Is future growth jeopardised by share buybacks?

In the 1980, less than ten percent of the market’s income was used for share buybacks, says McKinsey in the report “Are share buybacks jeopardizing future growth?”. Now, share buybacks alone have increased to about 47 percent of the market’s income since 2011. Still, total payout to shareholder, i.e. share buybacks and dividend payments, remains fairly stable. They are currently at about 85 percent of company’s income, which is about the same as in the 1990s. 

With that data, McKinsey argues that concerns about the effect of share buybacks on future growth are unjustified. “Instead, the trend in shareholder distributions reflects a decades-long evolution in the way companies think strategically about dividends and buybacks—and, more broadly, mirrors the growing dominance of sectors that generate high returns with relatively little capital investment,” says the report.

The report shows, that companies are well incentives to use share buybacks other than dividends. While from an academic point of view, the investor’s benefit from dividends and share buybacks is the same, company are more flexible in their usage of buybacks. When making dividend announcements, investors expect the same divided to be paid as a perpetuity. Expectations, which the company has to fulfil. On the other hand, share buybacks can just be expanded or reduced as needed and possible.

Moreover, there is only little evidence confirming that paying out money, regardless as via dividends or buybacks, is what’s holding back the economy. This is due to the increasing shift to intellectual property of the American economy - and probably most Western economies. As those are less capital intense, return on capital is higher and there is more cash flow available for distribution.