Stock Buybacks Are Helping Fight Inflation

Higher interest rates from the Federal Reserve's efforts to get a handle on inflation have contributed to the stock market's worst start to the year since 1939. That's bad news for investors, but the market signal being sent to corporate America is good news on the inflation front.

Lower share prices are encouraging companies to buy back stock rather than spend their capital on inflation-stoking activities such hiring and investing in their business. We don't want this shift to last forever, but it's a welcome development until inflation is tamed.

One example is homebuilding companies. Earnings and book-value growth have been strong over the past year. Even with the supply-chain problems the industry has faced, homes sold at high prices and fat profit margins. Yet because investors are worried that higher mortgage rates will hurt the housing market, the stocks have fallen significantly. Many are trading below book value — meaning that in theory, the companies would get more money from liquidating than they would get from selling all their stock.

Perhaps because of that, the homebuilder KB Home announced a $300 million buyback a few weeks ago. That $300 million could have been invested in land, labor or building materials, but all of those are in scarce supply and expensive, and the company believes shareholders are better off for now if the money is spent on buybacks instead. And by not spending that money on things that go into the production of homes, the company is putting less upward pressure on inflation.

Management teams are starting to be asked pointed questions on earnings calls about their capital allocation choices given the stock market turbulence. The chief executive officer of Park Hotels & Resorts this week said that in management's eyes, the company's shares are trading at such a discount that a "highest and best use of available cash" includes buying back stock. In other words, they believe it makes more sense to buy back their own stock than build a less-profitable hotel.