11 ms·

Buybacks at $46B a Month Dwarf Everything in U.S. Market (2015)

106 points by tosseraccount 11y ago

sna1l 11y ago
Apple buys back a large amount of stock because that is the only way they can really get any return out of their stock (http://247wallst.com/technology-3/2016/03/01/why-apple-may-spend-20-billion-in-stock-buybacks-in-2016-alone-or-more/ http://247wallst.com/technology-3/2016/03/01/why-apple-may-s...). Unfortunately due to the law of large numbers, for them to grow at even a 15-20%, would require billions and billions of dollars in revenue increases. Seems like the most prudent course of action for them and their investors. Albeit you could also argue that using that cash to buy other companies might be worthwhile.
- nickpsecurity 11y ago
  "Albeit you could also argue that using that cash to buy other companies might be worthwhile." BOOM! Especially HW and SW I.P. companies given Apple's market and legal strategy. Yet, it's the road not taken.
  - brisance 11y ago
    Only problem is that a lot of research has been done that show that M&A deals typically leads to destruction of shareholder value. [1]http://www.efinancialnews.com/story/2012-01-24/large-mergers-acquisitions-destroy-value-mckinsey http://www.efinancialnews.com/story/2012-01-24/large-mergers... [2]http://www2.warwick.ac.uk/fac/soc/wbs/subjects/accountinggroup/eventsandseminars/richard_taffler_paper.pdf http://www2.warwick.ac.uk/fac/soc/wbs/subjects/accountinggro... [3]http://www.evancarmichael.com/library/stephen-warrilow/Merger-Failures-Value-Destruction-and-Cultural-Conflicts--and-How-to-Avoid-Them.html http://www.evancarmichael.com/library/stephen-warrilow/Merge...
    - joshdickson 11y ago
      No. The goal of M&A is to increase shareholder value, if the data said acquisitions generally do not do that, we would not have M&A. Your links simply show that some M&A scenarios (major acquisitions, acquisitions that are overpaid for, etc) lead to underperformance, not that M&A as an overarching thing "typically leads to the destruction of shareholder value." Nowhere do those articles say that.
      - eru 11y ago
        We have M&A because it leads to value creation for management. They like their empires to grow.
    - nickpsecurity 11y ago
      On top of other commenter's remarks, notice I specifically said to acquire companies holding monopolies over aspects of Apple's competition plus opportunities for expansions of current strategies. Hard to imagine a HP/Compaq failure scenario here. Just lost money which the company might loose anyway. Locking in long-term success more might be worth that, though.
- joshdickson 11y ago
  That's not the law of large numbers.
  - wlievens 11y ago
    That one's more about returning to the mean, right?
  - rdl 11y ago
    There are at least two widely used "law of large numbers" -- mean reversion is more popular outside finance, and firm size vs market size is probably more popular within finance.
    - joshdickson 11y ago
      It is used in both situations, but it very clearly only means the former and the latter is incorrect. "Begs the question" is almost always used incorrectly; that doesn't mean its definition has changed.
david927 11y ago
For everyone wondering why the large cash balances on company books, this is why. But it also means that if companies are spending their 'rainy day' money that it's truly raining. The theory that the tech cycle is hitting its 8-year downturn cycle just got more substantiated.
- taneq 11y ago
  Does it really count as "spending rainy-day money" if they're spending their cash reserves on buybacks? It seems more to me like they just have literally nowhere else to spend the money other than bringing all those dividends back into the company.
  - joshdickson 11y ago
    This is right. Though it's not that there is nowhere to spend the money, it's that the company believes there is nowhere that would generate a better return than just buying back part of the company and the money earns nothing in the bank due to low interest rates. Apple has spent a truly staggering amount of money on buybacks, money which it could have, for instance, used to buy Tesla, Spotify, etc. Even after investing in major new product areas (watch, cars), they still have more cash than they will ever realistically need.
    - eru 11y ago
      If Apple's shareholders want to hold Tesla stock, they can just buy it via the money Tesla gave to them via the buybacks. They don't need Apple sitting in the middle.
      - joshdickson 11y ago
        That's not how an acquisition works. It's not about Apple shareholders wanting to hold Tesla stock, it's about Apple potentially wanting to own the company, and that results in Tesla shareholders receiving Apple stock at whatever the agreed upon price is. Apple would not just become an equity investor and buy some Tesla stock, it would assume control of the company.
lstamour 11y ago
The article is from March 2015, FYI...
- dang 11y ago
  Good catch. We added that above.
cperciva 11y ago
Remember, in a perfectly liquid market without taxes, a company which executes a share buyback will have no change in its stock price, since the shared redeemed will be exactly balanced by a reduction in the value of the company; and this is also exactly equivalent to distributing profits in the form of a dividend. On the other hand, when the rate of taxation on capital gains is lower than the rate of taxation on corporate dividends, it's advantageous to pay out surplus cash in the form of capital gains by executing a share buyback. This also provides a tax-planning benefit to shareholders: Everybody is forced to realize a dividend (and pay tax on it) but some shareholders will prefer to realize more or less capital gains in a given year. In Canada we have rules which sometimes reclassify capital gains as "deemed dividends" to prevent this sort of maneuver. A far better solution would be to simply fix the tax system so that economically equivalent actions get taxed identically in the first place.
- howlingfantods 11y ago
  Also, companies that borrow money to finance stock purchases (eg Apple) also save on their taxes because interest expense on debt is tax deductible.
  - JDDunn9 11y ago
    Expensing interest only saves you the total interest x interest rate. So they just get a 35% discount on their interest rate.
    - howlingfantods 11y ago
      You're absolutely right that the savings on interest is post tax. However the tax deductibility of interest creates a substantial tax shield and in general, has a net positive value for the company since changing the capital structure by increasing debt decreases the weighted average cost of capital. Studies suggest that debt, because of the deductibility of interest, on average leads to ~1 dollar of additional company value for every 10 dollars of debt financing (vs equity financing).
    - 11y ago
Animats 11y ago
This is a consequence of tax law and greed. There are three ways a company can pay for their capital - dividends, interest, and stock buybacks. The first is taxable. Only the last makes options given to executives valuable. The US should tax buybacks and interest as it does dividends. That would put a stop to this.
- AnthonyMouse 11y ago
  All of them are taxable. Interest is taxable income (to the lender), though it's also a prime opportunity for tax arbitrage so the lenders have a strong tendency to be incorporated in low tax jurisdictions. And buybacks effectively get taxed as capital gains (because they result in higher share prices), but not until the shareholders sell their shares, and of course then it's at the capital gains rate. So what you're really getting at is that dividends and capital gains should be taxed at the same rate. And if you really want to promote dividends, let reinvested dividends defer taxes like buybacks do until the shares purchased with the dividends are sold, even if they're reinvested in a different company. Then you'll see investors demanding dividends because the tax advantage of buybacks would be gone and dividends would have the advantage of allowing investors to choose what to invest the new money in.
  - sokoloff 11y ago
    > So what you're really getting at is that dividends and capital gains should be taxed at the same rate. In large part, they are: https://en.wikipedia.org/wiki/Qualified_dividend https://en.wikipedia.org/wiki/Qualified_dividend
    - roganp 11y ago
      Except that with a capital gain you can choose when realize that gain (and when you pay that tax) whereas the company defines its dividend schedule. But I did not know that was the law...it is always/everywhere repeated that dividends are taxed at the personal income rates (e.g. many times in these comments that is repeated), but that is not true.
  - 11y ago
deleted 11y ago
[deleted]
pfarnsworth 11y ago
Buybacks are a terrible waste of shareholders' money and is akin to putting lipstick on a pig. The only reason why IBM has had relatively decent numbers is because of the financial engineering associated with buybacks. Unfortunately, it all blew up with the current CEO who has to deal with the fact that revenues are dropping like a rock and can't be out-engineered anymore.
- riggins 11y ago
  Warren Buffet is on the phone for you ... He says when the intrinsic value of a company is greater then the price implied by the stock, buybacks benefit the shareholders .. And when the intrinsic value is less than the price implied by the market price of the stock buybacks are bad for shareholders.
walterbell 11y ago
Are there public companies where projected buybacks would result in the company being taken private, after N years?
- nickpsecurity 11y ago
  I've wondered this myself. Companies going back private in general. Curious how often that sort of thing happens and what benefits there are. Also, thought it might happen to Apple when I saw what profits they were making.
  - ekianjo 11y ago
    > what benefits there are. Benefits are obvious: you don't have to answer the shareholders for every quarter. You are free to innovate without thinking about short term profits only. Of course there are drawbacks as well, such as access to Capital. But when you sit on a large amount of cash, this is less relevant.
- kgwgk 11y ago
  No. "Going private" is an option when a company has less than 500 shareholders. A share repurchase or buyback is when a company buys its own shares, typically in the open market, to reduce the numbers of shares outstanding. It is extremely unlikely that as result of buybacks the number of shareholders will go below 500. It would require all the others to voluntarily sell their shares.
- dingaling 11y ago
  Yes, Michael Dell took his namesake company private again in 2013 after $25 billion of buy-backs.
  - kgwgk 11y ago
    He (they) also put $25bn on the table to buy the 85% he did not control already.
xenadu02 11y ago
So many companies with so much profit they literally can't find any way to invest it to generate return. It might make you wonder why wages are stagnant or what the argument for outsourcing to lower labor costs is really about, if you were the sort of person to bother wondering about such things.
- zanny 11y ago
  You shouldn't wonder. Businesses need demand for something before they start making it. That doesn't need to be demand for something that exists, but if there were money out there for goods not yet made there would be more investment towards them.* Since that is not the case, you can presume there is not money out there not yet tapped. Which, considering economic trends in recent decades towards wealth concentration in the same capitalist class who has nothing to spend money on except making more money nowadays, that should be no surprise. When the consumers are getting poorer, their demand is dropping, not increasing, so there is no reason to ever try increasing supply. Just use monetary loopholes to profit more instead. * : all relative to risk. There are of course things you could take large risks on and see incredible returns if you succeed, but you cannot predict or even guarantee success on them (gene therapy, new silicon fab tech, nuclear energy, new solar panel tech, better battery tech, AI, and way, way more). When the board is awash in cash from a perpetual money machine, and you could easily just do stock buybacks to make shareholders happy, you go with the no risk easy route to appease shareholders than taking the risk.
- virmundi 11y ago
  I no longer wonder about such things. The simple fact of the matter is that the system is designed to work against wage earners. It focuses on the benefit of our corporate overlords. For example, I use to work for a company as a wage earner. I left, moving my 401k into a self-directed IRA. Since the market has been bad lately, I remained in cash. I want to put that money somewhere else: property. I would love to buy a building downtown (which is theoretically possible). I would convert the top floor, about 5k sq/ft, into a co-work office that charges $10/day. The first floor I would rent out to someone, like a grocer. Sadly, the system works against this dream. First, I can't use the building directly if I purchased it with the IRA. I, as the IRA holder, cannot utilize any properties within the account directly. There goes the co-work. I can't put sweat equity in because that is an illegal contribution. There goes fixing the building without loosing money on labor. I can't directly take the checks and deposit them in the IRA. The law requires that all checks go directly to IRA holding company (who will take a percentage). Finally, I have to get a special IRA account that holds property. Trick is that there is almost no one that does that since they don't make a lot of money. The few that do, take a big chunk. So I, as a lowly wage earner, can't tap my largest asset directly. I can only use my money to feed the pockets of others via stocks and bonds. As the Simpson's sung, "It's the American way!"
ww520 11y ago
Is this one way to use the cash from profit oversea instead of bringing them back into the country and taxed?
carsongross 11y ago
Some day, please let it be soon, corporations will all be treated as big LLCs, with profits/dividends passed through to shareholders proportionally to be taxed at the individual income rates. Couple that with taxing cap-gains as income, since it is, and all this nonsense goes away. Owners (rather than todays "owners") get their share of profits, rich people pay their share in taxes, good triumphs over evil, and so on.
- sabalaba 11y ago
  Taxing capital gains at 39.6% (our current top income bracket as of 2016) would be bad for business, job creation, and growth in the US economy. California also taxes long term capital gains (LTCG) at a top rate of 13%. It would mean that an investor in California would experience a LTCG rate of 52.6%, the highest in the entire OECD. Capital has legs and having a non-competitive capital gains rate would incentivize investors to allocate their capital elsewhere. [1] http://taxfoundation.org/article/2016-tax-brackets http://taxfoundation.org/article/2016-tax-brackets [2] http://www.forbes.com/sites/robertwood/2015/03/25/u-s-capital-gain-rate-among-worlds-highest-but-president-obama-wants-more/#10f23b8f20ce http://www.forbes.com/sites/robertwood/2015/03/25/u-s-capita... [3] http://taxfoundation.org/blog/how-high-are-capital-gains-tax-rates-your-state http://taxfoundation.org/blog/how-high-are-capital-gains-tax...
  - rtpg 11y ago
    This assumes that capital can get the same ROI anywhere in the world, which is not at all true. If the strongest businesses are based in the US, the US can force investors to play by the rules they want. It's just another part of the equation.
    - LoSboccacc 11y ago
      Shell companies all over the world disagree. You can have access to the US market and still dodge taxes.
    - deleted 11y ago
      [deleted]
seizethecheese 11y ago
Apple bought back $30 Billion of itself in 2015[1]. It's market cap is around $600 Billion. It's buying 1/20th of itself every year. [1] http://www.aboveavalon.com/notes/2015/11/2/apple-is-buying-back-shares-like-theres-no-tomorrow http://www.aboveavalon.com/notes/2015/11/2/apple-is-buying-b...
wlievens 11y ago
Isn't there a (big) difference between just buying ack shares and keeping them in a pool, or actually destroying them to reduce the number of outstanding shares? Or are those two equivalent?
onion2k 11y ago
A lot of C-level pay is to tied to the company's earnings-per-share. A buyback makes that number go up without actually improving anything. It's a lazy way of getting your bonus. Here in the UK it was illegal for a very long time.
- Gustomaximus 11y ago
  If this is a lazy way for a CEO to meet goals, I'm as concerned how lazy the board is in not putting scenario exceptions in the bonus to allow for stock concentration via buyback. It would be a fairly simple line in a bonus plan. Likewise they shouldn't be punished if share are diluted via raising money on the markets if that is the best things to do at the time.
downandout 11y ago
I wonder how much of this is related to the harsh corporate tax environment in the US. Take Apple for example. They can't use their offshore cash to directly fund buybacks or dividends without repatriating the money and paying high US corporate taxes on it. Instead, they have borrowed against their offshore cash to make buybacks, and then whatever cash is needed for debt service can either be funded from operating income or by importing offshore cash in a relative trickle, with a correspondingly low tax burden, while the money grows virtually tax-free overseas. So by doing share repurchases with borrowed money, shareholders and executives can reap the benefits of offshore cash without subjecting it to the enormous tax burden they would by directly repatriating the money. As long as corporate profits are still piling up abroad, this trend of corporate buybacks will likely continue.
ChuckMcM 11y ago
Does anyone know if you can use foreign funds in a buyback as a way to repatriate funds? Wondering if you have cash sitting in a foreign bank, can you use those funds to buy your own stock? Probably not since it would be a giant loophole you could drive a bunch of cash through.
- iofj 11y ago
  Yes you can. From [1]: While U.S. tax law is currently making it unattractive for Apple to spend its foreign earnings on buybacks, that pile of overseas capital (now above $200 billion) is effectively guaranteeing bonds that raise cheap capital Apple can use to buyback its shares at an extreme discount. Steps: 1. Loan "US" cash, guaranteed by foreign cash (doesn't need profits repatriated) 2. Use loaned cash to buyback shares Optimization: 1. Loan "US" cash, guaranteed by foreign cash 2. Buyback using loaned cash 3. Have your foreign subsidiary buy the loan from whoever you loaned from 4. Use the interest payments to transform US income into foreign (non-taxable) income (it's not quite unlimited, there's a number of problems with this) [1] http://appleinsider.com/articles/15/10/27/apple-inc-snatches-up-14-billion-of-its-own-shares-in-massive-q4-buyback-surge http://appleinsider.com/articles/15/10/27/apple-inc-snatches...
mrfusion 11y ago
Guys what happens if a company buys back all its shares? I've always wondered that.
- RawData 11y ago
  The short answer is, it becomes a private company, no longer traded on the stock exchanges.
  - mrfusion 11y ago
    But who would own it? There wouldn't be any shareholders left.
    - TheOtherHobbes 11y ago
      There wouldn't be any public shareholders left, and the shares would no longer be traded on the public markets. But it's still possible to own, sell, or give away the shares privately. It just means any dealings are by private agreement, and not open to public trade or analyst scrutiny. This also means the value is more likely to be estimated by relying on business fundamentals and perhaps some aggressive haggling, and not on public market sentiment.
- slv77 11y ago
  The last outstanding share of a company is worth the value of the entire company. Selling the last share is typically a liquidation event where all assets are sold to a third party and the cash is distributed to the remaining shareholder. At that point the comany has no value (all its assets having been liquidated) and is shut down. Lets assume that the last remaining shareholder of Apple made the choice to sell his share to the company for $1 (not a very logical choice). The company still needs shareholders to operate and so the board would need to issue new shares. At that point the could simply grant them to themselves and take control of the company.
  - mac01021 11y ago
    Why does the company need shareholders to operate? Does our legal framework prevent a corporation from owning itself and appointing its own board and so forth?
irixusr 11y ago
In conclusion the stock market is up because there's lots of easy money and companies are buying back stock.

106 points by tosseraccount 11y ago

sna1l 11y ago

Apple buys back a large amount of stock because that is the only way they can really get any return out of their stock (http://247wallst.com/technology-3/2016/03/01/why-apple-may-spend-20-billion-in-stock-buybacks-in-2016-alone-or-more/ http://247wallst.com/technology-3/2016/03/01/why-apple-may-s...). Unfortunately due to the law of large numbers, for them to grow at even a 15-20%, would require billions and billions of dollars in revenue increases. Seems like the most prudent course of action for them and their investors. Albeit you could also argue that using that cash to buy other companies might be worthwhile.

nickpsecurity 11y ago
"Albeit you could also argue that using that cash to buy other companies might be worthwhile." BOOM! Especially HW and SW I.P. companies given Apple's market and legal strategy. Yet, it's the road not taken.
- brisance 11y ago
  Only problem is that a lot of research has been done that show that M&A deals typically leads to destruction of shareholder value. [1]http://www.efinancialnews.com/story/2012-01-24/large-mergers-acquisitions-destroy-value-mckinsey http://www.efinancialnews.com/story/2012-01-24/large-mergers... [2]http://www2.warwick.ac.uk/fac/soc/wbs/subjects/accountinggroup/eventsandseminars/richard_taffler_paper.pdf http://www2.warwick.ac.uk/fac/soc/wbs/subjects/accountinggro... [3]http://www.evancarmichael.com/library/stephen-warrilow/Merger-Failures-Value-Destruction-and-Cultural-Conflicts--and-How-to-Avoid-Them.html http://www.evancarmichael.com/library/stephen-warrilow/Merge...
  - joshdickson 11y ago
    No. The goal of M&A is to increase shareholder value, if the data said acquisitions generally do not do that, we would not have M&A. Your links simply show that some M&A scenarios (major acquisitions, acquisitions that are overpaid for, etc) lead to underperformance, not that M&A as an overarching thing "typically leads to the destruction of shareholder value." Nowhere do those articles say that.
    - eru 11y ago
      We have M&A because it leads to value creation for management. They like their empires to grow.
  - nickpsecurity 11y ago
    On top of other commenter's remarks, notice I specifically said to acquire companies holding monopolies over aspects of Apple's competition plus opportunities for expansions of current strategies. Hard to imagine a HP/Compaq failure scenario here. Just lost money which the company might loose anyway. Locking in long-term success more might be worth that, though.
joshdickson 11y ago
That's not the law of large numbers.
- wlievens 11y ago
  That one's more about returning to the mean, right?
- rdl 11y ago
  There are at least two widely used "law of large numbers" -- mean reversion is more popular outside finance, and firm size vs market size is probably more popular within finance.
  - joshdickson 11y ago
    It is used in both situations, but it very clearly only means the former and the latter is incorrect. "Begs the question" is almost always used incorrectly; that doesn't mean its definition has changed.

david927 11y ago

For everyone wondering why the large cash balances on company books, this is why. But it also means that if companies are spending their 'rainy day' money that it's truly raining. The theory that the tech cycle is hitting its 8-year downturn cycle just got more substantiated.

taneq 11y ago
Does it really count as "spending rainy-day money" if they're spending their cash reserves on buybacks? It seems more to me like they just have literally nowhere else to spend the money other than bringing all those dividends back into the company.
- joshdickson 11y ago
  This is right. Though it's not that there is nowhere to spend the money, it's that the company believes there is nowhere that would generate a better return than just buying back part of the company and the money earns nothing in the bank due to low interest rates. Apple has spent a truly staggering amount of money on buybacks, money which it could have, for instance, used to buy Tesla, Spotify, etc. Even after investing in major new product areas (watch, cars), they still have more cash than they will ever realistically need.
  - eru 11y ago
    If Apple's shareholders want to hold Tesla stock, they can just buy it via the money Tesla gave to them via the buybacks. They don't need Apple sitting in the middle.
    - joshdickson 11y ago
      That's not how an acquisition works. It's not about Apple shareholders wanting to hold Tesla stock, it's about Apple potentially wanting to own the company, and that results in Tesla shareholders receiving Apple stock at whatever the agreed upon price is. Apple would not just become an equity investor and buy some Tesla stock, it would assume control of the company.

lstamour 11y ago

The article is from March 2015, FYI...

dang 11y ago
Good catch. We added that above.

cperciva 11y ago

Remember, in a perfectly liquid market without taxes, a company which executes a share buyback will have no change in its stock price, since the shared redeemed will be exactly balanced by a reduction in the value of the company; and this is also exactly equivalent to distributing profits in the form of a dividend. On the other hand, when the rate of taxation on capital gains is lower than the rate of taxation on corporate dividends, it's advantageous to pay out surplus cash in the form of capital gains by executing a share buyback. This also provides a tax-planning benefit to shareholders: Everybody is forced to realize a dividend (and pay tax on it) but some shareholders will prefer to realize more or less capital gains in a given year. In Canada we have rules which sometimes reclassify capital gains as "deemed dividends" to prevent this sort of maneuver. A far better solution would be to simply fix the tax system so that economically equivalent actions get taxed identically in the first place.

howlingfantods 11y ago
Also, companies that borrow money to finance stock purchases (eg Apple) also save on their taxes because interest expense on debt is tax deductible.
- JDDunn9 11y ago
  Expensing interest only saves you the total interest x interest rate. So they just get a 35% discount on their interest rate.
  - howlingfantods 11y ago
    You're absolutely right that the savings on interest is post tax. However the tax deductibility of interest creates a substantial tax shield and in general, has a net positive value for the company since changing the capital structure by increasing debt decreases the weighted average cost of capital. Studies suggest that debt, because of the deductibility of interest, on average leads to ~1 dollar of additional company value for every 10 dollars of debt financing (vs equity financing).
  - 11y ago

Animats 11y ago

This is a consequence of tax law and greed. There are three ways a company can pay for their capital - dividends, interest, and stock buybacks. The first is taxable. Only the last makes options given to executives valuable. The US should tax buybacks and interest as it does dividends. That would put a stop to this.

AnthonyMouse 11y ago
All of them are taxable. Interest is taxable income (to the lender), though it's also a prime opportunity for tax arbitrage so the lenders have a strong tendency to be incorporated in low tax jurisdictions. And buybacks effectively get taxed as capital gains (because they result in higher share prices), but not until the shareholders sell their shares, and of course then it's at the capital gains rate. So what you're really getting at is that dividends and capital gains should be taxed at the same rate. And if you really want to promote dividends, let reinvested dividends defer taxes like buybacks do until the shares purchased with the dividends are sold, even if they're reinvested in a different company. Then you'll see investors demanding dividends because the tax advantage of buybacks would be gone and dividends would have the advantage of allowing investors to choose what to invest the new money in.
- sokoloff 11y ago
  > So what you're really getting at is that dividends and capital gains should be taxed at the same rate. In large part, they are: https://en.wikipedia.org/wiki/Qualified_dividend https://en.wikipedia.org/wiki/Qualified_dividend
  - roganp 11y ago
    Except that with a capital gain you can choose when realize that gain (and when you pay that tax) whereas the company defines its dividend schedule. But I did not know that was the law...it is always/everywhere repeated that dividends are taxed at the personal income rates (e.g. many times in these comments that is repeated), but that is not true.
- 11y ago

deleted 11y ago

[deleted]

pfarnsworth 11y ago

Buybacks are a terrible waste of shareholders' money and is akin to putting lipstick on a pig. The only reason why IBM has had relatively decent numbers is because of the financial engineering associated with buybacks. Unfortunately, it all blew up with the current CEO who has to deal with the fact that revenues are dropping like a rock and can't be out-engineered anymore.

riggins 11y ago
Warren Buffet is on the phone for you ... He says when the intrinsic value of a company is greater then the price implied by the stock, buybacks benefit the shareholders .. And when the intrinsic value is less than the price implied by the market price of the stock buybacks are bad for shareholders.

walterbell 11y ago

Are there public companies where projected buybacks would result in the company being taken private, after N years?

nickpsecurity 11y ago
I've wondered this myself. Companies going back private in general. Curious how often that sort of thing happens and what benefits there are. Also, thought it might happen to Apple when I saw what profits they were making.
- ekianjo 11y ago
  > what benefits there are. Benefits are obvious: you don't have to answer the shareholders for every quarter. You are free to innovate without thinking about short term profits only. Of course there are drawbacks as well, such as access to Capital. But when you sit on a large amount of cash, this is less relevant.
kgwgk 11y ago
No. "Going private" is an option when a company has less than 500 shareholders. A share repurchase or buyback is when a company buys its own shares, typically in the open market, to reduce the numbers of shares outstanding. It is extremely unlikely that as result of buybacks the number of shareholders will go below 500. It would require all the others to voluntarily sell their shares.
dingaling 11y ago
Yes, Michael Dell took his namesake company private again in 2013 after $25 billion of buy-backs.
- kgwgk 11y ago
  He (they) also put $25bn on the table to buy the 85% he did not control already.

xenadu02 11y ago

So many companies with so much profit they literally can't find any way to invest it to generate return. It might make you wonder why wages are stagnant or what the argument for outsourcing to lower labor costs is really about, if you were the sort of person to bother wondering about such things.

zanny 11y ago
You shouldn't wonder. Businesses need demand for something before they start making it. That doesn't need to be demand for something that exists, but if there were money out there for goods not yet made there would be more investment towards them.* Since that is not the case, you can presume there is not money out there not yet tapped. Which, considering economic trends in recent decades towards wealth concentration in the same capitalist class who has nothing to spend money on except making more money nowadays, that should be no surprise. When the consumers are getting poorer, their demand is dropping, not increasing, so there is no reason to ever try increasing supply. Just use monetary loopholes to profit more instead. * : all relative to risk. There are of course things you could take large risks on and see incredible returns if you succeed, but you cannot predict or even guarantee success on them (gene therapy, new silicon fab tech, nuclear energy, new solar panel tech, better battery tech, AI, and way, way more). When the board is awash in cash from a perpetual money machine, and you could easily just do stock buybacks to make shareholders happy, you go with the no risk easy route to appease shareholders than taking the risk.
virmundi 11y ago
I no longer wonder about such things. The simple fact of the matter is that the system is designed to work against wage earners. It focuses on the benefit of our corporate overlords. For example, I use to work for a company as a wage earner. I left, moving my 401k into a self-directed IRA. Since the market has been bad lately, I remained in cash. I want to put that money somewhere else: property. I would love to buy a building downtown (which is theoretically possible). I would convert the top floor, about 5k sq/ft, into a co-work office that charges $10/day. The first floor I would rent out to someone, like a grocer. Sadly, the system works against this dream. First, I can't use the building directly if I purchased it with the IRA. I, as the IRA holder, cannot utilize any properties within the account directly. There goes the co-work. I can't put sweat equity in because that is an illegal contribution. There goes fixing the building without loosing money on labor. I can't directly take the checks and deposit them in the IRA. The law requires that all checks go directly to IRA holding company (who will take a percentage). Finally, I have to get a special IRA account that holds property. Trick is that there is almost no one that does that since they don't make a lot of money. The few that do, take a big chunk. So I, as a lowly wage earner, can't tap my largest asset directly. I can only use my money to feed the pockets of others via stocks and bonds. As the Simpson's sung, "It's the American way!"

ww520 11y ago

Is this one way to use the cash from profit oversea instead of bringing them back into the country and taxed?

carsongross 11y ago

Some day, please let it be soon, corporations will all be treated as big LLCs, with profits/dividends passed through to shareholders proportionally to be taxed at the individual income rates. Couple that with taxing cap-gains as income, since it is, and all this nonsense goes away. Owners (rather than todays "owners") get their share of profits, rich people pay their share in taxes, good triumphs over evil, and so on.

sabalaba 11y ago
Taxing capital gains at 39.6% (our current top income bracket as of 2016) would be bad for business, job creation, and growth in the US economy. California also taxes long term capital gains (LTCG) at a top rate of 13%. It would mean that an investor in California would experience a LTCG rate of 52.6%, the highest in the entire OECD. Capital has legs and having a non-competitive capital gains rate would incentivize investors to allocate their capital elsewhere. [1] http://taxfoundation.org/article/2016-tax-brackets http://taxfoundation.org/article/2016-tax-brackets [2] http://www.forbes.com/sites/robertwood/2015/03/25/u-s-capital-gain-rate-among-worlds-highest-but-president-obama-wants-more/#10f23b8f20ce http://www.forbes.com/sites/robertwood/2015/03/25/u-s-capita... [3] http://taxfoundation.org/blog/how-high-are-capital-gains-tax-rates-your-state http://taxfoundation.org/blog/how-high-are-capital-gains-tax...
- rtpg 11y ago
  This assumes that capital can get the same ROI anywhere in the world, which is not at all true. If the strongest businesses are based in the US, the US can force investors to play by the rules they want. It's just another part of the equation.
  - LoSboccacc 11y ago
    Shell companies all over the world disagree. You can have access to the US market and still dodge taxes.
  - deleted 11y ago
    [deleted]

seizethecheese 11y ago

Apple bought back $30 Billion of itself in 2015[1]. It's market cap is around $600 Billion. It's buying 1/20th of itself every year. [1] http://www.aboveavalon.com/notes/2015/11/2/apple-is-buying-back-shares-like-theres-no-tomorrow http://www.aboveavalon.com/notes/2015/11/2/apple-is-buying-b...

wlievens 11y ago

Isn't there a (big) difference between just buying ack shares and keeping them in a pool, or actually destroying them to reduce the number of outstanding shares? Or are those two equivalent?

onion2k 11y ago

A lot of C-level pay is to tied to the company's earnings-per-share. A buyback makes that number go up without actually improving anything. It's a lazy way of getting your bonus. Here in the UK it was illegal for a very long time.

Gustomaximus 11y ago
If this is a lazy way for a CEO to meet goals, I'm as concerned how lazy the board is in not putting scenario exceptions in the bonus to allow for stock concentration via buyback. It would be a fairly simple line in a bonus plan. Likewise they shouldn't be punished if share are diluted via raising money on the markets if that is the best things to do at the time.

downandout 11y ago

I wonder how much of this is related to the harsh corporate tax environment in the US. Take Apple for example. They can't use their offshore cash to directly fund buybacks or dividends without repatriating the money and paying high US corporate taxes on it. Instead, they have borrowed against their offshore cash to make buybacks, and then whatever cash is needed for debt service can either be funded from operating income or by importing offshore cash in a relative trickle, with a correspondingly low tax burden, while the money grows virtually tax-free overseas. So by doing share repurchases with borrowed money, shareholders and executives can reap the benefits of offshore cash without subjecting it to the enormous tax burden they would by directly repatriating the money. As long as corporate profits are still piling up abroad, this trend of corporate buybacks will likely continue.

ChuckMcM 11y ago

Does anyone know if you can use foreign funds in a buyback as a way to repatriate funds? Wondering if you have cash sitting in a foreign bank, can you use those funds to buy your own stock? Probably not since it would be a giant loophole you could drive a bunch of cash through.

iofj 11y ago
Yes you can. From [1]: While U.S. tax law is currently making it unattractive for Apple to spend its foreign earnings on buybacks, that pile of overseas capital (now above $200 billion) is effectively guaranteeing bonds that raise cheap capital Apple can use to buyback its shares at an extreme discount. Steps: 1. Loan "US" cash, guaranteed by foreign cash (doesn't need profits repatriated) 2. Use loaned cash to buyback shares Optimization: 1. Loan "US" cash, guaranteed by foreign cash 2. Buyback using loaned cash 3. Have your foreign subsidiary buy the loan from whoever you loaned from 4. Use the interest payments to transform US income into foreign (non-taxable) income (it's not quite unlimited, there's a number of problems with this) [1] http://appleinsider.com/articles/15/10/27/apple-inc-snatches-up-14-billion-of-its-own-shares-in-massive-q4-buyback-surge http://appleinsider.com/articles/15/10/27/apple-inc-snatches...

mrfusion 11y ago

Guys what happens if a company buys back all its shares? I've always wondered that.

RawData 11y ago
The short answer is, it becomes a private company, no longer traded on the stock exchanges.
- mrfusion 11y ago
  But who would own it? There wouldn't be any shareholders left.
  - TheOtherHobbes 11y ago
    There wouldn't be any public shareholders left, and the shares would no longer be traded on the public markets. But it's still possible to own, sell, or give away the shares privately. It just means any dealings are by private agreement, and not open to public trade or analyst scrutiny. This also means the value is more likely to be estimated by relying on business fundamentals and perhaps some aggressive haggling, and not on public market sentiment.
slv77 11y ago
The last outstanding share of a company is worth the value of the entire company. Selling the last share is typically a liquidation event where all assets are sold to a third party and the cash is distributed to the remaining shareholder. At that point the comany has no value (all its assets having been liquidated) and is shut down. Lets assume that the last remaining shareholder of Apple made the choice to sell his share to the company for $1 (not a very logical choice). The company still needs shareholders to operate and so the board would need to issue new shares. At that point the could simply grant them to themselves and take control of the company.
- mac01021 11y ago
  Why does the company need shareholders to operate? Does our legal framework prevent a corporation from owning itself and appointing its own board and so forth?

irixusr 11y ago

In conclusion the stock market is up because there's lots of easy money and companies are buying back stock.