Share Buyback

Say you were running a bakery.

You hire two chefs who create some of the best bakes; customers love it. The demand is so much that you sell out every day and by the end of the year, you note that you have been able to generate a huge profit for the year.

What do you do?

You could pat yourself on the back and compliment yourself for making such amazing hires and take all the money and put it in your bank.

OR

You could recognise the talent and efforts of those who have made this success possible and take a portion of the profits and reward them with a bonus and then take the rest of the profits.

If you thought option 2, you are not cut out for business.

It is only fair to give some of the profits generated to those who made the profit possible in the first place.

In the real world that is not what happens.

Take Apple for instance.

They give stock grants to top executives whose job is to ensure that they are working towards increasing the share value of the company.

The vast production chain has been outsourced and these people would never get to partake in any of the profits that are generated. Apple would probably be using its economic power to ensure that it is squeezing these companies to offer lower prices and by extension pay even less to their employees.

On the other side are the retail workers which forms the vast majority of the employees on Apple payrolls. They are also paid incredibly low salaries and there is no universe in which they could get a stock grant or a stock option. The situation is so bad many store employees are trying to unionise.

Despite all the patents and all the technologies, if the factory workers and retail workers were not to do their best to deliver quality and customer service Apple would not be as successful as it is.

Apple produces incredible profits and recently announced $100 billion in stock buyback.

What does a stock buyback mean?

Share buybacks are one way of returning profits to shareholders.

It means that the company is returning the profits generated back to the shareholders by reducing the shareholder base. It reduces the number of tradable shares on the market and hence reduces the supply which causes prices to go up for those who are holding on to it.

If shares were land in a city, a stock buyback is like classifying certain land as forest area and banning construction there. The value of the rest of the land goes up.

It also means that the company does not have any avenues to invest this money and generate a return on investment.

In the entire bargain, it is assumed that the people who made this all possible do not deserve a single penny more.

This is fundamentally what is magnifying the inequities in wealth.

In the eyes of Wall Street, the profits were generated because the CEO has a big brain. All of the compensation is laid at the doors of the CEO when a bumper profit is generated. Everyone else is just a cog in the machine.

When those profits are not generated it is not like the CEO is fired. There are layoffs made where the very people who were robbed of any upside in the first place are fired. For those who remain, they are expected to produce just as much output or more with fewer resources.

Thanks to index funds and the rise of private equity a large portion of the global economy is controlled by a few.

Although it’s a relatively young industry, private equity firms controlled $8.2 trillion in assets globally last year, according to consultancy McKinsey & Company.

[...]

These are the top five firms, which raised a combined $474.2 billion in capital in the five-year period ending March, 31 2023.

Source: Quartz

These tricks are being used by companies across the world, not just in the US because a significant chunk of the global economy is controlled by these firms.

Stock buybacks have become the preferred way of raiding the company’s coffers. “Activist shareholders” take a position on the board and force companies to engage in stock buybacks to inflate share value and no sooner is it done, that they dump the shares and walk away.

This has earned Private Equity investors the monicker “Vulture Capitalists”.

The worker, whether in a factory, in a mine, a retail store or in the supply chain almost sees none of the profits that they generated by toiling in soul-sapping conditions.

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