover, Dennis J. Block

Legal aspects of corporate fiduciary responsibility. (out of print)

"How Companies Lie: Why Enron is Just the Tip of the Iceberg", Hardcover, Richard J. Schroth, A. Larry Elliott

There is more behind current corporate malaise that accounting problems and failure to disclose.

"Securities Regulation in a Nutshell", Paperback, David L. Ratner, Thomas L. Hazen

The basic content and organization of federal and state securities law.

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