Weekly Puzzle #12: GM Buyback

What is it?

GM recently announced a stock buyback of $5 billion. That buyback announcement triggered a wave of hand wringing from pundits and economists, some of whom argued that GM's buyback was a symptom of Corporate America's unwillingness to reinvest and stockholder short-termism. This article from the Harvard Business Review summarizes that view.

In this blog post, I take exception to that view, arguing that GM is a at best a middling company in a bad business. Faced with the choice of investing even more in this business or returning the cash to stockholders, I argue that GM made the better choice.

  Key Questions to Answer

  1. Reading both points of view on the GM buyback, what judgment would you come to about GM"s buyback? (And it is okay to disagree with me)
  2. More generally, in what types of companies is a buyback good news for investors?
  3. More generally, what types of companies are hurt by doing stock buybacks?
  4. Implicit in the critique of stock buybacks is the belief that cash that is used on buybacks is not being reinvested back into the company and that this leads to less overall investment in the macro economy? Is this true? If not, why not? If yes, is that bad for the economy?