Not a share buy back fan

From Yahoo:

Billionaire investor Warren Buffett defended some of his core holdings in a televised interview on Monday, but reiterated that equities in general would look expensive in an environment with normal interest rates.

The remarks from Buffett, chairman of Berkshire Hathaway (BRKa.N), come as several of his core holdings, including International Business Machines Corp (IBM.N) and Coca-Cola (KO.N), have showed declining revenue trends in recent years.

Buffett told CNBC that Berkshire had bought more shares of IBM during the first quarter, and forecast higher earnings at the company over the next 10 years.

He also praised IBM's stock buyback program, which he said had been "enormously beneficial" for shareholders, though he stressed that in general, buyback programs should be done based on share price and not as an all-purpose strategy.

At some point, I thought share buybacks were a good thing, but now no.  When we think of a company, it needs to take capital and invest it in projects that will reap a good return.  They need money, and if they don't, they should return it to shareholders.  I'd prefer direct methods such as one time dividends or some tax efficient method.  Bonus shares would be good as well.  Let investors sell if they need actual money.

Here's the main issue I have with buybacks as a form of shareholder return.  The shareholder only gets the return in a form of value of shares.  These values fluctuate tremendously.  Some argue that share buy backs are super tax efficient.  They might be, but I argue, taxes will have to be paid at some point.  Capital appreciation is taxed, which is the main return of the share buy back, so its hard to escape the tax problems.

The main point though is beyond the tax question, it focuses on the returns of the shareholder.  Typically companies won't put their money in projects unless they can get fantastic return out of it.  something north of 20 percent per year.  The shares of a company are unlikely to get that same rate of return on their shares.  Especially if they keep using their capital to buy their own shares instead of invest it in projects to get a return on capital.

It's a chicken and egg story.  I'd argue just give more bonus shares or dividends because no point buying your own stock, its like patting yourself on the back.  Doesn't make any sense.