Meb Faber Beats Down Stock Buyback Myths
Stock buybacks aren’t the “bogeyman” that many politicians and economists mistakenly portray them as: “They’re a phenomenal tool for investors [and] essentially flexible dividends,” argues Meb Faber, co-founder, CEO and CIO of Cambria Investment Management, in an interview with ThinkAdvisor, wherein he rebuts buyback myths.
Faber has been focusing on the positive aspects of share repurchase for years. Indeed, three of his RIA’s 12 exchange-traded funds are based on the concept of cash returned to shareholders for dividends and net buybacks.
All three of those value funds have four- and five-star Morningstar ratings, he notes.
In the interview, the longtime popular blogger and twice-weekly podcaster, host of “The Meb Faber Show,” maintains that companies aren’t repurchasing their stock as a way to boost top management’s compensation — a myth that many believe, he says.
Nor does he think that buybacks “magically make stocks go up” — another myth, Faber underscores.
As for the 1% excise tax on buybacks for companies that is part of the Inflation Reduction Act, he emphasizes that buybacks are already taxed twice.
“Taxing [them] a third time is obviously insane!” he declares.
Stock repurchasing has been around since Alexander Hamilton’s day, according to Faber.
“Trying to disincentivize companies from buying back their stock is crazy,” he says. Without share repurchase, CEOs would probably deploy their firms’ excess cash in “some sort of megalomaniac-style spending.”
A frequent industry speaker, the quant and former biotech analyst launched his RIA near Los Angeles in 2005.
A prolific author of books and white papers, Faber’s most recent tome — a sequel of sorts — pulls together insightful essays on investing: “The Best Investment Writing — Vol. 2: Selected Writing From Leading Investors and Authors” (2018).
Faber recently spoke with ThinkAdvisor by phone from Manhattan Beach, California.
He holds that “removing the buyback corporate feature would have the opposite effect of what politicians think.”
Here are excerpts from our conversation:
THINKADVISOR: Why are buybacks so controversial?
MEB FABER: It’s certainly a curiosity why politicians have glommed onto buybacks.
In trying to close the wealth and income gap in this country, a lot of them and others point out that company CEOs have [huge] pay packages. Whether it’s through salaries or options, they get paid a ton of money.
There’s a belief that this has something to do with buybacks. It doesn’t. It has to do with the boards setting really crazy C-level compensation.
But many [critics] have the belief that — instead of paying employees higher wages or hiring more people — what CEOs are doing with all that cash they have sitting around is buying back their stock, which is going to be beneficial to management.
There are a couple of problems with that line of thinking.
Also, there’s a false belief that buybacks are less than legal. That was never true. However, people repeatedly [say that it is].
What are your thoughts about the 1% excise tax on buybacks for companies that’s part of the Inflation Reduction Act?
Dividends and buybacks are already taxed twice: when the company makes money and again when the investor receives payment.
Taxing buybacks three times is obviously insane!
How do buybacks affect earnings or the value of a stock?
A lot of commentators say CEOs are buying back stock and doing financial engineering to try to raise earnings per share so they can hit higher compensation levels. That’s a myth.
Buybacks do have an effect on earnings per share, but [a board’s focusing on them] for a compensation scheme would be horrible.
What do companies typically do with their cash?
Five things: reinvest it in the business, acquire a competitor, pay down debt. And if you have a bunch of cash sitting around, you can return it to the shareholders through a dividend or a buyback.
The weird part is [politicians] wanting to disincentivize companies from buying back stock. That’s crazy. If you do, the CEOs will just have more cash sitting around. They’re not going to pay workers more.
