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Would shareholders be better served, in the long run, if companies diverted more of their earnings to capital spending, hiring and other investments in their basic businesses, instead of taking shares off the market?

...the case for greater business capital spending is that it could "lay the foundation for a more enduring economic recovery," Bowers said.

Consumer spending has largely powered the economy since 2000, but some analysts believe businesses should be leading the way now, investing in new plants and equipment and adding more jobs. That in itself would be a vote of confidence in the economy, their argument goes, and could help the struggling stock market as well.

Buyback Surge Is Stoking Debate
In a shift, some big investors say more earnings should be used for reinvestment.
By Tom Petruno
Times Staff Writer
August 17, 2005

With corporate America's appetite for its own stock at record levels, some investors are recommending a change of diet.

More than half the companies in the blue-chip Standard & Poor's 500 index shrank their shares outstanding in the second quarter as they plowed cash into stock buybacks, S&P data show.

But Wall Street, which long has cheered buybacks as good for shareholders, is having second thoughts. Increasingly, big investors are saying companies should be using more of their profit to reinvest in their businesses — and in the economy — and less to retire shares, according to a Merrill Lynch & Co. survey released Tuesday.

Buybacks have been popular with many companies for years, but never at the levels of the last 12 months. U.S. firms in the first half announced plans to buy $126 billion of their own shares, 76% more than the repurchase commitment made in the same period of 2004, said data firm Thomson Financial.

Companies often use buybacks simply to offset new shares issued for employee stock options. The surprise is when a firm's share count actually shrinks.

Thanks to the buying spree, the number of shares outstanding declined at 54% of the S&P 500 companies in the second quarter, compared with the 36% of firms that cut their share count in the first quarter, said Howard Silverblatt, a market analyst at Standard & Poor's.

Fans of share buybacks say they can be the smartest use of corporate capital. By buying shares in the open market a company can help support its stock price. What's more, if a company shrinks its share count, future earnings will be spread over a smaller number of shares — raising per-share profit and boosting the ownership stakes of remaining shareholders.