Why a Stock Buyback Strategy Hurts Investors

The main problem I have with companies buying back stock is, it obfuscates the effect of stock options. It's basically a massive wealth transfer from investors to executives and employees.

Question: How does a company come up with the stocks they're granting as options?
Answer: By diluting existing shares. Let's imagine ACME Widget Company is a publicly traded company that offers stock options to their employees. The company has 1 million shares of ownership traded on the stock exchange. If you worked for ACME, and they granted you 10 shares of stock, the moment you exercise that option (buy the stock), the number of shares becomes 1,000,010.00, or 1 million and 10 shares. By doing this, the value of each previously existing shares is decreased. That's what it means when economists talk about share dilution. You, as the mail clerk, are only granted 10 share options. The over-paid, empty suits in the executive suite are usually granted hundreds or thousands of share options. Now you see why this is a massive wealth transfer from investors to executives?

The big reason why companies buy-back their own stock is, they've run out of places to put their cash. Instead of issuing dividends, as any moral human being would do, they churn the money into the pockets of their executives, while temporarily goosing up the stock price. I say "temporarily" because, they're burning up cash, which is an asset on the balance sheet. The next time the company issues their earnings statement and balance sheet, their cash position will be less, or at least not as high as it would have been without the buy-back.

I personally prefer to buy stocks in companies that issue regular, stable, cash dividends. That being said, at the moment, I'm completely out of the market. I consider it massively over-priced. When I do get back in, it will be in the form of low-cost index funds, mixed with a fair amount of municipal, county, and state bonds. I like to keep my earnings as tax-free as possible.