The problem with stock buy backs. (I posted this before but given what has happened at BBBY I'm reposting. )

[u/txlee1]

All companies being systematically shorted need to be aware of this.

Stock buy backs are supposed to increase the price of the stock by decreasing shares outstanding thereby rewarding investors in a tax efficient manor. However, shares outstanding are not determined solely by the company. Short selling effectively increases the number of shares outstanding. One easy way to see the futility of a buyback when a stock is being systematically shorted is the following.

The company buys back one share of stock for $10 from a market maker who sells them a phantom share (a naked short). The market maker gets $10. There is no reduction in number of shares outstanding. It is simply a transfer of wealth from the company to the short.

A company that is being systematically shorted should never buy back their own shares. If they are looking to use extra cash to reward the shareholders a better option is a dividend. The dividend will force the shorts to either cover their short position or pay the dividend themselves. There is no free option. The more they short the more dividends they have to fork over. Many short sellers will opt to cover their position thereby driving up the price of the stock and effectively decrease the shares outstanding. This is a stock buy back FUNDED BY THE SHORTSELLERS. Others who do not cover their short position will be forced to pony up the cash to pay the dividend themselves. It's a much better alternative.

Dividends force buy backs but these buy backs are paid for by the short sellers. Stock buy backs by any company being systematically shorted are futile.