Consider Yahoo. The company bought back shares worth $6.6 billion from 2008 to 2014, according to Robert L. Colby, a retired investment professional and developer of Corequity, an equity valuation service used by institutional investors. These purchases helped increase Yahoo's earnings per share about 16 percent annually, on average.

But a good bit of that performance was the buyback mirage. Growth in Yahoo's overall net profits came in at about 11 percent annually.

Given these figures, Mr. Colby reckoned that Yahoo, if it had invested that same amount of money in its operations, would have had to generate only a 3.2 percent after-tax return to produce overall net profit growth of 16 percent annually over those years.

... buybacks provide only a one-time benefit, while smart investments in a company's operations can generate years of gains.... Mr. Colby conducted a cost-benefit analysis of 26 companies buying back stock versus using that money to invest in a business.

He found that McDonald's was another problematic example. Since 2008, McDonald's has allocated almost $18 billion to buybacks. This has helped produce 4.4 percent increases in annual earnings per share over the period. To equal that growth in overall earnings, the company would have had to generate just a 2.3 percent return on the money it spent buying back stock, Mr. Colby estimated.

Last November, Moody's Investors Service downgraded McDonald's unsecured debt rating, citing its plans to increase its borrowings in part to fund future buybacks.

... the crucial flaw in buybacks is that they reward sellers of a company's stock over its long-term holders. That's because a company announcing a repurchase program usually sees its stock price pop in the short term. But passive investors, such as index funds, and other long-term holders gain little from the programs.

Especially problematic are buybacks financed with borrowed money; repurchases of stock made at prices above its intrinsic value are also unwise.

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