In order for companies to continue to grow as well as to maintain and sustain profits, monies must be allocated to capital investment and improvement, or such a company risks falling behind competitors in regards to innovation, improvements, reliability and relevance. However, upper management of publically held corporations have a very powerful vested interest in wanting to have their cake and eat it, because their pay, especially their stock options, and bonuses are frequently related to the overall stock price performance, so that, for many of these executives, the price of the stock and how to "goose" it or get it to perform better than the aggregate stock price average, becomes their primary focus.
The two most prominent means to prop up and to increase a stock price, excepting improved fundamentals, are stock repurchases and dividend hikes. In regards to stock repurchases, the stock price to earnings ratio or P/E, reflects the earnings of the company via its current share price relative to its per-share earnings, so that when shares are repurchased by the parent company and hence retired, than the overall shares being held by the public has correspondingly fallen, signifying that with less shares in public hands, that the earnings per share, has increased, in which, the P/E ratio is one of those very important matrix points, that investors and pundits rely upon in evaluating the worth of a given company. In regards to dividends, these are scheduled cash payments provided to the stockholders of record, of which, just for the loyalty of owning these shares, stockholders are rewarded with cash dividends for such a holding, which, all things being equal, are very important for those stockholders as receiving dividends are a real and present return of one's investment in the stock to begin with.
The foregoing might seem to be okay, in fact, studies have consistently shown that companies that participate in stock repurchases as well as increasing their dividend payments, year after year, have outperformed the market as a whole, and if the game is simply to see a given stock outperform such averages, it is rather obvious, that stock repurchase and dividend increases are clearly the things to do. However, there is one very important caveat, which is that stock repurchases are taking real capital from the corporation and utilizing that money not to invest in the company, but rather to allocate that cash to purchase and to retire some of its public shares. So too, cash dividend payments are taking real cash from the company, and again rather than investing it in capital improvements, or R&D, distributing these monies to shareholders.
This then means, that when it comes to stock repurchases and dividend payments, a conscious decision has been made by the executive branch in conjunction with the Board of Directors, as to where and how to allocate monies made by that corporation, of which, most of those executives have a vested interest in seeing that decisions are made that will secure to them their lucrative bonuses, so that their mindset especially favors stock buybacks and to a lesser extent, dividend increases, as opposed to other viable and reasonable avenues. So then, when capital investment is consistently short changed, and when the salaries for regular employees are unduly suppressed, favoring instead stock buybacks, executive bonuses, and cash dividends, than wealth becomes more concentrated, and labor productivity and its return eventually weakened, because of the lack of prudent and necessary capital re-investment.