The Real Reason Behind Share Buybacks

Companies know investors love getting cash. And there’s no quicker way to put money into investors’ pockets than by giving them dividend checks. Companies can also increase investors’ returns by buying back their shares.

But, given a choice, I’d prefer getting a dividend check. Wouldn’t most investors? And I think companies know this. So why do they buy back shares?

For one thing, they can. Sometimes they borrow money to buy back shares – something that is much harder to do when issuing dividends. But the main reason is that buybacks usually increase share prices. And most company execs have share-purchase plans. The more share prices go up, the higher they are compensated.

Buybacks are supposed to be shareholder-friendly. And, for the most part, they are. But the biggest beneficiaries are company executives.

From now on, I’m valuing dividends a lot more than the so-called shareholder-friendly practices of share-buyback companies. And so should you.