Share buybacks are as American as mom, apple pie and hot dogs on the Fourth of July.
To call this argument baloney would be an insult to cold cuts. When American companies began repurchasing shares from their investors, Alexander Hamilton was treasury secretary—and corporations have been buying back stock, often a little and sometimes a lot, ever since.
A buyback is just what it sounds like: A company repurchases shares from the public, taking them off the market. Some of the earliest U.S. companies were told by government authorities to do just that. Ironically, that mandate to repurchase shares seems to have been motivated by the same fear shared by today’s opponents of buybacks: the risk of too much wealth and power ending up in too few hands.
In 1798, the Pennsylvania Legislature granted a corporate charter to the Germantown & Reading Turnpike Road Co. One requirement: If profits remained after a 9% annual dividend had been paid, the company would have to use “the said surplus” to buy back as many of its shares as possible at “the sums which were originally paid.” Other companies followed similar practices.
Mandatory stock buybacks—like the 6% to 10% dividends that were customary at the time—appear to have been intended to keep management from pocketing or wasting the public’s wealth.
The opposite view is that buybacks are bad because they line the pockets of wealthy outside shareholders, preventing executives from using corporate profits to serve the public interest—often with some government guidance. That idea isn’t new, either.
In 1965, the Harvard Business Review ran a series of articles and letters debating what it called “an important new trend”: the rapid growth in share repurchases by U.S. companies.
Between 1954 and 1963, 53% of New York Stock Exchange companies—“corporate ‘self-cannibals,’ ” as researcher Leo Guthart called them—reacquired stock.
Corporations had piled up their cash surpluses thanks largely to “reduced tax rates” and other government policies intended to help businesses invest for the future, wrote Carl Blumenschein, controller of Container Corp. of America, in a letter to the editor. “When this money is used to buy back the corporate stock on the open market, it defeats the basic goals of modernization and expansion.”
A buyback “is essentially a negative act which is inconsistent with constructive and aggressive management,” added Gordon Donaldson, a Harvard Business School professor. “Substantial repurchase of common stock is in a sense an admission of failure.”
However, between 1971 and 1984, Teledyne Inc. bought back 90% of its stock under Chief Executive Henry Singleton—whom Warren Buffett’s business partner, Charlie Munger, calls “the smartest businessman I ever knew.” Other major repurchasers then included Geico Corp., Tandy Corp., and Washington Post Co.
