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I think this is much ado about nothing. Companies get killed for cutting dividends, so doing buybacks are a good way to create value for shareholders in a manne

I think this is much ado about nothing. Companies get killed for cutting dividends, so doing buybacks are a good way to create value for shareholders in a manner than can be ramped up and down. It's also more tax efficient (I pay taxes on dividends, but don't pay taxes on owning an ever so slightly larger piece of the company). The author picks on Apple, but doesn't mention that Apple has dramatically increased its headcount and R&D spending all the while buying back stock. The truth is Apple is a mature company that is an incredible money making machine, they literally don't have ways to use the profits to make more successful tech products. What else should they do other than reward shareholders? Anyway, if it turns out when I sell my shares they were bought by the company, guess what I'll do with the proceeds? Either spend it (stimulating the economy) or plow it back into other investments. Buyback money doesn't magically disappear, it just cycles what the capital is being used for.

asdsa5325 8y ago
Yep, Apple also has tons of cash reserves, so taking on debt doesn't really matter for them.
- jonknee 8y ago
  And they were taking on debt as a work around for double taxes on foreign income. At crazy low rates because they are not a credit risk whatsoever. It was basic accounting.
iaabtpbtpnn 8y ago
They could fix the damn MBP keyboard...
- jonknee 8y ago
  Maybe they can buy them back!
Scoundreller 8y ago
On the tax side, I enjoy being able to time my gains/losses, instead of paying taxes every year. Also, as a foreigner, I have tax withheld by the IRS on US sourced income, but I do not on capital gains (except through my retirement account due to tax treaties).
aczerepinski 8y ago
Buybacks often don't creat value for shareholders though. When a stock is trading for more than its intrinsic value, buybacks destroy value. Buffett/Berkshire is literally the only example I can think of where they only buyback shares when prices drop below a certain threshold. Most companies do it regardless of whether it is creating or destroying value, based only on whether they have cash authorized to spend.
- slededit 8y ago
  You could argue the market is efficient and therefore always trades at the intrinsic value - on average. This view has more following among economists. Although if your CEO happens to also be the most legendary stock picker of our time then I'd let him time the market.
- jonknee 8y ago
  Who's to say what the intrinsic value is though? If you have an opinion on that you should be trading on it until the value comes in line and at that point buybacks are fine. Buybacks tend to happen at the worst times (boom years) and cut out in recessions which is counter to what you'd want as an investor. Though if you think of it more as an alternative to special dividends it makes more sense.
  - tptacek 8y ago
    They aren't saying there's a clearly readable intrinsic value for any given company, only that there is some intrinsic value, and that prices can float both below and above it. When they do, buybacks destroy value. Obviously, management will always have some argument to support the higher value implied by a buyback (it could hardly be otherwise, unless you think management could with a straight face argue that they should overpay for their own stock). When they guess wrong --- and they're clearly incentivized to guess high --- they cause problems.
    - skybrian 8y ago
      The thing is, if management is wrong about the price, aren't the shareholders wrong too? It doesn't make sense for shareholders to own stock that they think will go down. If they really think that, they should sell. So shareholders should think the stock is either fairly valued or undervalued, almost by definition. Any shareholders who don't sell during a buyback are compensated by owning a larger share of the company at what should be considered a fair or generous price from their point of view. The place where this breaks down is when you believe a company would have a higher intrinsic value, provided that it has sufficient financing. But this isn't based on the stock price; it's based on your theory of how much money you think the company will need. Also, from a non-shareholder's point of view (say, bondholders), a buyback means the company's ownership changed, it has less cash, and they didn't get anything for it.
TangoTrotFox 8y ago
The reason buybacks are disconcerting (aside from the debt driven buybacks the article focuses on) is precisely because of what you're saying. Buybacks are often a signal that a company has run out of ideas for what to do with with their money, other than what they're already doing. Especially for a tech company, that's a very bad sign. For instance you refer to Apple as a mature company yet the interesting thing is that today they are basically 'the iPhone company' - making the wide majority of their profits from a product type that didn't exist 11 years ago. And this is a typical pattern with tech and electronics. Times and trends change very quickly and the winner tends to be the company that's on top of the change. If Apple doesn't manage to move beyond the iPhone they will stagnate (which is arguably already happening) and inevitably decline.
gaius 8y ago
they literally don't have ways to use the profits to make more successful tech products And yet they haven’t updated their pro line since 2012. And the quality of OSX is slipping badly. If they are really bereft of ideas, spending a few billion on fixing bugs (instead of the animated poop icon) might keep them occupied until inspiration strikes
- compcoffee 8y ago
  >And yet they haven’t updated their pro line since 2012. And the quality of OSX is slipping badly. But these are subjective measures (to which I happen to agree with you). It's not as if they aren't investing in their products.

asdsa5325 8y ago

Yep, Apple also has tons of cash reserves, so taking on debt doesn't really matter for them.

jonknee 8y ago
And they were taking on debt as a work around for double taxes on foreign income. At crazy low rates because they are not a credit risk whatsoever. It was basic accounting.

iaabtpbtpnn 8y ago

They could fix the damn MBP keyboard...

jonknee 8y ago
Maybe they can buy them back!

Scoundreller 8y ago

On the tax side, I enjoy being able to time my gains/losses, instead of paying taxes every year. Also, as a foreigner, I have tax withheld by the IRS on US sourced income, but I do not on capital gains (except through my retirement account due to tax treaties).

aczerepinski 8y ago

Buybacks often don't creat value for shareholders though. When a stock is trading for more than its intrinsic value, buybacks destroy value. Buffett/Berkshire is literally the only example I can think of where they only buyback shares when prices drop below a certain threshold. Most companies do it regardless of whether it is creating or destroying value, based only on whether they have cash authorized to spend.

slededit 8y ago
You could argue the market is efficient and therefore always trades at the intrinsic value - on average. This view has more following among economists. Although if your CEO happens to also be the most legendary stock picker of our time then I'd let him time the market.
jonknee 8y ago
Who's to say what the intrinsic value is though? If you have an opinion on that you should be trading on it until the value comes in line and at that point buybacks are fine. Buybacks tend to happen at the worst times (boom years) and cut out in recessions which is counter to what you'd want as an investor. Though if you think of it more as an alternative to special dividends it makes more sense.
- tptacek 8y ago
  They aren't saying there's a clearly readable intrinsic value for any given company, only that there is some intrinsic value, and that prices can float both below and above it. When they do, buybacks destroy value. Obviously, management will always have some argument to support the higher value implied by a buyback (it could hardly be otherwise, unless you think management could with a straight face argue that they should overpay for their own stock). When they guess wrong --- and they're clearly incentivized to guess high --- they cause problems.
  - skybrian 8y ago
    The thing is, if management is wrong about the price, aren't the shareholders wrong too? It doesn't make sense for shareholders to own stock that they think will go down. If they really think that, they should sell. So shareholders should think the stock is either fairly valued or undervalued, almost by definition. Any shareholders who don't sell during a buyback are compensated by owning a larger share of the company at what should be considered a fair or generous price from their point of view. The place where this breaks down is when you believe a company would have a higher intrinsic value, provided that it has sufficient financing. But this isn't based on the stock price; it's based on your theory of how much money you think the company will need. Also, from a non-shareholder's point of view (say, bondholders), a buyback means the company's ownership changed, it has less cash, and they didn't get anything for it.

TangoTrotFox 8y ago

The reason buybacks are disconcerting (aside from the debt driven buybacks the article focuses on) is precisely because of what you're saying. Buybacks are often a signal that a company has run out of ideas for what to do with with their money, other than what they're already doing. Especially for a tech company, that's a very bad sign. For instance you refer to Apple as a mature company yet the interesting thing is that today they are basically 'the iPhone company' - making the wide majority of their profits from a product type that didn't exist 11 years ago. And this is a typical pattern with tech and electronics. Times and trends change very quickly and the winner tends to be the company that's on top of the change. If Apple doesn't manage to move beyond the iPhone they will stagnate (which is arguably already happening) and inevitably decline.

gaius 8y ago

they literally don't have ways to use the profits to make more successful tech products And yet they haven’t updated their pro line since 2012. And the quality of OSX is slipping badly. If they are really bereft of ideas, spending a few billion on fixing bugs (instead of the animated poop icon) might keep them occupied until inspiration strikes

compcoffee 8y ago
>And yet they haven’t updated their pro line since 2012. And the quality of OSX is slipping badly. But these are subjective measures (to which I happen to agree with you). It's not as if they aren't investing in their products.