The New Republic published an article in August titled Apple's Stock Market Scam, a stinging piece of writing whose central premise was the following: Apple Inc. did not reach its trillion-dollar valuation by product innovation or by simply being an extremely profitable business. It claimed instead that it had done so by repurchasing billions of dollars of its own stock. \nThe author wasn't alone in his views. Financial and political pundits alike have often painted stock buybacks as a greed-driven tool in recent years, one that detracts from corporate capital investment and thus, from economic growth. \nThese same pundits often see no issue with dividends being paid to shareholders while not hesitating to malign buybacks. Another common refrain is that buyback policies inflate executive compensation. \nDo the data and economics bear these arguments out? \nIt's true that in developed markets, capital investment as a percentage of operating cash flow has been on the decline. A few non-buyback issues are to thank for this. \nFirst, the relative size of the technology and healthcare sectors globally has increased substantially compared to other sectors. Companies in these sectors generally have low capital intensity and instead invest in research and development. \nResearch and development often do not factor into reported capital expenditure figures, especially under U.S. accounting rules, and the U.S. represents greater than 60 per cent of developed markets worldwide. \nThe claim that buybacks are on the rise is probably true as well. Again, however, there is nuance needed in the discussion. \nDimensional Fund Advisors, a major global investment firm, analyzed buyback and dividend payment tendencies of publicly traded American companies from 1973 to 2015. \nThey did find a steady increase in share repurchases as a percentage of market capitalization. \nHowever, the ratio of total cash paid to shareholders stayed completely flat over the analysis period. \nWhy? Increases in repurchasing activity were fully offset by decreases in dividend payments. \nEven if we're determined to prove that modern, publicly traded companies are not investing sufficiently, returning excessive amounts of cash to shareholders does not appear to be the culprit. \nYou'll notice that stock buybacks and dividends are grouped together in the above paragraphs. This part is important: dividends and buybacks are the exact same thing, at least economically speaking. \nIn both cases, a company has cash it wishes to distribute to its share holders. In a buyback, it reduces its share capital by delivering cash to the shareholders, whereas in a dividend, it reduces its retained earnings. \nThese are simply two closely related line items on the balance sheet; the difference between them is trivial. \nOne thing I like to do as l assess the reasonableness of anti-buyback claims is substitute "buybacks" for "dividends" in arguments. No one is likely to have a problem with the substituted versions of these arguments. \nOn executive compensation: buybacks can absolutely increase the amount paid to corporate executives, particularly by impacting their long-term incentive (LTI) plans. \nColumbia Law School research indicates that in 2016, LTI compensation made up 47.4 per cent of total compensation for CEOs of S&P 500 companies. \nOf this LTI compensation, income-related measures like earnings-per-share (EPS) were used in 64 per cent of plans. Since stock buybacks reduce shares outstanding, EPS is automatically increased, and CEOs stand to benefit. \nAre buybacks a bad thing? As with many questions, the answer is: it depends. \nGovernance issues in publicly traded companies may be exploited by executives using buybacks, though the practice itself may not be inherently bad for the economy. \nA less cynical argument may be that buybacks allow for the efficient allocation of capital, where companies may distribute cash to shareholders when they no longer have fruitful investments to make themselves. If the shareholders can then allocate these financial resources to their highest and best use, that's good for the economy as a whole. \nRegardless of our views on the matter, buybacks are now a key facet of our capital markets and are likely to continue to be. \nThis writing is for general information purposes only and should not be considered to be legal, accounting, tax, or personalized financial advice. Any opinions expressed are those of the author and may not necessarily reflect those of Louisbourg Investments Inc. \nThis feature was originally published on page A12 of the Moncton Times & Transcript on Thursday, November 22, 2018. Reposted with permission.