4 ms·

Share buybacks are one way of returning money to the shareholders (and that shareholders usually prefer to the alternative, dividends, because they only pay cap

Share buybacks are one way of returning money to the shareholders (and that shareholders usually prefer to the alternative, dividends, because they only pay capital gains taxes on the increase in stock price, as opposed to on the entire capital distribution). Ostensibly, they are returning this money to the shareholders because the shareholders can better determine where next to deploy the capital investments. This article's authors are either naive and uneducated or grinding a left-wing ideological axe.

elipsey 11y ago
I think the objection stated in the artical is to buybacks and downsizing at the same time, which the author claims was done by HP, for example. I don't know whether to credit this, but naively, it makes sense that this practice might contract output by cutting costs and transfering the savings to shareholders instead of reinvesting in more promising endeavours. It does seem like HP sort of makes less stuff every year. Didn't they go from making mainframes to desktops, to rebranding desktops manufactured elsewhere, and then finally to giving up tablets and dumping WebOS 18 months after they bought it?
- Lazare 11y ago
  HP is a company in decline, yes. But: 1) The money doesn't just go away. It ends up being spent or invested somewhere else. HP's loss is someone else's gain. 2) What's the alternative? HP is struggling to adapt to a changing world. They didn't stop making mainframes because they got bored with it. The options aren't "successful HP vs failed HP", it's more like "HP definitely wasting the money vs HP giving it back so investors can find someone who might not waste the money". Consider Microsoft: They made (are still making!) an enormous amount of cash from their "legacy" desktop OS and apps business. And they have burned (and are still burning) an enormous amount of cash utterly failing to succeed at search, gaming hardware, mobile devices, cloud computing, and probably ten other industries I can't recall. At one point I believe MS was losing $2B/year just on Bing, and what do they have to show for it? Even if they eventually "win" one of these gambles and end up dominating the market for tablets (or whatever), will they come out ahead on balance?
  - elipsey 11y ago
    So buybacks plus downsizing is a good way for a company with huge cash reserves and no viable business strategy to just give the money to shareholders, and then take their ball and go home... Another kind of "Creative Destruction" perhaps?
vox_mollis 11y ago
That's not what's happening, though. US companies are increasingly borrowing in order to execute buybacks, not using cash reserves to do it. http://www.reuters.com/article/2015/09/23/us-usa-fed-buybacks-analysis-idUSKCN0RN0D320150923 http://www.reuters.com/article/2015/09/23/us-usa-fed-buyback... Edit: downvotes? Perhaps another source: http://www.wsj.com/articles/the-new-bond-market-debt-investors-wary-as-offerings-fuel-buybacks-1442859162 http://www.wsj.com/articles/the-new-bond-market-debt-investo...
- Lazare 11y ago
  Economically, that's irrelevant. What we want is for capital to flow towards people with good ideas on how to invest it. It's not incredibly important whether this happens by: One: Apple making a ton of cash, and investing it in a great idea their CTO had. Two: Apple making a ton of cash, returning it to investors, who invest it in a great idea some startup's CTO had. Three: Apple making a ton of cash, investing the cash in the markets, borrowing a ton of cash on the markets, and investing that cash in a great idea their CTO had. Four: Apple making a ton of cash, investing the cash in the markets, borrowing a ton of cash on the markets, returning it to investors, who invest it in a great idea some startup's CTO had.
- supercanuck 11y ago
  I suspect some of this has to do with thr tax deductability of interest too
maxerickson 11y ago
The tax load should be fairly similar. The big difference is that the shareholder can choose when they pay the taxes on the gain that comes from the buyback (because they recognize it when they sell shares).
- aaronchall 11y ago
  Yes, that's big too.
- btilly 11y ago
  The tax load is very different because of different tax rates on long term capital gains (tops out at 20%) versus ordinary income (tops out at near 40%).
  - aaronchall 11y ago
    Yeah, I was going to say that, but we tax dividends at the same rate as capital gains if you hold the stock long enough (for a year). They were going to change that, but according to Schwab they still haven't.

elipsey 11y ago

I think the objection stated in the artical is to buybacks and downsizing at the same time, which the author claims was done by HP, for example. I don't know whether to credit this, but naively, it makes sense that this practice might contract output by cutting costs and transfering the savings to shareholders instead of reinvesting in more promising endeavours. It does seem like HP sort of makes less stuff every year. Didn't they go from making mainframes to desktops, to rebranding desktops manufactured elsewhere, and then finally to giving up tablets and dumping WebOS 18 months after they bought it?

Lazare 11y ago
HP is a company in decline, yes. But: 1) The money doesn't just go away. It ends up being spent or invested somewhere else. HP's loss is someone else's gain. 2) What's the alternative? HP is struggling to adapt to a changing world. They didn't stop making mainframes because they got bored with it. The options aren't "successful HP vs failed HP", it's more like "HP definitely wasting the money vs HP giving it back so investors can find someone who might not waste the money". Consider Microsoft: They made (are still making!) an enormous amount of cash from their "legacy" desktop OS and apps business. And they have burned (and are still burning) an enormous amount of cash utterly failing to succeed at search, gaming hardware, mobile devices, cloud computing, and probably ten other industries I can't recall. At one point I believe MS was losing $2B/year just on Bing, and what do they have to show for it? Even if they eventually "win" one of these gambles and end up dominating the market for tablets (or whatever), will they come out ahead on balance?
- elipsey 11y ago
  So buybacks plus downsizing is a good way for a company with huge cash reserves and no viable business strategy to just give the money to shareholders, and then take their ball and go home... Another kind of "Creative Destruction" perhaps?

vox_mollis 11y ago

That's not what's happening, though. US companies are increasingly borrowing in order to execute buybacks, not using cash reserves to do it. http://www.reuters.com/article/2015/09/23/us-usa-fed-buybacks-analysis-idUSKCN0RN0D320150923 http://www.reuters.com/article/2015/09/23/us-usa-fed-buyback... Edit: downvotes? Perhaps another source: http://www.wsj.com/articles/the-new-bond-market-debt-investors-wary-as-offerings-fuel-buybacks-1442859162 http://www.wsj.com/articles/the-new-bond-market-debt-investo...

Lazare 11y ago
Economically, that's irrelevant. What we want is for capital to flow towards people with good ideas on how to invest it. It's not incredibly important whether this happens by: One: Apple making a ton of cash, and investing it in a great idea their CTO had. Two: Apple making a ton of cash, returning it to investors, who invest it in a great idea some startup's CTO had. Three: Apple making a ton of cash, investing the cash in the markets, borrowing a ton of cash on the markets, and investing that cash in a great idea their CTO had. Four: Apple making a ton of cash, investing the cash in the markets, borrowing a ton of cash on the markets, returning it to investors, who invest it in a great idea some startup's CTO had.
supercanuck 11y ago
I suspect some of this has to do with thr tax deductability of interest too

maxerickson 11y ago

The tax load should be fairly similar. The big difference is that the shareholder can choose when they pay the taxes on the gain that comes from the buyback (because they recognize it when they sell shares).

aaronchall 11y ago
Yes, that's big too.
btilly 11y ago
The tax load is very different because of different tax rates on long term capital gains (tops out at 20%) versus ordinary income (tops out at near 40%).
- aaronchall 11y ago
  Yeah, I was going to say that, but we tax dividends at the same rate as capital gains if you hold the stock long enough (for a year). They were going to change that, but according to Schwab they still haven't.