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The Proliferation of Stock Buybacks

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A stock buyback occurs when a company buys back its shares in the open market. The move causes the repurchased shares to be absorbed by the company thus reducing the number of shares that trade publicly and increasing the relative ownership stake of each investor

In 1982, the Securities and Exchange Commission (SEC) finalized Rule 10b-18 (17 C.F.R. § 240.10b-18), which provides companies with a “safe harbor” to undertake buybacks without being subject to liability for manipulation under the Securities and Exchange Act of 1934 if the company performs the buyback consistent with the conditions of Rule 10b-18. By 1997, buybacks had surpassed dividends as a mode of distributing corporate cash to shareholders.

From 2007 to 2016, 461 S&P 500 companies distributed $4 trillion (equal to 54 percent of profits) to shareholders as buybacks, along with $2.9 trillion (equal to 39 percent of profits) in dividends, according to The American Prospect. In 2018, buybacks by S&P 500 companies reached 68 percent of net income, with dividends absorbing another 41 percent, according to the Harvard Business Review.

Source: Bloomberg
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Last Updated on April 12, 2020 by Ramin Seddiq

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