Read an idea in American Affairs in support of taxing buybacks. The logic goes that if all companies have a fiduciary duty to shareholders because the market is the most efficient capital allocator, AND all companies are giving their cash back to shareholders, THEN it must be true that the market can not figure out how to efficiently allocate this $1T of capital. Thus, the government should have “next dibs” for items on the agenda that it knows need capital, namely infrastructure and healthcare.
That doesn't make any sense. The market is the most efficient capital allocator because shareholders are the market, not companies.
Companies are giving their cash back to shareholders because each individual company thinks their shareholders can better allocate the cash, rather than the companies themselves. This is equally true for both buybacks and dividends.
This is because most companies have no wish to operate like broad VC firms or investment firms. While plenty of shareholders do.
The government has all the infinite "dibs" it wants, they're called taxes. If the government wants to tax buybacks further it doesn't need any particular logic of "dibs" to do so. And right now buybacks are taxed in exactly the same way as capital gains, which is the same way qualified dividends are taxed too. And corporate profits are already taxed too.
Buying back stock only creates value for shareholders if the stock is trading for less than its intrinsic value. Above that price buybacks destroy shareholder value.
Executives are doing this to meet performance targets and get bonuses. Not to allocate capital efficiently.
I don't think I can follow your argument. What's intrinsic value? The market is supposed to arrive at a fair value for a stock (and there's no reason to assume it doesn't because that would create arbitrage opportunities). If you buyback at the fair value no shareholder value is created or destroyed, the only change is in the ownership of the assets and future dividends.
Don't stock buybacks basically transfer wealth from the company to the shareholders? The major advantage this has over other means of transferring wealth is that shareholders get to realize their gains with only capital gains tax applied, rather then the much higher dividend tax rate.
No tax rates are now the same(don't nerdify this, it's correct enough for the point). The reason is that dividends are sticky. You lower the dividend, and stock holders will notice(and sell). You buy back stock, and then later stop, few will notice. Buybacks support stock prices really well for executive stock based compensation, they can sell into the buying which they know exactly when it will happen.
While the tax rates are the same the result is different since a shareholder can chose when to realize the gain. If you model dividend reinvestment vs share buy backs this taxation deferral is quite significant for the shareholder due to compounding effects. A simplistic illustration:
Tax rate on cap gains and dividends is 20%.
Inflation is zero.
Company earns 10% of its market cap yearly in profits.
Company's market cap is static over time.
Scenario A: returns profits as share buy backs.
Scenario B: returns profits as dividends on which the shareholder pays tax and reinvests the rest in company stock.
At the end of the scenario, sell all stock paying capital gains tax due (nothing to pay on scenario B since stock price has not changed.)
Even though dividends and capital gains are taxed at the same rate, scenario A beats scenario B by 10% over 10 years and 45% over 30 years.
> Don't stock buybacks basically transfer wealth from the company to the shareholders?
There's some confusion in your comment. The company is already property of the shareholder. The shareholder holds shares of the company. Thus, the assertion that stock buybacks transfer wealth from the company to the shareholder is a tautology because the wealth from the company is already the wealth of the shareholder.
In the individual case, some number of shares in the company is property of the shareholder.
Perhaps more accurate would be to say they liquidate part of a company's wealth (the broader value of all assets owned by the company) into stock price (the value at which a share can be sold on the open market).
From this perspective it seems fair to say that they transfer wealth from company control to shareholder control.
I think it is best to characterize it as being an opportunity for shareholders to part ways with the company, taking their share of ownership as cash and moving on.
Of course, all of these characterizations are the same and describe the same event, but I find this one the least inflammatory. It makes it clear that no transfer of wealth is happening, that buybacks don't meaningfully effect share price, etc.
No the shareholders own the company so they “own” the cash either way. Buybacks and dividends return control of the cash back to shareholders so they can allocate it elsewhere.
Theoretically an x billion dollar dividend results in the exact same outcome for a shareholder as an x billion dollar stock buy back. Not sure the time value of money factors in.
No it is merely a act of divestiture of capital / wealth that shareholders already own.
What is peculiar is that this act has nothing to do with running a company well in the long term, yet is the most immediate way executives can improve their "performance based compensation". Execs seem to have found a hack around stock based compensation that biases companies towards divestiture over investment, and the short-term minded shareholders are onboard with this scheme at the expense of long-term minded shareholders.
This looks largely like a bug in the executive compensation system...I'm curious what kinds of fixes are going to come out of the world of MBA academia.
Another advantage for many different kinds of shareholders (foreign, non-profit, tax-loss-holders, long-term-holders etc) could be that the taxation rules for buybacks are specific to the shareholder.
Dividend and company taxes can really screw certain types of shareholders.
It also depends on what kind of account the holdings are in. In retirement accounts, it’s all the same.
In our « tax-free savings accounts », we still get hit by IRS withholding taxes that we can’t write off against any corresponding taxes (because there aren’t any).
In a cash account, US dividends are taxed as if they were bond interest.
Capital gains also let stockholders pick and choose which year to crystallize their gains.
I don’t plan on selling some funds until I have a low tax year.
Don't stock buybacks basically transfer wealth from the company to the shareholders?
No. It drives up the share price. That's nice for people who want to sell, but does little for the long term. A company that has dividends might be able to increase them if the number of shares is reduced, but buybacks are often done by companies that dont have dividends. There are companies doing both and I'm not sure what to make of that.
> Don't stock buybacks basically transfer wealth from the company to the shareholders? The major advantage this has over other means
No, because the shareholders already have the wealth that is in the company, since stock is a form of wealth. It makes some part of the wealth shareholders already have liquid, though.
Most securities have a real intrinsic value that can be calculated the future cash flows to owners from that security. For bonds, the number of variables in this calculation makes this easier to understand: If you have a bond that will pay you $100 one time in one year, then the intrinsic value of that bond is slightly less than $100 (because there is risk you won't be repaid, there is inflation, and there is a cost to waiting to get your $100). If you pay $50 for it, you are getting a very good deal relative to intrinsic value, and if you pay $150, you are getting a bad deal.
This same calculation can be made for stocks based on their dividends and any terminal value from an eventual acquisition. These calculations fluctuate more because dividends are variable.
The parent's comment is right though, its something buffet often observes: If a company buys back stock far about its intrinsic value, it is transferring wealth from current shareholders to now ex-shareholders. If it buys it back below intrinsic value, then it is transferring it from now ex-shareholders to shareholders.
There is actually a wonderful story that illustrates this. Try searching for "buffet pritzker Rockwood & Co arbitrage".
The short version is that Rockwood & Co was sitting on a massive supply of very valuable chocolate, and its stock price didn't reflect the value of that chocolate. Pritzker controlled the company, and announced it would redeem shares for chocolate (a buy-back in chocolate). Arbitrage traders then bought up shares at the low price, redeemed them for more valuable chocolate, and pocketed the difference.
BUT, what they didn't calculate was that the amount of chocolate that remained inside the company was far larger than the amount that was going out to the departing shareholders. Essentially, the chocolate 'payments' for stocks were far below the intrinsic value of the company. So, every time an arbitrage trader traded in shares for chocolate (at a profit to them) Pritzker was actually getting far richer by retaining his remaining shares. Everyone was winning, but Pritzker was winning far more. In the end, Pritzker retained a much higher ownership percentage of an only slightly smaller stockpile of very valuable chocolate, and made a lot doing it.
I think I saw the full version of this story in the biography of Buffet, but I am not sure. It is super fun. It illustrates why a management team that is buying back shares below intrinsic value is helping the remaining owners increase their wealth, and vice versa.
Why didn't Rockwood & Co just sell the chocolate in bulk to someone else? I have to imagine the arbitrage traders were taking it at a discount because they're probably bad at selling chocolate, and they're probably reselling them too. Why didn't Rockwood & Co just do that instead?
The market is frequently irrational. Short squeezes, news cycles, macro economic events, etc can cause a stock to diverge from a reasonable calculation of its discounted future earnings. In short, the efficient market hypothesis is incorrect. It's why value investors like Warren Buffett have been able to get rich buying underpriced stocks. It isn't all that unusual for stocks to double or halve during the course of a year. Acknowledging this is why Berkshire is authorized to buy back stock only up to a certain multiple of book value. More companies should follow suit.
If price=value by definition then that means there is no such thing as market manipulation, buy definition. And that the value of exchange traded tulips was in actual fact enormous at one point.
The fact that arbitration actually exists is because there is a disconnect between price and wealth generated solely by information differential.
And beyond an exchange, that, merely because their parent's opportunity cost differs greatly, raising one infant is in fact vastly more valuable than another essentially identical infant.
I would suggest that price is not identical to value, it's just that the market is usually the best way to determine a value.
Not really. Arbitrage opportunities typically occur when the risk and opportunity can be defined such as spread and liquidity across exchanges or contracts, euro denominated vs USD denominated assets, etc. intrinsic value is much more subjective. Yet, there are times where stocks might drift above or below their intrinsic value significantly. For instance, many CPG companies have become bond proxies due to rates, where the price only makes sense with a 3-4% discount rate.
Companies have non public information and therefore can more accurately price the value of their stocks relative to the market than investors can. This may not apply in the long term, but insider trading is illegal due to this information asymmetry.
In the extreme case of a disclosure that will tank the stock price their current investors would be better if the company sold new shares ahead of that announcement. This would then dilute the loss across more investors. Though the ethical issues should be obvious.
Buybacks are simply the opposite of issuing new stock which happens to have tax advantages.
Out of curiosity... are stock buybacks subject to any kind of insider trading rules? I'd imagine that they'd be needed if the executives own stock in the company (or whose compensation is otherwise tied to the performance of the stock).
There are separate rules, but they operate in the opposite direction. The SEC rules give a safe harbor, a type of immunity for enforcement actions for share price manipulation, to firms whose insiders sell when a buyback is announced.
> Buying back stock only creates value for shareholders if the stock is trading for less than its intrinsic value. Above that price buybacks destroy shareholder value.
That's assuming the value of the cash is the same in the hands of the corporation as the shareholders. But if the corporation has nothing it needs the money for internally then the cash is nothing but a liability that it has to waste resources trying to figure out how to externally invest, or have it get infected with principal-agent problems and empire building. The shareholders as more directly self-interested parties may be better equipped to find investments with a better risk-adjusted return.
Moreover, if the company is successful then needlessly holding the cash causes the stock to trade for less than its intrinsic value, because holding cash lowers the company's overall ROI from the above-market returns its actual business is generating to the average of that and the presumably market-average rate of return it collects on the cash. Returning the cash causes the company's share price to adjust (i.e. rise) to reflect the higher returns from its actual business once they're no longer being diluted.
Investors then try to model what the future dividends of the company will look like once it establishes a dividend, or what price it is likely to eventually get acquired for as a lump-sum payment.
Buybacks don't create value. They return the value created by the company to stockholders. They are form of dividends you're just automatically reinvesting it into the company stock instead of getting cash.
Yeah, wanted to respond this way. Buybacks are basically a one off dividend. Companies want to return money to shareholders, but don't want to commit to returning a certain amount regularly, so they do buybacks.
Whether the stock is over or undervalued is a bit besides the point, actually. It's a direct flow of cash to investors, that any investor can take advantage if they think the current price is too high (or not, if the price is too low)
Buybacks are not about creating value, they are about transferring value which already exists back to the legal owners.
Banning buybacks would leave money in the hands of the managers/administrators. Only suggest this if you feel CEOs are under paid and control too weak.
But "buying back stock" only temporarily creates value for the shareholder. If they don't immediately sell the stock, the price will return to what it was before they buyback, because no underling value in the company has increased (especially when dividends are never payed out, like most high tech companies that are always in the "growing" phase : looking at you FB, Goog etc).
The point is both the companies in question and the ultra-wealthy that are the beneficiaries of the vast majority of these buybacks AREN'T paying taxes, so it's another way for the government to at least attempt to capture the $$ that should already be going into the treasury instead of offshore accounts/subsidiaries/whatever double dutch triple lux tax evasion scheme of the month they're using.
How are they not paying taxes? The people selling their stock to the company in the buyback have to pay taxes on any gains and the people holding onto the stock long term will eventually have to pay taxes on any gains when they finally do sell (they're not going to hold onto a stock until the heat death of the universe so they are going to realize their gains and pay taxes on them at some point).
The companies are in many cases doing things like this:
1) their revenue they classify is centered in a different country like Ireland
2) they setup a massive line of credit with an international bank
3) they take out massive loans against the money they have “overseas” that is not taxed
4) they then pay the buybacks and other things to their investors with that loaned money in US
5) they then pay back the bank at their international site
6) the bank then borrows more money from federal reserve at nearly zero interest rate
Rinse and repeat.. tons of companies have done this. So sure some investors will eventually cash out but companies should also be taxed if they derive some benefit from the country they are from or selling products. I would argue those taxes should be low but allowing companies to totally dodge them seems like a bad setup long term.
What I don't understand about this is... Why can't I partake? If my employer is based out of these havens for tax purposes, why can't they pay "me" by paying into the bank account of the foreign on-paper-only company I own, whose line of credit with a foreign bank I then use for my own expenses?
I feel like this must be against the law somehow, but I don't quite understand where the line is.
> What I don't understand about this is... Why can't I partake?
Honestly: because you're not rich and connected enough to have the rules written for to your benefit your naked self-interest. If it was legal and economical for ordinary people to evade taxes, too many people would do it and the country would collapse.
It's not against the law at all. It's just expensive because you forgo labor protections, social security contributions, medicare contributions, paying for accountant's time to file for international income, etc.
Wages are taxed differently than a company's income. If you were to distribute the income to yourself every 2 weeks, you'd end up paying all the same taxes as wages.
It's pretty straightforward to determine where someone works. You are physically in the USA when you do the work so you're on the hook for income tax. What the companies do is set up a bunch of companies in different locations. Then they manipulate their books so that the low tax companies show profit while the high tax locations don't.
But you're not getting paid. Your company is getting paid, and then you're using credit against your company's assets to pay your expenses. You, for all intents and purposes, are volunteering.
Maybe your company has to sell something to be legit? Okay, you sell the people who are paying your company toothpicks. They pay your company for the toothpicks, the labor is just incidental.
Because the Department of Labor has actual real teeth and staff, whereas the IRS is drastically understaffed.
Also the situation you describe would make your life incredibly complicated. The logistical hoops necessary to pay your rent make it extremely unappealing, IMO.
Wouldn't it be hilarious if the bank prior to the buyback bought a bunch of the stock (I don't know if this is true, but seems plausible). Then in that case the company would literally be taking out a loan from the bank in order to buy the stock from the bank. So then the question is if its possible for the bank to claim some sort of thing where when they sell the stock to the actual company that it is some special type of transaction and maybe gets favorable tax treatment? Wow I want to look into that.. sounds interesting / shady if thats possible to do..
I believe your comment is referencing normal people paying taxes, where the comment you are replying too is referencing the ultra-wealthy and corporations paying taxes.
The ultra-wealthy and big corporations take advantage of schemes to lower their taxes.
Corporations are paying taxes. US corporate tax receipts as a percentage of GDP are a tick higher than the OECD average. Also, it’s not the “ultra wealthy” primarily benefitting from these buybacks. Most corporate equity is owned by the bottom 99% and pension funds.[1] (Someone with a $5 million retirement account may be very comfortable, but they’re not hiding their money in offshore accounts.)
[1] Most corporate equities are held by retirement plans or foreigners. Just 25% are held in taxable account. Of those, the bulk is owned by people outside the top 0.1%.
Considering the US’s keystone position in global economics, providing safe passage for trade (and relatively stable oil/NG prices, but never mind that) at the cost of a large standing navy, I think a single tick over other OECD countries is a joke. The multinationals owe the US better infrastructure.
Good it's called capitalism. We need creative destruction to move forward.
>> Retirees and the public were left holding the bag.
This!
Largely because the finance industry(or perhaps the world) is run by sales people.
Don't be a sucker, if you don't understand your financial assets in detail(e.g. if you are buying an index fund, understand why, not just based on past performance, go deep, what's the weighting?(currently float weighted which makes it easiest to sell to you, but the worst possible weighting makes it buy high and sell low).
Fuck that's a shit fuck ton of work for just a surface level analysis. But you should do much more research into your mutual funds/stocks than you do your next car purchase.
So yeah, it's not that they were left holding the bag, it's that they were sold free money that turned out to be not so free. Imagine that.
> the ultra-wealthy that are the beneficiaries of the vast majority of these buybacks
The S&P 500 is > 80% owned by institutions. That is mutual funds, pension funds and insurance companies. The main beneficiaries arent fat cats, but rather anyone with a 401k.
Are you claiming that a mutual funds' performance evenly benefits anyone with a 401k?
In the last 40 years 0.00025% of Americans have tripled their share of the wealth. Of course everyone with a 401k has benefited but they are nowhere close to the main beneficiaries of capital gains.
No. The share of wealth of the top 0.00025% has tripled.
The pool of people people in that quantile is dynamic.
In 1980, that was about 600 people. In 1980 the richest person in the United States was J. Paul Getty. I imagine most of those people are no longer alive.
In 1980, Jeff Bezos was 15, Bill Gates was 24, Larry and Sergey were 6, and Sergey had been living in the United States for 1 year. It's likely that the effect you're seeing is an artifact of the role technology plays in the economy rather than exploitation or rent seeking.
Your data does not say what you are claiming it says. It is possible (or even probable) for the ultra-wealthy to have retirement accounts. Once we admit that, then the obvious question becomes: Who do you think owns most of the money in those retirement accounts, the rich or the poor?
Retirement accounts are limited by the amount one might deposit annually. The most perhaps one can make is 19k in 401k and perhaps somehow max out SEP IRA - $56k (which I find quite tough to max out). Regular IRAs are out of questions, since at the income level dealing with 401k and SEP IRA, one does not get any benefits of funding regular IRA afaik.
So... The best-case scenario is $75k per year someone might be able to stash away in a retirement account. Let's say someone is able to do it for 50 years - it leads to $3.75m. It is a decent amount for retirement in my opinion, but 1) it is unlikely to optimize it fully to get there, and 2) doesn't really look stratospheric to make a difference in retirement funds ownership categorizations (i.e. 0.1% owns large part of retirement investments).
There are lots of IRA accounts with far more money in them. We have the data (from 2011) which shows it.
==As of 2011, 314 multi-millionaires had more than $25 million saved in their IRA, with average holdings of $258 million, the GAO reported. About 9,000 taxpayers had at least $5 million in their IRA, with average holdings of $16 million.==
==All told, 630,000 millionaires — about 1% of all IRA savers — cumulatively had more than $1 trillion in IRA accounts, accounting for 22% of all IRA assets.
Meanwhile, the other 99% — the 42 million taxpayers whose IRAs held less than $1 million — had average savings of just under $100,000.==
Thank you for sharing this link. Not sure what to think about it tho...
"In essence, Bain would value the special, riskier shares at pennies on the dollar. In one deal, employees invested about $23,000 in their IRAs. When the takeover target went public, those shares were worth about $14 million, and were worth about $23 million they finally sold the shares. That’s a 100,000% return."
Meaning, someone was risking their $23k in IRA. And looks like that investment opportunity was given to regular employees as well, meaning it wasn't a rigged up illegal trade based on some kind of insider information?
One legal (AFAIK) method:
The company had low/no valuation, and it was private. Those shares were sold to the employees (likely of the vehicle containing the company) at the stated valuation. Once they went public, there was a valuation event. Roughly, they snuck through the 409a before it had to be reported.
So if shares had a low valuation, employees buying these risked that they will worth nothing in the future. I.e. not really different from buying AMZN shares in IRA.
Unless, shares were valued low on purpose, and were offered to buy at that price as another form of compensation (so compensation was difference between "as valued" and "real value"). In that scenario, it appears that these employees had ordinary income, which was not declared as such... And of course, that smells "fraud"...
So the question is - was the original investment truly at risk?
$75k per year is a pretty insane amount of disposable income for most Americans, where median household income is 63k[1], per capita disposable income is 45k[2], and 78% of people report living paycheck-to-paycheck[3]. Anecdotally the only people I know who are funding their retirement well in there 20’s are generationally wealthy and got a house from mom and dad. Many, even those with some disposable income, live paycheck to paycheck.
Also, as my sister comment points out, rich people can still have ridiculous retirement accounts. Saying that “everyone gets a piece in retirement” ignores a large portion of our society.
That's the wrong type of investment for a retirement account with a 50-year horizon. An account like that is (should) be invested in a diversified portfolio of stocks and bonds, such as one composed of low-cost index funds.
By definition not the rich, since retirement accounts are capped by law to relatively low yearly contributions.
Sure the ultra-wealthy can have their retirement accounts too (if they even bother), but they can't be any larger than anyone else's. Just a tiny tiny tiny sliver for them, really.
Since the ultra-wealthy are by definition a small portion of the population, and retirement contributions are capped at a low annual rate, it does in fact make the point that the parent commenter is trying to.
==All told, 630,000 millionaires — about 1% of all IRA savers — cumulatively had more than $1 trillion in IRA accounts, accounting for 22% of all IRA assets.==
1 million dollars in a 401k is not the same as a 1 million dollars in a house. When the median american makes 65k per year and has 45k in disposable income it takes a lot of luck to put a million dollars into a 401K. There are 300 million+ americans, of which only 650k have a million or more in the 401k. How can we call the top 650K middle class?
We can assume that the 650k people with $1 million in just their IRAs also have significant other assets. I’m not really sure what you are arguing here.
Why would a retirement fund want a buyback? They would prefer a healthier company in ten years rather than a lump sum they need to pay someone to reinvest.
1) Because buybacks and dividends are what produce the entire value of stock at the end of the day. 2) Buybacks don't need to be reinvested, they already are by definition. 3) Rebalancing your portfolio due to buybacks is done automatically by your fund that you already pay a small maintenance fee for.
There's nothing unhealthy about buybacks, that's a total misconception that needs to die. They're just treated differently from unqualified dividends for tax purposes.
1)The value of the stock is based on the value of the company, a better performing company produces more value than a buyback. 2) I'll admit I'm not too knowledgeable about every kind of buyback, but surely some involve buying back stocks. For some kinds, you're probably right. 3) I would be surprised if many funds existed where there weren't transaction fees or a percentage based fee, giving them reasons to prefer buybacks even if it doesn't help the actual owner.
>They're just treated differently from unqualified dividends for tax purposes
At the end of the day it's not much of a tax loophole. The same total amount of money ends up getting taxed, it's just that shareholders can decide whether they want to opt-in to realizing their capital gains. Some choose to sell back fewer shares (frequently none) and some choose to sell back more shares (especially stock-receiving employees, who may feel a need to diversify). Hardly something to get upset about.
A retirement fund may not want the tax event of a dividend.
A retirement fund needs $x/month: things may work out such that they receive too much cash from dividends in any given month/quarter. So they're receiving, and being taxed on, cash that is not needed.
With buybacks a retirement fund can determine how much money they need and can cash out only what is required, and only take the tax hit on that.
Retirees are also going to be selling down their portfolio as they age for living expenses. The ultra-wealthy are probably not systemically selling out of the equity market.
The beneficiaries of these buybacks are the general public, these are public companies. They are your pension funds, your rainy day funds, they are government healthcare programs, Norway's Oil fund... They are everyone. The reason they aren't paying taxes on buybacks is because they haven't actually made any money until someone sells stock.
To add to this, the ultra-wealthy, university funds, funds-of-funds, etc. are interested in capital preservation, according to the article. This means they likely will not reinvest their profits into companies that will grow; they're more likely to reinvest into other companies that will do buybacks.
> Companies are giving their cash back to shareholders because each individual company thinks their shareholders can better allocate the cash, rather than the companies themselves.
I thought the reason for a stock buyback was that the board believes the stock is undervalued.
I can't imagine investing in a company that borrows loads of money from the government just to hand it back to shareholders. That sounds like a total scam to me and a terrible investment. I wouldn't accept stock in a company like that even for free. But what do I know. I'm not a CEO.
> Companies are giving their cash back to shareholders because each individual company thinks their shareholders can better allocate the cash, rather than the companies themselves.
This is very strange explaination. As stated it sounds like stock buybacks are some sort of altruistic endeavor resulting from some kind of collective shrug.
This couldn’t be further from truth. Buybacks are the result of executive incentives to hit a certain stock valuation. You can either do this the intended way by growing the company’s value by making competing in the marketplace, or you can do it the lazy underhanded way by manipulating the stock market by creating an artificial scarcity.
You don’t get chalk this up to a faceless emergent phenomena when there are a very short list of people on FTC documents who made the decision at each and every one of the these companies.
>This couldn’t be further from truth. Buybacks are the result of executive incentives to hit a certain stock valuation.
Why do you ignore the people who choose to sell their shares to the company?
Stock buybacks move cash from the company's coffers into the hands of selling shareholders, period. Whether it's good or bad to do so at any specific time is certainly debatable, but the idea that it "manipulates" the share price is wrong, both in theory and practice.
As a shareholder I want my money to be managed in a way that maximizes my investment. When executives incentives are paid by the value of the stock at a particular frozen moment in time, I get cheated. I get cheated because a buy back at the moment that the CEO and the board grade themselves is not in best long term interest of my wealth. I don't have time to be buying a selling stock everyday, they're fucking me by playing games. Money should be spent on research and development. That way GM and IBM dont become kodak, Walmart doesnt become Sears, and the great GE doesn't become...well GE is already there. Established american companies will grow from buy backs and mergers until they get disrupted because they didn't invest.
I highly doubt that compensation for executives is based on the value of a single share, not taking into account outstanding shares. That’s a blindly obvious loophole.
Their compensation would be based on market cap, which you can’t increase by doing a buyback.
That "blindingly obvious loophole" is basically the standard.
These compensation deals are very often based on earnings per share or value per share. And you can increase it.
The link below is from the Conference Board, which is about as rock-ribbed big business friendly capital establishment types as they come. Even they caution about executive trickery here.
In this case, companies are exploiting a short term feedback loop around taxation and share price, to funnel money into the executives and primary share owners.
In the long term -- the next crash will be a doozy.
Shareholders and companies are equally inefficient at allocating capital.
If not for buybacks, the company would probably have wasted the money on creating more useless jobs which would add no value to the company.
Instead, the company prefers to give the money back to shareholders in the form of capital appreciation so that they will either hold it or sell some of it and use the proceeds to buy shares of another equally wasteful corporation.
Eventually these corporate stock buybacks will lead to grotesque wealth inequality and if we're lucky, complete collapse of the international fiat monetary system which facilitates such atrocities.
> Companies are giving their cash back to shareholders because each individual company thinks their shareholders can better allocate the cash, rather than the companies themselves.
_This_ doesn't make any sense. Companies don't think. They're legal entities that are controlled by a small group of people. This group of people can decide that they would prefer to do share buybacks to meet their own performance targets.
Fact 1. Companies’ brains (for this level of executive decision-making) are their boards of directors.
Fact 2. Boards of directors are made up of people elected by shareholders.
Fact 3. “Making the shareholders money” (either through dividends or equity) is the most obvious “platform” on which to get elected to this position; and “not making the shareholders money” is usually a quick way to get replaced.
Fact 4. Unlike government elections in America—but like elections in Commonwealth nations—corporate “snap elections” can be triggered at any time from a shareholder vote. This means that a board-member can be removed pretty much instantly if they start to look like they’re not serving the shareholders’ interests.
Fact 5. Members of the board usually want to stay on the board, because it confers advantages. Even if there are no explicit advantages to being on the board, they get the ability to vote in ways that work toward their own personal interests, perhaps even getting themselves sweetheart deals. Even if they don’t go for these, there might be “lobbyists” (internal to the company, from industry-organizational bodies, etc.) that are willing to bribe them to vote certain ways.
And now, the assumption, that tends to hold in cases of publicly-traded companies: shareholders in the company are, by majority, pure investors that want their share value to increase, with some making short-term plays and others going long, but neither all that interested in the company outside of its portfolio value.
Putting the facts and the assumption together, you can derive that the board is structured in such a way, and members of the board are incentivized in such a way, that their behaviour is extremely predictable, operating almost according to an algorithm, rather than acting like a “group of people” with human whims.
This emergent behavior of the group, and the clear algorithmic model that can be used to predict it, are what people mean when they talk about “what corporations want.”
It’s very similar to how a person can want things that are at odds with the “wants” of the cells that compose them (such as doing things like drinking that damage those cells, despite each cell embodying an algorithm that steers toward that cell’s own survival.)
Fact 4 is largely incorrect. Boards with adversarial relationships with large blocs of shareholders generally adopt provisions like staggered board terms (like the US Senate).
Fact 3 is also a fairly fanciful interpretation. Large public corporate board membership can be lucrative, but is in practice not competed for by a talent pool the way that say, a CTO or VP of Sales or CFO role would be. New board members are almost always vetted and nominated by the existing board. Hence new board members are nearly always either 1. in-group members (a cynic would say "cronies") with satisficing business acumen from the same social/business milieu as the incumbents, or in the exceptional case, 2. high visibility outsiders (a cynic would say "window-dressing") from other endeavors, such as former politicians, admirals and generals, etc. A new movement adds a third possible vector in, namely being a highly qualified business person with a politically / optically desirable diversity characteristic. But once that candidate comes in, they quickly will learn that the means to stay in the Inner Ring and gain lucrative additional such opportunities is to toe the line...
I'm sympathetic to your idea of emergent behaviors of the group arising from knowable axioms about the individuals and their motivation but I think you've got some incorrect axioms about the selection and incentives of those individuals.
These are obviously not "facts" and companies obviously do not operate in that way.
Really obviously. Just observe any company.
I appreciate you might have a real hard-on for capitalism, but making up stuff like you just did doesn't help.
Companies are cess-pools of politics, incomplete information, petty rivalries, and disparate power. Most shareholders are clueless, poorly informed or spreadbetting.
Given this is all true, your "facts" are all objectively false.
Employees at a company might be engaging in petty rivalries in a "cesspool"... but the board of directors is composed of extremely professional, educated and informed investors.
Also, the board primarily represents not the small independent investor, but the majority of shares which are owned by professional institutional investors, which have quite the clue and are extremely well-informed -- they have entire teams of research analysts.
The comment you responded to does accurately represent how corporate boards work, if you actually bothered to "observe any company" in reality -- specifically publicly traded ones.
That's not a valid counter to the parent's well-formed post. Speaking for myself, I have observed countless companies and those facts continue to hold true.
I appreciate you might have a real hard-on for anti-capitalism, but making up stuff like you just did doesn't help.
Fact 2 is true-ish, sort-of, but largely irrelevant. Except in extreme cases that tend to make headlines, shareholders vote for the people management selects.
If the purpose of equity buyback is to more efficiently allocate capital, then individual companies executing equity buyback are doing so because can no longer make efficient use of capital by using it to fuel additional growth and higher returns.
If that's the case, then equity buyback is tantamount to admitting that the company has no future potential for growth. As a company's stock price reflects expected value from future growth, a buyback should therefore trigger a drop in the stock price.
But it usually doesn't, usually buybacks trigger increases in the stock price as fewer shares remain in circulation in the public market and the company improves executive flexibility by consolidating control, and as investors expect to be paid a premium over market price through the buyback program.
Why? Because private players don't care about macro performance metrics. Buybacks have nothing to do with what may or may not be the best allocation of capital in the market.
The stock price doesn't reflect growth at least not directly. The price reflects expectation of future earnings. If the company is never going to grow but makes stable 1M per year in profit then that company is worth something. Let's say it's worth around 16M as that's around the break even point at which people prefer to have cash over company stock. If now that company uses 1M in yearly profit to buy back shares it's still worth 16M but every individual outstanding share is worth more as it now represents bigger part of the same pie. Therefore after the buyback the share price should increase. We can also say by exactly how much (barring any other new information).
This is finance 101 really. Buybacks are just more tax efficient because they are not taxed at the time of the buyback but at the time the stock holders sell.
The company (therefore remaining shareholders) no longer has that $1M that they spent on the buyback, meaning the total pie is actually smaller as well as having fewer shares/slices outstanding.
Yes, what dividends have to do with it? The company has value no matter if it pays the dividends or not. Controlling it has value for example as it may be worth something when bought by another company. You can also always dissolve it and pay the cash back to shareholders or you can buy back the stock which is a form of dividend (one when you're automatically reinvesting into the company stock).
Buybacks are effectively taxed at the same rate as dividends, at least qualified dividends, just timing differs:
Simple case with a corporation worth $200 with two equal shareholders, who each paid $100 for their half of the company and are in 20% capital gains tax bracket, ignoring net investment tax of 3.8%:
Dividends:
Corporation pays $100 in qualified dividends, $50 to each shareholder. Each shareholder pays their capital gains tax rate on the $50. If that rate is 20% for each, then a total of $20 is collected by the US Treasury. Each shareholder then reinvests or spends the remaining $80 in the economy, while the government puts the $20 to work.
Buy Back Case:
Corporation buys back $100 of shares from 1 shareholder. No taxes were due there as there were no capital gains for shareholder 1. Shareholder 2 now owns 100% of the corporation, so their investment is now, all other thing equal, worth $200. When shareholder 2 sells, a bill for $20 is due ( $100 in capital gains x capital gains rate ). Shareholder 1 reinvests/spends $100 in economy, government gets no additional cash now, but will eventually when Shareholder 2 sells.
In the end, government gets the same $20 in tax. Benefits of the buy back are that investors are able to choose whether or not they want to cash out, whereas a dividend forces it on all investors. Downside is that government has to wait for the $20 in capital gains taxes. However, if shareholder 1 owed capital gains on the buy back ( perhaps they bought their share for $50, so would owe $10 in the $50 it made on the sale ), the government would get $10 from that sale + $20 down the road when shareholder 2 sold.
Option three would be to not distribute cash through dividends or buy backs and reinvest directly in the business. In that case the net result and tax treatment is about the same as buying back shares. Trying to treat buy backs as a special case would just result in a defacto incentivization of conglomerates.
I’d rather invest in just that company, one that can continue reinvesting profits in itself at attractive returns year in and out. I can sit back and let compounding work it’s magic ( although at some point in my life I will switch from a net producer to a net consumer and opt for cash ). In cases where a company does not need all the cash it generates to continue its growth or does not have growth prospects ( not necessarily a bad thing), then I’d rather have cash to invest more productively elsewhere.
> Corporation buys back $100 of shares from 1 shareholder. No taxes were due there as there were no capital gains for shareholder 1. Shareholder 2 now owns 100% of the corporation, so their investment is now, all other thing equal, worth $200.
Maybe I don't understand how stock works, but wouldn't shareholder 2 still own only 50%, with the corporation still owning 50% of itself?
There is a disconnect here that needs to be clarified but you are actually part correct. The 'corporation' owns the shares, but shareholder 1 owns the corporation and thus it is his now. Shareholder 1 now owns 100% of the company but the company is worth 50% less because it spent half it's money on buybacks. So shareholder 1's value of ownership did not increase at all, only shareholder 1's % of ownership. Stock buybacks do not add value to a company and are not like a dividend at all. All they are is an indicator that the board thinks the shares are undervalued.
So...I know realistically, this isn't possible, but what if a corporation bought back every share except for one. Would that one lucky shareholder who probably bought his one share for $20 now own the entire corporation?
A stock buyback is not like the company is buying its own stock and holding it in a brokerage account.
Think about it like ... the opposite of an IPO. Instead of dividing up the firm into n shares and selling them to investors for cash; it's buying back n/m shares and effectively canceling them.
After the buy back, there are fewer shares of the company which are proportionately more valuable assuming the market capitalization has remained the same.
I looked up if a company can do the opposite - basically poof additional shares into existence and sell them - and found out they basically can and it's called stock dilution.
How is that legal? It doesn't make sense to me that if a share is worth x% of a company that said company can just decide "Nah, you actually now only own half of that" and sell more shares.
Fake edit: I googled "how is stock dilution legal" and found this [0] which explained it well and now it makes sense to me. The diluted stock might be a smaller % ownership, but since the company gained value because of money coming in, the dollar value of the shares stays the same.
No, the corporation retires the shares after the buyback. Total outstanding shares decrease. All remaining shareholders get a larger percent ownership of the corporation
The general principle is that unrealized gains are not taxed, but realized gains are.
If you are the seller from whom the company buys back shares, you pay taxes on your gain. If you’re a shareholder who doesn’t sell, you haven’t realized any gain.
Of course I understand that. But why it should be allowed to pay accumulated profits out from the company in a way that the taxes for share owners are deferred? What is the societal good of that?
Taxes for all shareholders are deferred until they sell. Taxes for all retail businesses are deferred until they sell their product. Taxes for all homeowners are deferred until they sell their house. Taxes for all art/collectible investors are deferred until they sell.
It’s a matter of practicality and fairness. (Don’t make someone sell an investment solely to raise the cash to pay taxes on an unrealized gain. Don’t create paperwork that’s unnecessary. The government is a patient investing partner. They’re willing to wait to take their cut when you sell. They can borrow arms-length money in the meantime far more cheaply than you can anyway.)
What would this look like from a practical standpoint, though? Dividends are a taxable event because you're giving someone money. In a buyback, the value of the stock simply goes up, which isn't a taxable event. How do you determine the cost basis on something like that? If there's a stock buyback over the course of 6 months, how do you determine which proportion of the price increase is due to the buyback, as opposed to inflation or normal growth?
In a buyback, a shareholder must sell shares back to the company. When they do, the shareholder's gains are taxed with capital-gains tax.
Furthermore, whenever shareholders sell shares after the buyback, their shares are generally worth more, so they pay increased capital gains, too.
I don't know which yields more tax revenue in the long run, but buybacks definitely generate some tax income.
The only time I could see a "buyback" influencing share price without taxation is if the buyback has a price cap, and every shareholder believes that the company is worth more, so they don't sell any shares back. This is exceedingly unlikely unless the company is very thinly traded.
From my perspective, the key difference with a buyback is the winnowing of shareholders to those who believe more-strongly in the company's future. With a dividend, every shareholder gets a small amount of cash. With a buyback, some shareholders get cash for their shares, and every other shareholder gets a bigger slice of a company that is worth less (total) money.
If the market is efficient (and it isn't, but it can be) then following a buyback, one would expect the market capitalization of the company to be smaller, as the company has paid out money. After 6 months, if the market cap of the company, plus the funds expended in the buyback, is greater than the inflation-adjusted pre-buyout market-cap, then the company has created shareholder value through some other mechanism (even if the mechanism is pure psychology).
>one would expect the market capitalization of the company to be smaller, as the company has paid out money
This doesn't make sense to me. If I spend $X to buy a widget worth $X, I've paid out money, but I haven't net lost anything. I'm worth the same in total. If the widget is a share in a company, even my own, that shouldn't change the fact that the net change in total value is zero.
When a company buys its own shares it’s essentially cancelling them: they become essentially worthless.
Look at if from a different angle: the ones selling the shares to the company are the shareholders. In aggregate, the shareholders own the company valued at $B (market cap) before the buyback, and the company valued at $A plus the cash paid $X after the buyback. If $A=$B they are creating $X out of thin air.
Even simpler to grasp: you have a business 50/50 with a partner. There is $1m in the company account, you reach an agreement and he will sell his interest back to the company for $1mn in cash. You are sole owner now. The company doesn’t have the cash anymore. How much was the company worth before? How much is it worth now?
> After 6 months, if the market cap of the company, plus the funds expended in the buyback, is greater than the inflation-adjusted pre-buyout market-cap, then the company has created shareholder value through some other mechanism
The mechanism may be called profit, earnings, free cash flow... at least for the old-fashioned companies that bring in more money that they spend over the six-months period.
I think it is mostly psychology via ratios. For example a number of institutional investors go by EPS. If shares in this industry are trading at a 20 x multiple and your companies shares are trading at a 10x multiple, you can try to buy back shares to get your multiple higher. Again, just one example but I'm sure the boards of directors, who are elected mainly by the institutional investors determine what will multiples and ratios they need to hit to be in the magic zone for algorithms and also investor psychology.
Buybacks get you a higher EPS number, I don’t see why would you expect the multiple to increase. But it’s true that there are many effects in play: signaling, offer/demand of shares, apparent improvement in ratios vs peers...
> If the market is efficient (and it isn't, but it can be) then following a buyback, one would expect the market capitalization of the company to be smaller, as the company has paid out money.
The company's cash flow is the same, but there are fewer outstanding shares, so earnings per share goes up. Earnings per share matters because when it increases that implies that future dividends per share will also increase.
If investors expect higher future dividends, that means that the stock is worth more, so it goes up.
You tax the buyback itself, right? You tax the money the company is spending on its own stock. That's the only step of the transaction where money is changing hands
Isn’t that a double tax? Taxed at buyback time, and taxed when shareholder cashes out and realizes their gain? Though I guess a small (10%??) tax could still make buyback tax + dividend long term gains is still less than normal income tax.
I'm not trying to be obtuse, I'm genuinely curious how this would work and what changes to tax law would need to be made.
Would you tax the entity buying the stock (in case always a company since it's a buyback; which I think would be the only example of taxing a stock purchase), or the entity selling the stock (either an individual or a company, which is already potentially taxed as capital gains)?
If the goal is to tax it similar to dividends you would tax the person selling the stock but it's already taxed as capital gains, either long term (0%/15%/20%) or short term (marginal bracket rate).
This is correct. Stock buybacks are just a way of doing dividends that is more tax advantaged.
The right answer isn't to introduce new forms of buyback taxes with unknown second-order effects (who would you tax? if the shareholder is avoiding dividend taxation, taxing the corporation isn't a great solution). The solution is to just improve the way we tax dividends and capital gains.
I agree with this entirely. If you tried to tax buybacks, you'd likely be inadvertently taxing a ton of the corporate infrastructure used for administrative purposes. In this case, the buyback is clearly like a tax-advantaged dividend, but with a key difference: it's not liquid. Dividends cross that critical threshold of spendable cash that triggers taxation.
If only 20 widgetshares exists in the world and we each have 50% (you have 10 and I have 10) and the market for widgetshares is $200.
Should you be taxed for your theoretical $5.26 gain if I destroy 1 widgetshare but you haven't sold any. Buy backs are no different. You will pay taxes if you sell.
Personally, I think you should pay taxes if you take out a loan using the market value of the shares as collateral. This is where everything starts getting funny and companies and individuals start being able to avoid taxes forever.
At the time of death, either make the estate pay capital gains taxes on the market value of the assets, or just don't give the heirs a stepped-up basis. It will catch up eventually.
No it's not as investors will have to pay taxes on any gains when they sell there stock which should happen in proportion to the buyback all else being equal. Buybacks just allow them to defer realizing those gains and paying taxes on them until they finally decide to sell.
I true for large or institutional investors, but not with 401ks and IRAs though. Also, for large institutional investors, they can time sales to use capital losses to avoid tax burden.
Ok so your original response to the comment is factually incorrect. Unless you think deducting capital losses and retirement accounts should be gotten rid of.
Another word for "a tax loophole" is "the tax law". The fact that ham fisted bureaucrats and legislators create unintended consequences with every "incentive" they put in the code makes it no less binding.
I don't remember what section of the IRS code or regulations cover it, but there are rules to prevent disguising a dividend as a stock buyback. They provide a good illustration of why the tax code is complicated.
(All numbers in the following are made up).
Some major company a long time ago was going to pay out a dividend, and then their accountants had a great idea. Instead of a dividend, they would first do 100 for 99 stock split. Then they would do a 1% stock buyback. The shareholders would be taxed at capital gains rates instead of ordinary income rates on this.
Note that for any shareholder, the result afterward is that for every 99 shared they owned before the split and buyback they still own 99 shares. No one's actual percentage ownership of the company has changed--but they have received money from the company.
The code and/or regulations were updated to fix this. But then buybacks that were not hidden dividends were getting classified as ordinary income, too, and so further code and/or regulation changes were made to further refine this.
What it eventually ended up with is rules that looked at how ownership was distributed among the shareholders before the buyback and after the buyback, and decided if it was a disguised dividend or a legitimate buyback based on how that distribution changed.
(I haven't followed tax law for several years. Anyone happen to know if this is still there after the Trump tax changes?)
This sort of thing is a large part of why tax codes and regulations tend to be big and complicated. Even if they start out fairly simple, people find holes like that split/buyback trick, and closing those holes adds complexity. The result is that you only generally will see either very simple tax systems (like sales taxes) or very complex systems. Systems that start out in between end up moving toward very complex.
They are taxed. If there’s a capital gain when BigCorp buys my stock back, I pay taxes on it. You can argue whether or not Capital Gains is too high or low but the mechanism is there.
Then there’s the question of what I do with the money. If I invest it in government bonds, they get the remainder. Otherwise the money gets recirculated through consumption or other investment.
If you really think companies are too eager to return money to shareholders, take away deductibility of interest. This would dissuade companies from borrowing money to buy shares. (Effectively creating debt from equity)
Very few companies (mostly tech companies) can take advantage of those tricks. Exxon can’t assign all its oil fields to an Ireland subsidiary to inflate expenses and reduce profits in the US. The median effective tax rate for the S&P 500 in 2018 is 21%. That’s the same as or higher than the statutory tax rate in Canada, the U.K., Sweden, Norway, and Germany.
Since 2019 is not yet filed I assume you mean 2018 as "last year".
Here's Amazon's SEC filing for 2018 [1]. They paid 1+ billion on income taxes (page 37) on 11B in profits. They paid billions more in property taxes and other regulatory taxes.
Note that annual taxes also are affected by previous year issues. This is why from the same document, same page, you see them paying 1.4B on 3.9B of profit.
So getting upset about a year of no taxes with profits, when it truly does happen, is missing important nuance on what companies do pay. Check surrounding years, and read the SEC filings to see the reasons, which I've always found to be quite reasonable. It's not as bad as the pop press would have you believe when they cherry pick the outliers from one year or another.
And the pop press usually ignores all the other taxes that corporations also pay, focusing solely on income taxes, as if that were the only tax.
Nothing in your link shows Amazon paying zero in federal income taxes, except the statement by the author.
I trust SEC filings more than this article without supporting evidence.
From the SEC filing, on page 22, they talk about US income taxes, and state over the three years covered that they paid out billions with exact amounts in the SEC filing.
Care to provide a well sourced link with the zero federal income taxes claim supported by something legally binding like SEC filings or shareholder filings? I've never seen one to date.
Sure, and I would point my source to be the very SEC filings you linked. Head to page 62. Look at “US Federal” under “Current Taxes” — you will see “(129)”. What the “()” means is that they believe the government owes them 129 Million in tax REFUND.
If you count deferred taxes they do owe money, but that’s money that hasn’t left their pockets in that tax year. Hence 0 federal taxes for tax year 2018. That is a hard fact.
Snopes gives a further summary of how to calculate it, albeit for the tax year 2017, though equally applicable as it’s the same format as the SEC filing you linked.
>What the “()” means is that they believe the government owes them 129 Million in tax REFUND.
If you look a few lines lower, you see that same (129) as being owed from foreign taxes. This means it is deferred since it was paid on foreign income to countries for which we likely have tax treaties. You'll also note the federal and international taxes match to under 1% as 563m and 565m, also waiting to be accounted for, to avoid double taxation on the income. It's the same thing as if you worked in one state while living in another, and had to file income taxes in both places: many states let you defer their payment and instead collect from the other state. In this case it's between countries.
>Hence 0 federal taxes for tax year 2018. That is a hard fact.
It's a very misleading fact since the deferment will likely result on them paying federal income tax for 2018. This lack of nuance spreads ignorance to people that don't understand such things are common and legal, and the companies do in fact pay substantial taxes over time.
And this "fact" ignores that this is likely the result, as explained above, of multi-country tax resolution which doesn't happen instantly on US tax time, since other countries have other tax schedules.
Again, he same link you posted showed they paid 1.1B in Federal income taxes the previous year. From year to year taxes vary due to how things roll over, so it's easy to cherry pick a year where they pay zero, but other years they pay quite a lot, sometimes too much, giving them a discount in future years.
This is clear from page 22 of the SEC filing where they state " The U.S. Tax Act enhanced and extended the option to claim accelerated depreciation deductions by allowing full expensing of qualified property, primarily equipment, through 2022. Cash taxes paid (net of refunds) were $412 million, $957 million, and $1.2 billion for 2016, 2017, and 2018. " regarding US federal income taxes.
If you want more details, p62 of [1] shows how the deductions were computed. The majority of the deduction was because of "excess tax benefits from stock-based compensation", which, if you google the phrase, means they overpaid taxes in previous years.
The income totals are also global. The US taxes are only on the US profits, not the global profits. These are broken out in another SEC document mentioned in the one I linked, which makes all the pieces more clear.
I agree that some years net federal income taxes are zero, but almost no company has this happen many years in a row without well deserved reason (such as massive tax loss some other year allowing them to carry forward those benefits).
In short, look at 2018 taxes in a few years, and I bet it won't still be zero. This annual rush to complain about company taxes is usually the same ignorance game, wholly ignoring the underlying reality or going back and offering retraction articles once the original is proven wrong.
Typical of HN on finance topics. You're downvoted for presenting facts and providing sources. And your source was audited by a 3rd party and accepted by the government who has their own auditors.
On page 62, it says "Cash taxes paid, net of refunds, were $412 million, $957 million, and $1.2 billion for 2016, 2017, and 2018."
The buyback money presumably is the money after corporate tax so it has gone through one round of taxation. The stock holders selling the stock will pay capital gain tax again, so the money will go through another round of tax.
Not profits but debt. With the ultra-low interest rates of the last ten years, companies could finance bonds at rates just above inflation. However, instead of using those funds to grow the business (e.g. R&D), they simple bought back shares, increasing the price of the stock.
Can you cite? What companies are using debt to finance repurchases? Also the person you responded to probably meant that they profit in a technical bookkeeping sense not. You can still have profit while having debt and profit will be taxed in a certain way.
> Read an idea in American Affairs in support of taxing buybacks.
Honestly, at their most supportable, share buybacks seem to be just dividends in all but name with different tax consequences (i.e. they're a tax dodge). I'd support a law that declared the only legal way to intentionally return cash to shareholders is via dividends, to close the loophole and increase tax revenues.
In other cases, they just seem like financial engineering employed by CEOs and other interested parties to game their personal job performance metrics.
But why do that? We accept that if I hope a stock or any other asset which value increases I am not liable to pay the tax until I actually realize that profit by selling. It makes sense to do it this way as well as otherwise you would be losing money to taxes just because the price fluctuates (one year it increase, another it decreases). When the company buy backs stock it actually triggers the tax event: people who sold the stock to the company are now paying tax on capital gains.
> It makes sense to do it this way as well as otherwise you would be losing money to taxes just because the price fluctuates
I'm unsure how you're reaching this conclusion. I said nothing about eliminating capital gains and moving to some kind of system where investors are taxed on yearly stock price fluctuations. All I proposed was to forbid companies from purchasing their own stock for the purpose of manipulating its price upward.
Dividends exist and have a long history as being the the way of returning cash to shareholders. Forcing their use for that purpose would make it easier to make and enforce policies on that activity.
The point is that purchasing their own stock is not for the purpose of manipulating its price. The price increase is a natural consequence of there being less outstanding shares. Less outstanding share = one share is worth more.
>>Dividends exist and have a long history as being the the way of returning cash to shareholders. Forcing their use for that purpose would make it easier to make and enforce policies on that activity.
Buybacks has many advantages though. The biggest one is that if you want to reinvest dividends into stock you would have to pay taxes which creates a situation where you are liable for taxes even if you didn't make any money (if the price fluctuates). Buyback is like automatically reinvested dividend. I don't think it should be taxable for the reasons outlined above.
> The point is that purchasing their own stock is not for the purpose of manipulating its price. The price increase is a natural consequence of there being less outstanding shares. Less outstanding share = one share is worth more.
You're literally describing manipulating price by manipulating supply. If companies aren't buying back their stock to make its price go up, why are they buying it? You're contradicting yourself.
> Buybacks has many advantages though. The biggest one is that if you want to reinvest dividends into stock you would have to pay taxes which creates a situation where you are liable for taxes even if you didn't make any money (if the price fluctuates). Buyback is like automatically reinvested dividend. I don't think it should be taxable for the reasons outlined above.
I understand that stock buybacks have advantages in certain situations for some people. I'm suggesting those advantages be eliminated.
But why? What's the problem with buybacks? Everybody still pay the taxes. They just don't pay the taxes when reinvesting profits into the same company shares until they actually sell the shares.
Why would you like to tax those people then? They aren't running away with any cash, they will pay taxes when selling the shares. They just avoid unfair side of the income tax (you pay when you profit but you don't get back or get back very in unfavorable way when you lose money).
> In other cases, they just seem like financial engineering employed by CEOs and other interested parties to game their personal job performance metrics.
They may seem like that from the outside looking in, but you'd be hard press to find a finance professional who agrees with that assessment. Just imagine how many incorrect notions laymen have about software and realize that the same is true in finance and any other sufficiently advanced field of knowledge.
I trust "finance professionals" on stuff like that about as much as I trust Mark Zuckerberg on internet privacy.
Insiders may have expertise, but their insider-ness means one should be skeptical of their perspective for all kinds of reasons (including, but not limited to: self-interest, indoctrination, selection effects, acclimation to industry practice, etc.).
I'm thinking probably not because the investors, who are either High Net Worth Individuals or investment banks, should be hedging their tax exposure appropriately.
When one has a hammer, everything seems a nail. Taxes are not money looking for something to spend it on. I could argue that corporate taxes are redundant because people ultimately run and benefit from corporations so tax them instead. In reality it doesn’t matter because the government needs $X to fund its obligations and will get it however it can
The federal government doesn't need to raise any taxes to pay bills, it can just create currency. Once you realize the primary purpose for taxes is social policy, it makes more sense.
Even if we accept that companies returning money to shareholders means that they can't find good use for the capital doesn't mean the government will. If anything maybe the shareholders themselves can find better use for the money. After all they have wider avenue of possible investments (things outside of the scope of what the company is doing).
There is also the whole fairness side of things: even if it's a bit less efficient for shareholders to have the money or even if they want to spend it for consumption doesn't mean the government should take it.
I'd rather just have a corporate tax rate of 0% and shift the tax to people. That's who (eventually) gets the profits, anyway. It would also create a level playing field for larger corporations and pass-through entities.
We don't need a new tax, just a fix to an old tax- tax all capital gains the same as normal income. Even better if we enabled a refund of some sort in years with negative capital gains to act as an automatic stimulus.
> THEN it must be true that the market can not figure out how to efficiently allocate this $1T of capital.
You're essentially saying companies are choosing to do the wrong thing with their money therefore we're entitled to seize it. If that were a compelling argument, why wouldn't we treat individuals the same? And who do you think stock prices affect, with virtually all of society in the stock market either directly or through pension funds?
By keeping interest rates artificially low, stock buybacks are more appealing than capital investment or labor force expansion. It's simply a logical outcome of the policy our government is pursuing.
Here's the problem: you're asking governments to have first dibs over the actual owners of the capital. The whole reason that companies are doing buybacks is that they cannot turn all of their money from $1 into $1.05 anymore, and they give it back to shareholders to go figure out how to get returns. When the government uses it, they turn $1 into somewhere between -$0.20 (wars) and 0.10 (infrastructure with myriad bribes/kickbacks along the way). I don't think it's a good idea to encourage the later over having people who stand to experience the consequences of making bad investments (the rightful owners of the money) make investing decisions.
That money doesn’t just disappear, right? It gets spent to private contractors on all too often outrageous terms but it goes back into the economy, too.
The velocity of MZM sits at around 1.3 right now, so it goes back after almost a year of being wasted. But who it goes to after that year matters as well. I would prefer Larry Page get the money because he will be able to intelligently allocate it. Or a productive poorer citizen get it to consume wisely. The myriad rent seeking morally defunct (and likely intellectually defunct) people who receive the government kickbacks are a bad set of people to end up with the money after a year. They invest poorly and spend frivolously. But sure, after several years, the money that didn't end up in the China's and the Cartels' pockets will probably back in circulation among the intelligent members of the economy.
$1T would be enough seed money to get an international effort moving to solve climate change using emissions targets, ferrous phytoplankton seeding like IRONEX I and/or kelp blooming/capture/sequestration. Much cheaper than the inflated numbers thrown around as arguments for doing nothing / delaying longer that ignore the $200+ trillion destroyed by doing nothing.
Deny -> extinction
Complain about costs -> extinction
Do nothing -> extinction
Do too little -> mass deaths, world war
Act decisively -> enough of us would likely survive
I have never heard of extinction as a possible consequence of climate change. Care to elaborate how that might be possible? Even if society crumbles due to unrest, the Earth will be inhabitable in at least some areas. It's hard to imagine that every single human being on Earth will die.
There have already been multiple mass extinctions in the past driven by global climate shift. There are currently 1 million species at risk of extinction right now, which is a significant fraction of known species. Full on ecological collapse has been happening on all fronts for years, and it still continues to accelerate. "society" isnt responsible for pollinating plants or turning co2 into o2, and it's scary how easily and completely people forget that in just one generation. There is alot of middle ground between billions of humans and thousands of humans, and i think its safe to say if and when we are reduced to thousands that the rest of the planet will be destroyed beyond any hope of recovery.
Maybe most agriculture will have to happen indoors? Chile, Spain and many other year-round producers do it in greenhouses / hoop tunnels. Vertical farming/airoponics and so on to help scale food production.
I think the bigger problem is if we kill the ocean through sea level rise, warming, deoxygenation and acidification, then we kill 3/4 of oxygen production (but we would still have 100k-400k years supply) and 2%+ of the food supply.
Maybe my wording conflates unintentionally meaning "extinction of humans" with "extinctions of many species." Extinction of many species is happening at several orders-of-magnitude of background, historical trends. Homo sapiens sapiens extinction outright is unlikely unless we double-down on emissions.
Let's call climate change a "Dial-a-yield" planetary nuke that will extinct many species and most likely reduce our numbers anywhere from 1-50 million if nothing is done, e.g., pre-historic levels. We have to make drastic changes now to dial back the "yield." How bad climate change has to be is ultimately up to all people across the world, here and now.
Large US corporations have been buying back their own stock in record amounts, while investors have been cashing out of US stocks at a record pace, recent data shows: https://www.msn.com/en-us/money/markets/investors-bail-on-st... -- money is not being plowed back into IPOs, secondary offerings, etc.
According to orthodox economic theory, large US corporations must be buying back stock with earned profits and new debt[a] because they don't have better uses for that money. Rational executives and company boards looking out mainly for shareholders must have concluded that buying back shares at current prices is a better use of money than investing, you know, in the business.
Maybe.
In reality, executives and directors could very well be authorizing stock buy-backs to keep share prices up so their stock options remain in-the-money for as long as possible. If that's the case, the buybacks are meant more for the benefit of executives and directors than for the benefit of the business or its shareholders.
> In reality, executives and directors could very well be authorizing stock buy-backs to keep share prices up so their stock options remain in-the-money for as long as possible. If that's the case, the buybacks are meant more for the benefit of executives and directors than for the benefit of the business or its shareholders.
This plan shouldn't work because buybacks shouldn't cause stocks to rise unless the market thinks they're a good idea. For example, if a company with 1 million shares is worth $90 million and has $10 million of cash on top of that, then each share will be worth $100. If it uses that cash to buy shares it will be able to get 100 thousand of them, so it will become a $90 million company with 900 thousand shares. Each share is still worth $100.
It works fine in the short term. It even makes the company more attractive to people who think it is a bad deal - maybe I expect them to go bust in 12 months, but there is an opportunity right now for me to buy shares off Trader A and sell them to a company for a slight markup, leaching money out of a failing concern. I've actually bought government bonds using very similar logic. I can't say if my logic on that specific trade was right, but as long as traders expect buybacks in the near future the price will be artificially elevated.
Essentially, for a shortish time-frame (don't know how long) stocks trade as tokens giving access to a cash flow instead of a measure of the intrinsic value of the company.
The issue is that the price will drop immediately on the prospect of further share buybacks ending. The shareholders who didn't sell are left holding the bag - a company with less cash, more debt and likely a wealthy executive bowing out while the going is good. As soon as something goes publicly wrong that suggests the end of buybacks (maybe a corporate debt crisis of some sort) the stock prices will probably drop further than usual because the buybacks end.
That’s only true as long as the buybacks are done using a cash pile. There are a lot of companies that, instead of trying to grow, give dividends to their investors (think utility companies). Their stock prices tend to be pretty stable, since their inherent worths don’t change much. Suppose there is a 100 million dollar power company that instead of giving dividends of 1% per year, they instead bought back stock with that money. We would expect the stock valuation to go up by about 1%, since it’s now 99% of the stocks holding 100% of the 100 million dollar business.
Right. Buybacks don't raise the shareprice relative to doing nothing, but they do raise the shareprice relative to paying dividends. Maybe it would be better to describe this as "dividends lower the share price".
> We would expect the stock valuation to go up by about 1%
Yes, but not overnight. It will take one year or one quarter or whatever would by the period required for the price to recover if it had distributed the 1% dividend. (You said an annual dividend of 1% but that seems too low for a stable business!)
So the part that this doesn't cover is any sort of earnings multiple/discount. For simplicity assume the $10M was earnings over the last year. Your EPS is $10. After your buyback, assuming all things equal, your same $10M now makes your EPS $11.11.
The point there is the mechanics of buybacks make more sense when you think of how they behave marginally, and what it says about how the company's future earnings are being discounted.
If you're referring to "...investors have been cashing out of US stocks at a record pace", than to further clarify - investors are divesting out of the public stock market entirely. They're not selling their Apple stock in a buyback to invest the proceeds of the sale into an exciting IPO, or a deep value small cap. They're just taking it out of entirely.
Think what that implies about the macro structure of a "market economy" when the majority of new money going into stocks is executive/company initiated stock buy backs, and not "investment".
Macro, it seems to mean that owners believe in their companies and want more equity. Hardly a bad thing unless you're trying to predict the next recession
As costs to borrow continue to fall, the search for yield is exacerbated. Buybacks seem like a rational choice for executives to meet their performance goals/incentive structures given that the list of other options is becoming shorter/harder.
Meh, seems like a straightforward effect of ultra low interest rate that's been well-known for years.
See https://seekingalpha.com/article/3672916-buyback-arbitrage-i... for several examples of how smart this is. The TLDR is that this is just a company unable/unwilling to lower its dividend yield and arbitraging that yield against low interest rates. Every share it buys back represents a dividend it never has to pay again. A ~2% loan for 30 years in present-value terms is cheaper than a 3% dividend yield into perpetuity for some number of shares it can buy.
Low interest rates as well as high cash levels. The whole point of markets is to raise cash then pay it off. Not to tank the price and rip off investors.
Also, buying back shares keeps stock prices high, makes each outstanding share worth more (less dilution), so more value for the remaining owners.
yup, this is taught in MBA programs as a classic example of a moral hazard/principle agent problem. executives are offloading downside risk to shareholders and locking in profits for themselves.
one way to discourage such behavior is the lengthen the time horizons of performance incentives like stock grants and bonuses (to, say, 7 years).
In reality, that is the only reason IBM is still floating around $100. It isn't worth that, and if they didn't buy back their stock, they'd crash their value.
What do broad buybacks say about the professed benefit of capitalism that it's supposed to reduce prices for customers and society? This cashflow seems like it's representative of rentier leverage against market effects that are supposed to squeeze profits in order to deliver innovation and efficiency.
AQR published a paper on share buybacks last year [0] with the opening sentence "People seem to forget some of the very basic lessons of financial economics when it comes to share repurchases".
One of the big things missed by all the articles covering share repurchases, is that they are increasing at a rate similar to company market cap. That shouldn't be too surprising. The real story is why is R&D not keeping up?
I strongly agree that the real story is in why R&D spending is stagnating or dropping in comparison to earnings. Personally, I think there a number of contributing factors including less competition from new businesses (new businesses starts with employees are way down from previous decades), decreased competition from large competitors (see Disney buying up everyone in the entertainment industry as an example), regulatory capture, increased risk aversion in the corporate world, and just the fact that low hanging fruit are mostly picked at this point so that the next major improvement might require way more investment than a lot of companies are comfortable with (see the massive increase in new semiconductor fabs and drug discovery as examples).
The conclusion that buybacks are alternative for real investments is wrong.
The aggregate change between R&D and capex versus buybacks and dividends is not just some arbitrary decision. ROI from R&D and investments is slowing down for various reasons.
Instead of investing more without reason to do so, companies should give profits to owners or pay off excess debt.
There is wrong and right way to use buybacks. When company is not overvalued relative to its earnings, buyback is viable alternative for dividends. Taking debt to do buybacks or pay dividends is insane.
Companies (often ones with business both in and outside the US) generally borrow money to pay for buybacks (Apple as an example). So corporate debt goes up, paid out of future earnings if they exist, to keep the stock price up and keep shareholders happy. But it is not making business value which ultimately is what business exists for and should reflect in the stock price. So the price is propped up for some time period based on distant profits that may never happen, instead of reflecting company value improvements in the more near future.
Apple is probably a bad example, here. It's got more cash than it knows what to do with-- nearly as much cash as debt. And its debt is at a relatively low interest rate. It's arguable that while interest rates are so low, it makes sense to take on a bit more debt than usual, and when interest rates get high, it makes sense to reduce your debt ratios.
I've never understood this take. Buybacks cannot be analogous to dividends because they require you to relinquish your stake in the company to realize the gains.
That's only true if you own single shares that you can't divide. If the market cap of the company is divided in enough shares that everyone can sell their portion of the buyback then it can be exactly like the dividend. And investors often directly reinvest the dividends so if you are holding an index fund that reinvests dividends, buybacks or dividends are the same except for any tax differences. If you're holding an index fund you also don't have the problem of the shares not being divisible, because someone else is managing that in aggregate for you.
Example: You own 10% of company with market cap $100M. You have $10M.
Dividend scenario: company pays 3% dividend, you get $300k. You have $10M + $300k = $10.3 million.
Buyback scenario: company buys it's own stock for the same amount. You own 10.3% of the company. You have $10.3 million. If you want, you can sell stock to get $300k in cash.
The only difference is that in the buyback scenario you can decide when to sell (and pay taxes).
Slight nit: The math you're using is creating money from nothing. You started off with $10M and by dark magic you now have $10.3M.
What really happens is that you start off with $10M in stock.
With dividends you get $300K in cash, but now the company doesn't have that cash anymore so its value is reduced by $300K, so you end up with $300K in cash and stock which is now only worth $9.7M.
With buybacks you sell $300K worth of stock to the company. Then you have $300K in cash and the $9.7M in shares you didn't sell which are still worth the same amount because even though the company has less cash it also has fewer outstanding shares and those cancel out.
This is ignoring the effect on valuation of separating the business from the cash -- if the business is more productive than the cash then that may indeed make the share price increase, because then you have a more concentrated investment in the more productive business instead of having the investment diluted by being forced to also invest in an ordinary pile of cash that happens to be part of the same corporation.
> The math you're using is creating money from nothing. You started off with $10M and by dark magic you now have $10.3M.
I think the idea was that the company is worth $100mn at the beginning and it accumulates $3mn of cash over the year that it wants to distribute somehow to remain a $100mn company.
Mmm, that perspective doesn't really reflect the, I guess, party liquidity in a practical scenario.
The company has money, they trade at $X. In a trivial sense it means you can buy a share for $X +- some spread.
The capital return mechanism is that the company now owns the share, and can retire it, the part that really isn't important is who they got it from.
It's sort of like electrons in a metal, they're just sort of around. Worrying about the behavior in specific instances doesn't paint the picture of the aggregate behavior.
That’s a difference, but they are still analogous. Not realizing the gain is actually a helpful tax avoidance strategy. I’m investing long term, I’d rather not realize the gain.
OK. You're probably right. I still hate it. There's not a viable explanation that doesn't make it seem shortsighted and greedy (personally, and possibly due to HN filter).
Why is R&D not a good investment suddenly? Shortage of tech workers (blah blah) ...?
The cynical take is that the time to ROI is too long. If it is going to take 10 years to turn a profit the executives do not want to pull the trigger on that because they will be out the door in 5 and never get the payments.
Another possibility is that all the low hanging fruit is gone. So the marginal improvements do not return large financial gains.
you’re on a board very nearly dedicated to startups.
perhaps the s&p500 is no longer a good place to do r&d, compared to smaller, vc-backed startups. if they see significantly reduced gains from r&d compared to smaller companies then we should be crying years of joy that money is flowing out of them so it can be reinvested into smaller firms.
It is still a good investment, but the timelines are getting longer as the challenges get larger. This is happening simultaneously during a time when attention spans and patience are decreasing.
Toxic individualism. Me above all. Consequences are for chumps. And it's all so cynical. We see this in politics as well. One last dash pillaging the world for money and power, burning it down to the ground in the process.
It is drowning out real investment, this conclusion is correct because the companies themselves are saying so in their statements. Some companies are taking on huge debt to keep up in the buyback races despite having bad products that are losing market share. Oracle is probably the biggest example of this buyback insanity via debt, but there are many other companies doing the same thing.
Other companies have committed in their financial statements to "returning 100% of free cash flow to investors via buybacks and dividends", so they are actually committing to not invest in the company at all regardless of how much money they make. Chevron and Texas Instruments are two big examples of this, there are dozens of other companies with similar buyback first strategies.
That's very interesting because that is what you would do if you wanted to liquidate a company and shut it down (on a leisurely timescale). Exactly how much of the US economy is being wound down? Maybe this is a great opportunity for new businesses with an appetite for R&D risk, maybe this is the US laying down so that China will replace it faster.
Absolutely. What we are witnessing is people extracting as much money as possible from healthy and unhealthy companies just because they can. This has been going on in the private equity/hedge fund world for decades, buybacks are the mechanism that is now being used on the public markets in similar, unethical ways.
Oracle is betting on not having a future, they are extracting as much money as possible from the vehicle before it goes off a cliff.
Based on what I know about Oracle's software quality to customer inertia ratio, they're probably betting right. I wonder if the future is as legitimately bleak for all of the other buyback companies.
Take a look at balance sheets. Price to Book ratio has been growing on major company names. Book value is the equity remaining after assets - liabilities. Assets are dwindling/remaining constant and liabilities are growing due to debt funded buybacks. There will be no equity left many big names in the public markets due to the debt load.
It’s all a big wealth transfer game. The entire world is along for the ride hooked on index funds owning enormous stakes in these large companies and will be left with the bag in any downturn. No downturn can ever happen now and everyone knows it, especially the Fed. The current system can never correct otherwise it would implode. CEOs are exploiting this fact to full potential and will be gone/dead before any consequences arise.
For technology companies, buybacks signal to me that they have dying (or dead) engineering. It is rather financial engineering at work.
One of the kpi at play here is EPS [1], typically used to evaluate CEO performances.
To me, this was about numerator increasing over a rather static base.
What instead happens, is that denominator is reduced (with buybacks) to jack up EPS value. It amazes me, that most of run-of-mill (non analyst) folks simply buy into EPS↑ story.
I can understand this. I know my company has a bug backlog a mile long, and some real issues we should put substantial time into; but it would rather have HR put downwards pressure on compensation while pursuing record buybacks. It gives a sense for what the priorities are.
This is robbery by the management class, and who can blame them.
If I can take on debt at a corporate level and personally enrich myself, by increasing the value of the stock through buybacks and then selling it, why wouldn't I?
This is all made a whole lot worse by stock option packages that give managers equity at major discounts.
I think we'll look back at this as the largest heists in history. Should serve as a good lesson to central bankers in creating wack incentive schemes (but it probably won't)
I don't exactly understand who you think is being "robbed" here. Shareholders?
Because if that's the case there's little evidence of it. US equity returns have had one of the best decades in all of history. That certainly does not support the narrative that American shareholders are being ripped off on a systematic scale.
The economy as a whole. All these companies are putting themselves at risk by taking on debt to do buybacks. As soon as there's a hiccup, this can lead to a cascading effect of bankruptcies, leading to a recession or depression.
It's only a heist if no one else is as smart as you. If anyone is as smart as you, they would notice that stock buybacks are correlated with a future decrease in price, as the increasing price of the stock is due to manipulation (i.e. the current demand for the stock is not a function of an increase in expected future values, nor does it signal a change in population level discount factors).
This is just your average outrage by people who don't know how to properly reason about financial markets.
Sure as a shareholder I also like stock buybacks. For instance, when Berkshire Hatheway does it, it's almost certainly a good thing.
I don't think that's what we're seeing in the vast majority of cases though. I think what we're seeing is managers personally enriching themselves by taking on corporate debt and doing so in a very tax-advantaged way. Keep in mind they're not buying the stock they own in the first place, they're being given it via stock options at crazy discounts.
If this were true, why aren’t we seeing an incredible surge of shareholder lawsuits? Those managers are ripping off all those long hedge funds and activist investors, and none of them are crying foul?
This supports Peter Theil's theory that innovation has stagnated. When companies give their profits back to the shareholders instead of investing in continued innovation, because they can't figure out a way to innovate with that capital.
The world needs more Elon Musk type of entrepreneurs.
I agree wholeheartedly. The whole world seems to be in a consolidation phase where every innovation from before 2010 is being milked dry (see iPhone derivatives, streaming services, Lithium-ion tech, carbon composites, airliner designs :P, etc...) but very little new tech is being invested in outside of academia (and even within academia sometimes...). Everyone has figured out it's more profitable to rehash existing ideas instead of take a risk and markets are encouraging it. Want more profit? Buy your competitors instead of invest in some moonshots. We've become very complacent as a society.
Your praise for Musk can't be repeated enough. Whatever you think of the guy, he is completely fearless regarding big investments in things that are possible in principle, but with a large risk of failure.
Most people shy away from those kinds of risks. I really wish we had more people with capital that took big risks on things that are unlikely to succeed, but would materially bring the world forward if they did.
>I really wish we had more people with capital that took big risks on things that are unlikely to succeed, but would materially bring the world forward if they did.
If this is the desired outcome, how do you tell the difference between an entrepreneur and a con-man?
Savvy investors should know the laws of physics and be able to make a decent educated guess regarding what limitations are caused by fundamental limits, and what are instead the result of a e.g. any random local maximum, institutional inertia, lack of imagination, a long-standing duopoly and so on. Plus factor changing technological possibilities into this.
I don't think it's such a big deal if a few private investors lose their investment to a con, but there are a lot of smart people out there. Not everyone stated boldly that reusable rockets are impossible, that no social network could have better success than MySpace, that mobile phones had to have a keypad and only run pre-installed software or that electric cars could never be a viable competitor.
Strongly agree. Elon Musks' $40k USD Cybertruck reveal was one of the first times in years it felt like our present was making some kind of headway into the future, but while also being accessible to common people ($40k truck is still a huge luxury don't get me wrong).
> 40k truck is still a huge luxury don't get me wrong)
I don’t think you have priced trucks in awhile. You can buy a 60k Jeep truck, an 85k RAM 2500, a 95k GMC Sierra ATR4 (or whatever), a 65k Bison Colorado, etc etc. Trucks got expensive. I think you price new 40k trucks you’re going to be looking at Tacomas.
40k for a specialty electric truck is absolutely too good to be true, and I promise you it won’t happen like that.
All that said, that Tesla truck isn’t even remotely real. There is almost no way it passes crash testing with 1/8th stainless steel panels as is, let alone European homologation requirements, it has no mirrors or wipers. It’s all for show right now so pardon me while I don’t join in the hyper parade.
You're not wrong, but I'm considering it a luxury outside the real of automotive. I've been working full time as software developer for 3 years and I cannot afford a Cybertruck. Not even close lol.
Or we could tax excess capital and reinvest it in ourselves as a country upgrading our infrastructure, educational attainment, health, and the common wealth.
Companies that can productively reinvest capital at attractive rates of return get a strong valuation premium in the market. Every company would love to be in this position. Companies that can make a compelling case to shareholders for long-term investments get to make long-term investments and like Amazon often get super valuation premiums.
If a company can't reinvest capital at attractive rates then returning it to shareholders is the best option. Forcing companies to invest in unattractive investments is the path to a zombie economy. I can't count the number of companies that should have returned money rather than going on some unprofitable growth binge.
R&D spending is a badly understood black box. we incentivise miss measuring it with weird tax breaks and complex rules. From an economic point of view, it's not clear that existing firms should be engaging in it: many industries follow model where specialists create new products which are then available to industry via a mix of buying out small firms, licensing their products or imitating them (that seems to be how big chunks of silicon Valley work and also drug discovery and fashion for instance, three quite innovative sectors).
The result is the number being inflated up by firms dodging taxes, down by people working in their garages, sideways by including things and excluding other things based on weird regulations.
Share buybacks are similarly in a weird place: tax rules favour them twice, once when buying back and again when borrrowing to fund that. Plus interest rates are at a record low so that encourages them too.
People have a 1950s model that assumes research is something AT&T do and that the amount they spend is an honest reliable value. But they don't and its not. Some where someone is building WhatsApp 2.0 or 6G comms equipment in their basement in weekends. Their time and energy is counted for nothing in these numbers. And when they sell their company ro Facebook who issues shares to buy it and then buy those shares back (as that's the tax efficient way to buy things), they value they created will be a "buy back" not an "invention"...
I suppose some amount of this line of reasoning (R&D is hidden under acquisitions) would be observable if changes in R&D spending were compensated by changes in total acquisitions (of smaller firms)
1. For mature tech companies selling high margin products, R&D is typically 8-16% of revenue while operating profit margins are 20-40% of revenue. Even after taxes and interest, it’s natural for buybacks to exceed R&D
2. Not all R&D spent is booked as accounting GAAP R&D. Any internal tool for example can not be booked as R&D because it’s not sold to end customers.
3. Companies outside of tech do not report their amount of R&D spend but include it with SG&A. If deemed immaterial then you don’t see it
Hey, the fed's giving free money. Why wouldn't execs do this? Imagine being at the top of a public company, with unlimited borrowing ability and retirement in a few years. Why wouldn't they?
This is a misleading comparison. When you spend money on R&D, it's spent. Somebody is actually consuming man-hours to do work that then can't be used for something else. When you "spend" money on buybacks, it's just moving money around. No scarce resources are consumed, it's just a meta-determination of who gets to decide how to actually spend the money.
And moving the money from huge risk-averse corporations to investors that may have a higher risk tolerance may increase investment into innovative new ventures.
There's the bit about 60% of money being managed passively, and these passive funds will buy Microsoft stock at $100 or $1M (proportionally). The stock buybacks shouldn't affect the market cap (it's just moving money). It's impossible to know if the buybacks have actually affected market caps, but consensus seems to be that it's increasing market caps. That means you're getting free money from passive funds. Seems like a problem for pensions and most 401ks.
That's assuming "passive funds" aren't what huge corporations hold their liquid assets in when they're not used for buybacks. At least 60% is less than ~100%.
Every time i read these threads i feel criminally incompetent in finance. You would think that putting your money to work for you would be incentive enough to dig deep, but i don’t seem to have the mental stamina to figure it all out. There’s probably a latent fear that I’ll also realize just how much money i haven’t made and regret that too.
I need a course or something that i can walk into with $20k or whatever and do all the things. Self-directed education doesn’t seem to help and Edward Jones just wants to sell me their shit.
The game wasn't designed for you and me. It was designed for the ones that can take advantage of it with massive amounts of cash, connections, and staff to exploit it for them. Bet on the companies to figure it out for themselves and just stick to index funds over the long haul. That way at least you're not playing a game that was designed to take your money.
this is good advice but also ordinary people should be able to understand why the economy is breaking. most economists treat it as a mystical thing only they can divine the meaning of, so it can be pretty hard to find clearly written stuff for lay people.
I've said this before and I'll say it again: in the absence of a tight coupling between profit and payouts (either buybacks or dividends) the value of a stock becomes detached from the value of the company, and approaches pure opinion. When profitable companies don't pay out dividends or buy back stock, their stock price growth has nothing to peg it to the actual profit of the company. Likewise, when unprofitable companies pay dividends and buy back stock, their stock price begins to directly contradict their (lack of) growth. In short, with tricks like this available, the stock market is a bad way of measuring how the economy is doing.
It's not clear from the article whether or not the companies borrowing money are the same companies buying back their own stock. But if they are, then it's clear that the economy (as indicated by real value being produced) has already crashed, and this is just a hack to delay admitting this, so that execs and the financial sector can continue to profit. It's become clear that the government will bail out companies when this strategy inevitably fails, so it's average people who will pay the cost.
To be honest, I am a bit surprised this hasn't happened sooner. It's a fairly obvious hack: if you fail to produce value, just borrow money and prop up your stock price. Perhaps that's why: maybe it's too obvious--the people who make their money by finding new and creative ways to move money around have to at least create the appearance of investing in real value.
“in the absence of a tight coupling between profit and payouts (either buybacks or dividends) the value of a stock becomes detached from the value of the company, and approaches pure opinion.”
I think I can agree with that. Whenever I hear someone say that a stock is overvalued because it’s market cap is 15 or 20 times sales, I always ask so what? Who says 15 to 20 is too high. Why not 100 or some arbitrary number? I mean, the stock has no dividend and they never have done buybacks and you aren’t going to get a piece of their sales in the form of a paycheck! Why should you care what multiple the market cap is over sales??!!
It’s all opinion. You are just valuing it based on what other analysts think is the “right” multiple.
Sometimes I wish the stock market worked like a blind bidding auction. You can’t see the current price nor the other bids. And nobody is allowed to publish any articles expressing their opinions on any stock.
There's two ways to look at everything. Buybacks can be seen as companies giving money back to the shareholders. Or if you decouple the company from it's stock, you'll see that buybacks are an investment in the company's own future, since they believe that their own stock is at a discount now, and they'll make more selling it later.
Companies are buying back shares. Individual investors are selling shares [1]. Private equity [2] and VC are raising record sums [3].
Alternate title: financial markets shifting capital from public to private companies. The economy’s R&D engine has shifted. Financial markets are following.
Yeah, I don't really understand the negative sentiment here. If a company's buying back stock, then someone's selling those shares. That investor now has extra cash on hand to invest somewhere else. It's not like that capital just gets thrown into an empty pit.
Mature companies returning money is a pretty natural state of affairs. Unless you believe that all growth and investment over the next 25 years is going to be done by exactly the same set of companies from the last 25 years.
That's a recipe for stodgy sprawling monopolistic conglomerates. Competition and innovation is only possible when new entrants challenge entrenched players. And turnover in firms is only possible when capital is transferred from the large, pre-estabilished firms to small, growing ones.
That transfer of capital to innovative challengers necessarily involves large, mature companies returning money to shareholders either in the form of dividends or buybacks.
Prohibiting buybacks might increase dividends. It’s more likely to boost M&A. What it unlikely is for internal R&D, capital investment or hiring to benefit.
Totally amazed that share buybacks are controversial. If a company believes its shares are undervalued, and the best place to use its capital, then it should buy them back. In the same way, if a company decides retiring debt is in its best interest, then it should use the money that way instead (and that often happens when it has high priced debt in the markets that's callable and interest rates fall). Comparing share buy back and R&D makes no sense. Would we rather have Apple invest in R&D that it doesn't believe in, just so it has a place to put its money? If companies couldn't buy back their stocks, they most likely would pay dividends or just bank it (which is what Apple did for decades), and the share price would rise anyway.
Share buybacks don't dodge taxes - at least not directly. They allow the price to rise for those people who aren't selling (in the same way that banking the money would).
The economy is becoming increasingly automated and dominated by a handful of large, hugely successful companies that can keep printing out the same widget or service over and over , generating reliable, recurring revenue streams. There is no need for research when your competitors are tiny and or non-existent, with no hope of closing the gap.
R&D is an investment. So are buybacks. The powers that be have made the call that at this moment in time buybacks happen to be more lucrative than R&D.
There is significant investment in R&D going on - happening in the form of investments in startups which will be targets of acquisition later on.
Tangential thought:
Startups are experiments that validate theories on product - market fit by generating positive cash flow. As a corollary, if you are a startup, your developers should be focused on validating that theory (iterating on MVP) and not fondly reminiscing and recreating Ginfrastructure(TM). Post acquisition, there will be a rewrite.
As there is a drop in internal R&D, there will be a corresponding rise in acquisitions now or in the next few years. So it is a good time to be working in a startup - preferably one that is making money!
Its probably a bubble coming what happens when the stock market goes down? Ie tradewar causes price inflation of goods on imported goods from China. Central bank then increases interest rate to fight higher inflation. Price of new money goes up, stock market goes down.
Perhaps I'm being simple, but I don't really understand the problem here. Companies are sitting on too much cash that they don't know what to do with. There is only so much that can productively be spent on R&D. If they don't do something with their cash, investors will start demanding a dividend. Once you start giving dividends it becomes hard to stop giving them. To prevent perpetual dividends, companies perform a buy back which also helps out investors but is a one time thing which doesn't need to be repeated.
But what's wrong with perpetual dividends? I think the relationship between investors and dividend-paying companies is a lot healthier than non-dividend-paying companies.
If buy 1 share of DividendCorp I can rationalize it as a stream of future dividends generated by the company's profits. I want the company to succeed in the short term and the long term.
If I buy 1 share of OtherCorp which pays no dividends I am purely speculating on the price. I don't even have to care what the company does I could just be one of those "technical analysis" people riding chart waves. I just need to pass the bag to someone else at a gain.
You're not speculating on price, you are trusting that the company will make sound decisions which will result in growth and future profits, thereby increasing the stock's value. People mostly invest in stocks that don't pay dividends as opposed to instruments that pay fixed returns or companies that pay dividends because there is far more upside potential. I don't want all the companies I invest in to start being big dividend paying companies because that impedes their ability to grow.
This will depending on your tax jurisdiction, but it's almost certainly a consequence of taxes:
If the company buys its own shares, there are usually no taxes on the purchase.
If the company issues dividends, it has to pay taxes on dividends distributed. The shareholders may also have to pay a small amount of taxes on dividends they receive.
Good. Markets without buybacks and dividends are a ponzi scheme. The whole point of selling equity in a business is to raise funds, use it to grow, then return funds to investors.
I have built a site which allows you to see whether individual companies are buying back stock or diluting e.g.
buying back
https://shareseer.com/search?q=hd
Why do people think that if you pour more money into something like R&D you'll get more results? That isn't how it works. You get diminishing returns on anything, do you not think internal statisticians and economists at the company haven't calculated that?
Sometimes it's about timelines, not sheer ROI. Apple is in a position to make long term R&D bets because they don't face the same board pressure that many other companies do.
Also, it's not only R&D. Long term capital outlays like building new factories are also something that buybacks compete against, and some companies like Telsa do the opposite: Raise more from the capital markets and invest in long term spending in both R&D and capital outlays.
Looking at the system as a whole, though, board pressure aside, we should want companies like Tesla raising cash for longterm spending while other companies issue share buybacks or dividends.
This is a disturbing trend that's been developing over the past 100 years, and I believe it is the main reason for our country's stagnating economic growth. Let's take a look!
100 years ago, companies on average dispersed 90% of their earnings back to shareholders as dividends. But by the 1970's however that number fell to below 50%. Fast forward to the 2000's and the payout ratio is down to around ~30%.
What happened? Companies used to distribute their profits back to their owners, the shareholders. But that isn't what's happening anymore. In my amateur historical analysis, I believe there are two causes for this disastrous trend:
1) Tax dodging
2) The Casino/Gambling Mentality of Stock Market Investing
My theory is that the trend started with investors 50 to 100 years ago looking to dodge taxes, and gain a little free compounding. Makes sense! Right?
But it's just gone too far. Now investors receive almost nothing for owning a stock. Take Apple Inc. for example. In 2019 Apple made a profit of $55 billion. How much of that did they pay back to their shareholders? $14 billion.
And Apple isn't even the most egregious case. They at least pay a dividend. Google, Amazon, and Facebook combined paid $0 back to their shareholders this year!
So how has this insanity continued to go on for so long? The answer is simple: Adults don't know what stocks are. They think that a stock is a thing that you buy, its price goes up and down, and the game is to try and sell the stock when the price goes up, and hope that the price doesn't go down. And the machine that keeps the whole thing moving along is the Stock Buyback.
Buybacks also represent profits being returned to the shareholders. They aren’t different from dividends in that respect. Companies are still paying out shareholders, they are just doing it in a different way.
I've watched somewhere that these buybacks is to keep the stock prices afloat lest their employee stock options get hammered and they lose employees. Tech workers are operating on fumes.
Amazon has done 0 buybacks in the past 30 quarters [0] and is one of the best-performing components of the S&P 500 index. I'm not convinced that all corporate executives are right to assume that the best use of capital is to simply repurchase stock. Look what it's done for Amazon: it's delivered great economic value.
Hypothetical question: what happens if a company buys back 100% of its stock and hence has no owners? For example, who would choose a CEO in such case?
When shares of stock owned by an equity mutual fund are bought back by the company, the fund uses that money to buy shares of other companies. The money does not disappear or immediately go to consumption. Buybacks allow money to be transferred from companies with poor growth prospects to companies with better growth prospects.
Interesting that the market is at an all-time high and companies still feel their stock is cheap enough to warrant investing in. When will this bull stop?
Thought that was an interesting take.
Edit: here is the link but it may be behind a paywall. https://americanaffairsjournal.org/2018/12/share-buybacks-an...