Why do share buybacks cause such a big rift? (for example Twitter exploded yesterday with this and earlier this vs this, with a good collection here)?

Thought 1: Inequality vs Equity

Simply speaking, there are two types of participants in the economy:

Employees and Shareholders

The employees believe that more jobs and higher compensation are a good thing. The shareholders want their equity to increase in value.

In the case of buybacks, the employees want companies to re-invest the cash that is used for buybacks to generate more and better jobs, while the shareholders want higher returns via dividends, buybacks, and profitable growth.

In my mind, the escalating debate about buybacks is a version of the larger discussion about the inequality of economic growth. Median real incomes barely moved in 20 years while the shareholder wealth has compounded exponentially during the same time.

What’s the solution?

Under the current regime, I think it comes down to the one word: Equity

Jobs alone cannot be the employee’s personal LTV (life-time-value) maximization strategy. It has to be equity.

It is not enough to just earn a steady income and keep living costs low. Equity provides participation in the growth in productivity that may not be passed through in incomes and that can help offset increases in the cost of living and inflation. From a societal perspective, we might also want more people with equity since then more people will have so-called skin in the game with better incentives, and better sharing of upside and downside leading to less societal conflict.

From employee to shareholder:

Unlike the middle ages, even if the starting conditions are not equal, in the U.S. most people have a chance to become a shareholder by doing one or combination of these four things:

Invent
Manage
Sell
Save and invest

While the entrepreneur’s (#1) way to equity is typically more glorified than the manager’s (#2) (a point that colors much of the debate about share buybacks), both can be successful strategies to transition from employee to shareholder. Some people are better at management, others at entrepreneurship: either can be a path to ownership if value gets created (see thoughts about Value below). Here is a very good career book to get things started.
Another path is sales (#3). Selling is not taught in most schools and is often looked down upon, however, no matter what profession or role you end up in, mastering elements of sales is critical on the path to equity. Building quality relationships and thinking about problems from the customer’s view points are all valuable aspects of sales. Even if you never plan to do sales and want to remain an expert, in order to transition from employee to shareholder, you’ll need some sales skills.

“There are countless factories vying to sell generic products to the companies that own the customer relationship. Perhaps 90% (sometimes 100%) of the profit goes to companies that make the sale, not the ones who actually made the product.
That’s because while they make the thing, they don’t do the work. The hard part is earning attention and trust. The hard part is helping someone make the choice. (There’s a difference between the hard part and the important part. Without the factory, there’s nothing to sell. Making it is important. But increasingly, it’s not the hard part.)
The Broadway producer makes a profit, the chorus member ekes out a living.” - Seth Godin

Finally, perhaps the most reliable way into ownership (#4) is saving and investing. This path can give you the ability to remain a specialized expert, artist or employee without the need to invent, manage, or sell. Even at the lowest wages, putting away 10-15% into an investment account with a solid investment approach and never selling, will eventually ‘compound’ an employee into a shareholder.

Thought 2: Short-Term vs Long-Term Value

Back to share buybacks:

Once being a shareholder is a significant part of your life, the debate about share buybacks becomes less about inequality and more about value. For example, as a shareholder, you’d like to have public companies act like family businesses that are being managed for the long-term value creation.

Yet, many share buybacks result from short-term incentives such as low interest rates, the full tax deductibility of debt, and the proliferation of stock options as a mechanism to reward senior management as opposed to higher salaries. These encourage more financial engineering, short-term value redistribution, and less long-term value creation.

“Obviously, repurchases should be price-sensitive…Blindly buying an overpriced stock is value-destructive, a fact lost on many promotional or ever-optimistic CEOs.” - Warren Buffett, 2018 shareholder letter.

A strange thing about the current economic environment:

A typical economic mid-cycle produces margin expansion with decent revenue growth. A typical late cycle produces faster revenue growth with margin contraction. That is because prior investments (capex, R&D) help produce stronger growth, yet the available labor becomes scarce and so the labor costs go up reducing margins. Also, margins decrease because late-cycle competition increases.

The current bulls argue that we are still mid-cycle because we haven’t seen either strong revenue growth or big margin contraction. But others argue that lots of financial engineering and lower growth spending has altered the economic paradigm, at least temporarily.

The lack of growth investment along with ever increasing corporate debt levels, means the economy can have a hard time generating strong revenue growth in the future. And importantly the labor productivity is not being given back to labor, it is going to shareholders via buybacks.

Take-aways

Become a shareholder one way or another. With the entire U.S. system designed to support and protect shareholder returns, you will be aligning yourself with the winning side, at least historically.
Decreasing the incentive of management to goose earnings and stock prices in the short-term with buybacks or financial engineering can encourage managers to act more like long-term owners of a family business and have a better mix of upside and downside exposure.

Thank you John Toohey for edits and contributions.