A new way to measure "fake buybacks"

The CEO of Blackrock, Larry Fink, apparently wrote a letter to the CEOs of many US companies to stop short-termism. This letter can be found here. He explicitly mentions the rise in share buybacks.

We have been arguing for a while that many buybacks done by companies are nothing to applaud for but a way to pay their employees. We even called them fake buybacks, for example cited in this article for the Financial Times.

While this behavior is fully legal, it clouds the view on companies'  margins as payments in stock replace hard cash.

It works the following way. A company issues stock grants to its employees and buys that stock later back, obviously with money then not available to pay a higher dividend to shareholders. As this is not a payment in cash, non GAAP margins are not impacted and the company gets praise for doing a buyback.

This may be legitimate for small, fast growing and cash strapped companies but not for mature companies with little or even no growth, in our view.

It is difficult to quantify this effect. Therefore, we introduce a new metric to size this effect, and call it "free cash flow yield to employees" (FCFE). In our view, every investor in a company should be aware of this number. We are hopeful that it even will become a standard metric used by analysts.

The publication on the definition of this new metric FCFE and "fake buybacks" can be downloaded for free at https://www.cesifo-group.de/ifoHome/publications/docbase/details.html?docId=19184190. Our calculation for the largest hundred non-financial companies show that more than 10 % of the free cash flow generated dissipates into fake buybacks, a non-trivial number.