The Factor Undermining Stock Buybacks: Morgan Stanley

Technology stocks just had their worst day in nearly two years, and hedge-fund manager Bill Ackman received more bad news.

But first, let’s focus on an important analysis by Michael Mauboussin, head of consilient research at Morgan Stanley Investment Management’s Counterpoint Global and adjunct professor at Columbia Business School, and his colleague Dan Callahan.

Mauboussin and Callahan explored the dynamics of equity issuance and retirement, revealing that companies often simultaneously buy and sell their own stock. They engage in stock buybacks while issuing shares to acquire other companies, make investments, or compensate employees with stock-based compensation.

Their research concentrated on Russell 3000 companies with at least $1 billion in sales, analyzing data from 1,350 stocks between 2021 and 2023. They discovered that companies aggressively buying back their stock while sparingly using stock-based compensation outperformed the market.

Even companies that were not aggressive with buybacks kept pace as long as they didn’t heavily compensate employees with stock.

They acknowledge that other factors, like company fundamentals and interest rates, also influence returns. However, they emphasize the importance of understanding the impact of equity issuance on returns to make informed capital allocation decisions.