Earlier this month, Sen. Elizabeth Warren blasted corporate share repurchases as “nothing but paper manipulation.” According to the Massachusetts Democrat, when a company buys back its own shares, it merely cheats the system.
“They got a little fluff-and-buff in their stock,” Warren said. “And how did they do that? By taking their excess cash and saying, ‘Geez, we can’t figure out anything to do with this cash. We’re not going to give it back to our investors. We’re going to make the investment decision that the only investment in America that makes any sense is to buy back our own stock.’”
The senator has no clue what she’s talking about.
As with any other capital-allocation decision, purchasing a company’s own shares can be appropriate or inappropriate — depending on the facts. It is often a very sound business decision.
Share repurchases help investors when the purchase price is below the company’s real, intrinsic value, based upon the determination of the most informed people on the planet: the executives of the company itself. In this case, the company is spending one dollar in exchange for something worth more. When a company purchases its shares above intrinsic value, however, it is replacing a dollar for something worth less.