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One of the interesting things which has egged on the current bull run has been the abundance of cash. I need to find the exact link but it seems lot of companie

One of the interesting things which has egged on the current bull run has been the abundance of cash. I need to find the exact link but it seems lot of companies are buying back stocks which then masks the nonperformance under the garb of market beating EPS growth.

sokoloff 9y ago
What's the under or non-performance? If a company is generating enough cash to buyback its shares, that's every bit as much a real return to shareholders as a dividend would be. If a company retires 10% of its shares from a buyback, each investor now owns ~11% more of the company than they did before.
- adamlett 9y ago
  It’s not so simple. In a perfect market, the market value of the company will go down when company buys back stock. Why? Because the value of the cash is now gone. So in your example, each stockholder just owns a slightly larger piece of a slightly smaller pie. Of course markets are not perfect, and nobody knows for sure if the market value of the company is fair or not. When a company engages in stock buybacks, it’s essentially saying that it believes its stock to be undervalued, which is why stock buybacks sometimes have the surprising effect of elevating the stock price, at least in the short run. After all, who has better information about the company and its prospects than itself? But as they say, the market is a voting machine in the short run, but a weighing machine in the long run. If it turns out that the market value of the company is higher than its intrinsic value, then stock buybacks are actually destroying shareholder value. The cash would have been better spent buying shares in an index fund.
  - JumpCrisscross 9y ago
    > In a perfect market, the market value of the company will go down when company buys back stock Consider a company worth $100 with ten shares of stock with $10 of cash on their balance sheet. Each share is worth $10. They company uses the $10 to buy back one share of stock. The company is now worth $90 and has 9 shares outstanding. Each share is still worth $10.
    - arcticfox 9y ago
      Right, it depends whether "market value" is referring to share price (your example) or market cap (which indeed should go down).
      - adamlett 9y ago
        Yes, I was referring to market cap.
  - thaumasiotes 9y ago
    > which is why stock buybacks sometimes have the surprising effect of elevating the stock price, at least in the short run All large stock purchases have the short-run effect of elevating the stock price. It would be shocking if this didn't happen; it is not surprising in the slightest that it does.
    - adamlett 9y ago
      It’s “surprising” because—assuming the company is correctly valued by the market—the company should become less valuable when the cash is spent. The company doesn’t “get” anything for the money, because the shares it buys, get retired. Edit: Sorry, I got myself confused and mixed up the total market cap (which should go down) with the share price (which should stay the same, because there are now fewer of them).
  - pathseeker 9y ago
    >It’s not so simple. In a perfect market, the market value of the company will go down when company buys back stock. Why? Because the value of the cash is now gone. So in your example, each stockholder just owns a slightly larger piece of a slightly smaller pie. That's not right. You have a larger piece of a smaller pie, but you have the same amount of pie. Edit: the confusion is you are talking about total market cap while the parent is talking about share price. Total market cap is irrelevant to stockholders. Share price is all that's relevant.
    - adamlett 9y ago
      You have a larger piece of a smaller pie, but you have the same amount of pie. Yes, this was my point. Stock buybacks are value neutral if the market value of the company is correct. Ie. the share price stays the same.
- captain_perl 9y ago
  You're missing the point. When there's less shares, the EPS increases, making it appear the company is performing better. It's the easiest lever a CEO can push on to look good. The numbers don't lie, right?
  - mathattack 9y ago
    It may underperform in absolute terms, but or shareholders per share is what matters. If a company has lots of projects that can exceed the cost of capital, then they reinvest profits and ingest more capital. When this is no longer the case, the responsible thing to do is return money to shareholders via dividends or (more tax efficiently) via buybacks. Then investors can use the money elsewhere. The issue here is it seems like on the margin CEOs get more risk averse on long term projects as they vest, and can grab the bird in the hand.
  - sokoloff 9y ago
    > When there's less shares, the EPS increases, making it appear the company is performing better. When there are fewer shares, my individual stake in the company is actually performing better.
    - captain_perl 9y ago
      No, there's less shares (which are priced higher) but also less cash available. Your individual ownership is the same value, but the optics are better for the CEO. Also, and most importantly, the CEO is now in the money and can sell, so his compensation increased just by increasing the share price.
      - teemwerk 9y ago
        That's not really an honest interpretation. The part you're ignoring is future earnings. Assuming a company maintains its earnings, you have a bigger slice of the pie next quarter. If the company trades at the same EPS multiple, your stake definitely has gained value. You're totally ignoring enterprise value. In a vacuum, nothing has changed about a company's future earnings when they repurchase shares. The kind of bizarre roundabout way to consider it is if Apple bought 25% of itself with its money mountain (they can't, beside the point), your stake in the company goes up because you own shares in Apple, which in turn owns 25% of itself. You effectively have more equity in Apple when it buys its own shares.
- blevin 9y ago
  Unlike dividends, this channel of return seems distributed according to shareholder's trading savvy. It's often said that a company is overpaying for its shares (1) but the phenomenon minus narrative often seems that the company is intentionally playing the losing side of the trade to offer up value to shareholders who sell. This makes it an active exercise to capture that value, compared to a rule-allocated return like dividends. Another interesting thing is that this form of buyback return channel would seem to exclude passive index funds unless they were actively shrinking (i.e. selling). (1) Example from this morning talking how GE bought $30B of shares and later tanked. That's a pretty significant although unequally distributed return of value to those shareholders who sold vs. those still owning GE. https://finance.yahoo.com/news/general-electric-company-stock-gone-184740841.html https://finance.yahoo.com/news/general-electric-company-stoc... > They call it “returning money to shareholders.” I call it “wasting shareholder money,” because they almost always buy at prices that are too high
  - mywittyname 9y ago
    The same thing happened to Borders before declaring bankruptcy in 2011.
zombieprocesses 9y ago
After the financial crisis, people were demanding that CEO pay be tied to company performance. So instead of large salaries, CEOs were given large equity positions ( options ). The politicians/people thought this was a punishment, but it was actually a great boon for CEOs. Not only do they pay 20% on capital gains instead of nearly 40% on salary, they can boost stock prices artificially over the short term by taking out loans ( nearly 0% for the last 10 years ) and then buy stocks back. This is also a favorite hedge fund raid. Hedge funds open up large positions on companies. Demand board seats. Get board seats and then get the execs to sell assets, layoff employees and take out loans to buyback shares. Get out with a nice profit. And the company is left with a huge debt loan that'll crush them once interest rates rise.
- closeparen 9y ago
  What? You pay income tax on the value of your options, and also capital gains tax on the appreciation in their value after vesting. That’s only a tax advantage if you get options in a worthless company that later becomes valuable. The luckier startup employees are in that boat, not Fortune 500 CEOs. For public companies, you can reap this advantage yourself by buying and holding their stock using your cash compensation.
  - zombieprocesses 9y ago
    > You pay income tax on the value of your options, and also capital gains tax on the appreciation in their value after vesting. Yes. That was my point. > That’s only a tax advantage if you get options in a worthless company that later becomes valuable. What? Since 2010, most large companies had their stock prices double, triple or even more. > For public companies, you can reap this advantage yourself by buying and holding their stock using your cash compensation. Except you don't get all your salary upfront.
    - 111_1_111 9y ago
      > Yes. That was my point. No, it wasn't. This is what you said: > Not only do they pay 20% on capital gains instead of nearly 40% on salary That statement is patently false.

sokoloff 9y ago

What's the under or non-performance? If a company is generating enough cash to buyback its shares, that's every bit as much a real return to shareholders as a dividend would be. If a company retires 10% of its shares from a buyback, each investor now owns ~11% more of the company than they did before.

adamlett 9y ago
It’s not so simple. In a perfect market, the market value of the company will go down when company buys back stock. Why? Because the value of the cash is now gone. So in your example, each stockholder just owns a slightly larger piece of a slightly smaller pie. Of course markets are not perfect, and nobody knows for sure if the market value of the company is fair or not. When a company engages in stock buybacks, it’s essentially saying that it believes its stock to be undervalued, which is why stock buybacks sometimes have the surprising effect of elevating the stock price, at least in the short run. After all, who has better information about the company and its prospects than itself? But as they say, the market is a voting machine in the short run, but a weighing machine in the long run. If it turns out that the market value of the company is higher than its intrinsic value, then stock buybacks are actually destroying shareholder value. The cash would have been better spent buying shares in an index fund.
- JumpCrisscross 9y ago
  > In a perfect market, the market value of the company will go down when company buys back stock Consider a company worth $100 with ten shares of stock with $10 of cash on their balance sheet. Each share is worth $10. They company uses the $10 to buy back one share of stock. The company is now worth $90 and has 9 shares outstanding. Each share is still worth $10.
  - arcticfox 9y ago
    Right, it depends whether "market value" is referring to share price (your example) or market cap (which indeed should go down).
    - adamlett 9y ago
      Yes, I was referring to market cap.
- thaumasiotes 9y ago
  > which is why stock buybacks sometimes have the surprising effect of elevating the stock price, at least in the short run All large stock purchases have the short-run effect of elevating the stock price. It would be shocking if this didn't happen; it is not surprising in the slightest that it does.
  - adamlett 9y ago
    It’s “surprising” because—assuming the company is correctly valued by the market—the company should become less valuable when the cash is spent. The company doesn’t “get” anything for the money, because the shares it buys, get retired. Edit: Sorry, I got myself confused and mixed up the total market cap (which should go down) with the share price (which should stay the same, because there are now fewer of them).
- pathseeker 9y ago
  >It’s not so simple. In a perfect market, the market value of the company will go down when company buys back stock. Why? Because the value of the cash is now gone. So in your example, each stockholder just owns a slightly larger piece of a slightly smaller pie. That's not right. You have a larger piece of a smaller pie, but you have the same amount of pie. Edit: the confusion is you are talking about total market cap while the parent is talking about share price. Total market cap is irrelevant to stockholders. Share price is all that's relevant.
  - adamlett 9y ago
    You have a larger piece of a smaller pie, but you have the same amount of pie. Yes, this was my point. Stock buybacks are value neutral if the market value of the company is correct. Ie. the share price stays the same.
captain_perl 9y ago
You're missing the point. When there's less shares, the EPS increases, making it appear the company is performing better. It's the easiest lever a CEO can push on to look good. The numbers don't lie, right?
- mathattack 9y ago
  It may underperform in absolute terms, but or shareholders per share is what matters. If a company has lots of projects that can exceed the cost of capital, then they reinvest profits and ingest more capital. When this is no longer the case, the responsible thing to do is return money to shareholders via dividends or (more tax efficiently) via buybacks. Then investors can use the money elsewhere. The issue here is it seems like on the margin CEOs get more risk averse on long term projects as they vest, and can grab the bird in the hand.
- sokoloff 9y ago
  > When there's less shares, the EPS increases, making it appear the company is performing better. When there are fewer shares, my individual stake in the company is actually performing better.
  - captain_perl 9y ago
    No, there's less shares (which are priced higher) but also less cash available. Your individual ownership is the same value, but the optics are better for the CEO. Also, and most importantly, the CEO is now in the money and can sell, so his compensation increased just by increasing the share price.
    - teemwerk 9y ago
      That's not really an honest interpretation. The part you're ignoring is future earnings. Assuming a company maintains its earnings, you have a bigger slice of the pie next quarter. If the company trades at the same EPS multiple, your stake definitely has gained value. You're totally ignoring enterprise value. In a vacuum, nothing has changed about a company's future earnings when they repurchase shares. The kind of bizarre roundabout way to consider it is if Apple bought 25% of itself with its money mountain (they can't, beside the point), your stake in the company goes up because you own shares in Apple, which in turn owns 25% of itself. You effectively have more equity in Apple when it buys its own shares.
blevin 9y ago
Unlike dividends, this channel of return seems distributed according to shareholder's trading savvy. It's often said that a company is overpaying for its shares (1) but the phenomenon minus narrative often seems that the company is intentionally playing the losing side of the trade to offer up value to shareholders who sell. This makes it an active exercise to capture that value, compared to a rule-allocated return like dividends. Another interesting thing is that this form of buyback return channel would seem to exclude passive index funds unless they were actively shrinking (i.e. selling). (1) Example from this morning talking how GE bought $30B of shares and later tanked. That's a pretty significant although unequally distributed return of value to those shareholders who sold vs. those still owning GE. https://finance.yahoo.com/news/general-electric-company-stock-gone-184740841.html https://finance.yahoo.com/news/general-electric-company-stoc... > They call it “returning money to shareholders.” I call it “wasting shareholder money,” because they almost always buy at prices that are too high
- mywittyname 9y ago
  The same thing happened to Borders before declaring bankruptcy in 2011.

zombieprocesses 9y ago

After the financial crisis, people were demanding that CEO pay be tied to company performance. So instead of large salaries, CEOs were given large equity positions ( options ). The politicians/people thought this was a punishment, but it was actually a great boon for CEOs. Not only do they pay 20% on capital gains instead of nearly 40% on salary, they can boost stock prices artificially over the short term by taking out loans ( nearly 0% for the last 10 years ) and then buy stocks back. This is also a favorite hedge fund raid. Hedge funds open up large positions on companies. Demand board seats. Get board seats and then get the execs to sell assets, layoff employees and take out loans to buyback shares. Get out with a nice profit. And the company is left with a huge debt loan that'll crush them once interest rates rise.

closeparen 9y ago
What? You pay income tax on the value of your options, and also capital gains tax on the appreciation in their value after vesting. That’s only a tax advantage if you get options in a worthless company that later becomes valuable. The luckier startup employees are in that boat, not Fortune 500 CEOs. For public companies, you can reap this advantage yourself by buying and holding their stock using your cash compensation.
- zombieprocesses 9y ago
  > You pay income tax on the value of your options, and also capital gains tax on the appreciation in their value after vesting. Yes. That was my point. > That’s only a tax advantage if you get options in a worthless company that later becomes valuable. What? Since 2010, most large companies had their stock prices double, triple or even more. > For public companies, you can reap this advantage yourself by buying and holding their stock using your cash compensation. Except you don't get all your salary upfront.
  - 111_1_111 9y ago
    > Yes. That was my point. No, it wasn't. This is what you said: > Not only do they pay 20% on capital gains instead of nearly 40% on salary That statement is patently false.