Detroit automaker General Motors announced on Friday it was bringing back a quarterly dividend after suspending it at the start of the pandemic to preserve cash. The company is also resuming what it calls “opportunistic stock buybacks,” with plans to buy back $5 billion of its own stock.
This maneuver earned him a bad reputation. But why do we love to hate stock buybacks?
When companies have cash to spare, buying back shares is a way for managers to reward shareholders. It’s a move that may boost the stock price, but critics say there are better ways to spend that money.
“Every dollar that goes into stock buybacks is $1 that is taken out of something else,” said Niko Lusiani of the Roosevelt Institute.
He pointed out that GM, for example, could use the $5 billion it just set aside for buyouts to pay its workers more, cut prices or bolster key initiatives, like a deeper push into vehicles. electrical.
“That’s $5 billion that could really accelerate the pace of bringing these electric vehicles to market,” Lusiani said.
The company is moving forward with its electric vehicle plans, GM spokesman Jim Cain said. Its first battery plant is expected to open in Ohio in a few days, with more on the way.
“Investments have reached critical mass and earnings are so strong that it means there is capital we can return to shareholders while keeping all of our other investments on track,” Cain said.
Buyouts may not be popular with everyone, but they are an essential tool, said Charles Elson of the University of Delaware.
“If you don’t return the money to the investor, then no one will invest, and then you won’t have any kind of business in the future, or the products you make won’t be made,” a- he declared. .
Another criticism is that executives use buybacks to drive up a company’s stock price, often just as earnings season rolls around.
There’s another thing to keep in mind, said Alice Bonaimé of the University of Arizona: “There’s this idea that I reduced the number of shares, and I think ‘Bing! My stock price will go up. But the company’s value also went down.
GM did not specify in its announcement what the timing of its buyback program will look like. The recently passed Inflation Reduction Act includes a 1% tax on share buybacks that will come into effect next year.
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