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US corporations announced $437B of buybacks in Q2 2018, doubling previous record
- forapurpose 8y agoA related analysis of the economics of the 'Buyback Economy', from about a month ago: https://news.ycombinator.com/item?id=17296102 https://news.ycombinator.com/item?id=17296102
- bb2018 8y agoI'm always a bit unclear on how stock buybacks get reported so badly, though I suppose it is in the complexity of the transaction. If that $437B was in dividends I doubt anyone would think twice about it, yet that is in essence what they are.
- maerF0x0 8y agoExcept they're not. Buybacks increase the share price, that means leveraged investments (such as options) have a disproportionate increase in value.
- bb2018 8y agoSure - but is anyone complaining that companies are getting rich off options? Buybacks increase the share price and that is why board of directors prefer them over dividends (since their bonuses may be tied to them) but this is simply an aligning of preferences. If I own a company I want it's value to go up. If I could choose between my $100 stock going to $110 or my $100 going to $105 with a $5 dividend I'd choose the first since it is more tax efficient.
- adrr 8y agoWouldn't it make more sense to issue more stock when the stock is at all time high and buyback when the stock is low like during a recession?
- deleted 8y ago[deleted]
- jannes 8y agoThat would dilute the share price when it's high and boost it when it's low. Reaching some kind of equilibrium in the middle... What would be the point of that? A stock buyback is not an investment, but rather a transfer of wealth that's not taxed very much.
- adrr 8y agoFor a company, it would be obtaining capital cheaply on a per share basis. Most of these companies have huge debt. Take for example, Amgen which is spending $10 billion to buy back shares. They have over 31 billion in debt or which is $10 billion is short term.
- graeme 8y agoThat’s what Warren buffett advocates.
- Analemma_ 8y agoMeanwhile, in March real wages fell 0.1% despite low unemployment: https://twitter.com/erikbryn/status/1016667480771780610 https://twitter.com/erikbryn/status/1016667480771780610 Three cheers for the Trump tax cuts that we were promised would boost wages. How much did we add to the deficit for this crap?
- berbec 8y ago$2.3T [1] 1: http://www.latimes.com/politics/la-na-pol-tax-cuts-debt-20180626-story.html http://www.latimes.com/politics/la-na-pol-tax-cuts-debt-2018...
- prolikewh0a 8y agoAnyone who thought the working class would benefit in any way from these tax cuts was delusional. Profit is almost never seen by the creators (workers) of the profit in this current system.
- craftyguy 8y ago> Anyone who thought the working class would benefit in any way from these tax cuts was delusional. Sure, but the 'anyone' includes a large (though not majority) portion of the US voting population. Now what?
- astrodust 8y agoA large but not majority portion of the US voting population can't find America on a map. Now what?
- craftyguy 8y agoSo we should accept that a large but not majority portion of the US voting population is relatively uneducated? Or do something about it? I fail to see how your comment is making a different point than mine, maybe it's not?
- berbec 8y agoGood thing companies are putting that big tax cut into hiring more worker and increasing wages. Otherwise, it would just be a big plus for corporate bottom lines and yet again invalidate trickle down, voodoo economics.
- clumsysmurf 8y agoGod forbid! Goldman Sachs : "every percentage-point increase in labor-cost inflation will drag down earnings of companies in the S&P 500 by 0.8%" https://www.wsj.com/articles/wage-gains-threaten-to-squeeze-retail-industrial-profits-1531134000 https://www.wsj.com/articles/wage-gains-threaten-to-squeeze-...
- ljw1001 8y agoI'm not an economist, but doesn't that make people .2% better off on average? It's almost like GS is interested in something other than the common good. :)
- mdorazio 8y agoTo me, the increasing buyback trend is an indicator that the US economy is effectively nearing a peak and the underlying economic model that depends on infinite growth is going to need rework in the not too distant future. Companies generally do buybacks when they don't have any productive use of their profits that would contribute to fundamentals (and thus boost share price the old-fashioned way). Companies are piling up profits and then realizing that it's easier to boost share price by just buying their own shares than by investing in more long-term things. As per-worker productivity increases and wages continue to see only modest gains this trend is likely to continue. That's worrying for the vast majority of Americans who aren't executives or shareholders.
- Retric 8y agoBuybacks have significant tax advantages and are little different from dividends. Really, the entire point of companies is to give shareholders money, so buybacks don't say much about the wider economy.
- germinalphrase 8y agoIt is certainly one point of companies.
- Carioca 8y agoIt's a very common point of view, famously championed by Milton Friedman[1] 1: https://en.wikipedia.org/wiki/Friedman_doctrine https://en.wikipedia.org/wiki/Friedman_doctrine
- vannevar 8y agoMore like a common misconception. If shares were distributed broadly, Friedman's view might make sense, and perhaps he was assuming that overall, it is. But stock ownership is not broad, it is exceedingly narrow---a tiny fraction of the population holds a wildly disproportionate share. So if corporations, which impact virtually everyone's lives, truly owe a duty only to their shareholders, it would be deeply autocratic. Friedman is simply wrong: all corporations are chartered by government, and consequently have a duty to promote the general welfare, above and beyond their duty to enrich their shareholders.
- DesiLurker 8y agowhy do these buybacks happen (seemingly) closer to market top rather than bottom? thats just reflecting a common theme across market over last year or so. seems like a very dumb way to utilize cash on hand. is there a more structural reason for this?
- cmer 8y agoIt's all about jacking up the stock price for shareholders. Unfortunately.
- simonsarris 8y agoUnfortunately? Shareholders buy shares for two reasons: 1. The share price may go up 2. The dividends pay out These have been the reasons for buying shares since shares of the Dutch East India company was chartered. If neither of these ever happened, there would be no shares purchased. A buyback is just a bonus instead of a salary. You could make the criticism that a company having nothing better to do with its money is bad, and I agree, but in the interim paying it out as a bonus is a great way to reward shareholders for holding. It's also better than a dividend in case next year the company does find something better to invest the money in, because investors really don't like when companies decrease dividends.
- pascalxus 8y agoonce the stock price hits certain highs, the CEOs get huge bonuses. So, it doesn't really make sense to buy back when the stock is low.
- kevinhiggins 8y agoSome boards have given CEOs earnings per share based compensation plans, so it’s also a quick way for those to meet their compensation objective. Wise boards don’t structure compensation plans in such a manner, but some do.
- astrodust 8y agoIt's often coincidental. The stock is flying high because the company is producing a lot of free cash-flow, and the company can't find a use for the cash so it does a buy-back. When the stock is tanking your company is usually in rough shape and has no money for such reserves for a buy-back, the cash will be necessary to survive or restructure. In those situations, when things get really dicey, they'll do share consolidation. That's often to avoid getting de-listed when their stock price dips too low.
- startupfounder 8y agoThis is all about price to value. Price < Value This is very interesting and shows that there is an amazing amount of cheap cash available that is just piling up. Spending that cash on buybacks increases the value of the outstanding stock that existing shareholders have and then supply goes down, price goes up and the stock price goes up. Dumb investors.
- akshayB 8y agoBuybacks generally benefit top 1% or the C-level and make them richer. The impact on 401k of common is just a gain in few percentages or maybe some extra dividend. Also there is a conflict of interest CEO's are paid in stock and the only way in which they ensure they make more money is to take actions which boost the value of company stock. Market cap and higher the stock values also can be used in so many different ways, like acquisitions and also as a tool to leverage as an equity against which money can be borrowed.
- astrodust 8y agoIt's also a sign the companies have too much money and not enough opportunities to spend it on.
- akshayB 8y agoCompanies hoard cash because they want to ensure continuity. I loose respect for companies which go an extra mile to exploit loopholes. All companies do it. For example - Apple borrows money to pay dividend to stock owners even though they have unbelievable amount of money. But somehow the messed up US tax code this action sounds logical.
- astrodust 8y agoThat's just what you get when you hire accountants that know what they're doing and are obligated to pursue the path which results in the lowest amount of tax paid as permitted by law. If Apple didn't do this they'd get sued. Activist shareholders would be all over them in an instant. That puts them in a tough spot. I'm sure Apple would rather that loophole was closed, it's really absurd that they have to do all this just to make it work, but there's nothing they can do about it. The problem here is that the US tax system is utterly bizarre.
- fjsolwmv 8y agoIt's an utter myth that a company can be punished by its shareholder's for paying too much tax, just as it's a myth that they could be punished for letting their employees due paid volunteer work.
- southphillyman 8y agoA lot of publications predicted this exact scenario as the tax cuts where being sold as a job/wage booster. What boggles my mind is how so many people vote "for jobs" promised by a particular party, get shafted, then go right back to the same party next election cycle and eat up the same rhetoric about job creation in exchange for votes.
- AtlasBarfed 8y agoBuybacks are almost solely to artificially trigger stock option targets for CEOs, right? Otherwise that is money that should be paid out as a dividend or reinvested into operations and research.
- koolba 8y ago> Buybacks are almost solely to artificially trigger stock option targets for CEOs, right? Otherwise that is money that should be paid out as a dividend or reinvested into operations and research. No buybacks provide a potential tax advantage for investors. Dividends have tax consequences in the year that they're received. Buybacks lift the price of the stock by an equivalent amount but do not force the investor to realize the gains so they can defer the taxes to a later date.
- kaycebasques 8y ago> so they can defer the taxes to a later date. This assumes that the share price has maintained that elevated level at a later date. Ideally, you want to cash out on some long-term positions right around the time of the buybacks. The buybacks have raised the share price, but you’re only paying long-term capital gains taxes, which used to be capped at (I think) 15% for all investors, regardless of income bracket.
- simonsarris 8y agoNo, its the diffence between a bonus and a salary. A stock buyback is like giving employees [shareholders] a bonus. Some employees get bonuses every year based on how the company is doing. Employees are OK with getting a lower bonus next year. Employees get very, very unhappy when their salary gets decreased in a bad year. Investors are the same way. They punish a stock when a company decreases its dividend. If you aren't sure you can make a promise in perpetuity, don't increase your dividend, instead give shareholders a bonus, aka stock buyback. Then, if next year you need the cash to invest in the company, instead of another buyback, you do that. Investors stay happy because you didn't decrease your dividend. Some companies, like Target (which has never decreased its dividend ever) might have a hard time competing with Amazon because Amazon can make almost no profits on paper (until recent years) while funneling all their revenue back into the company. Target does not have this luxury. They DEFINITELY cannot say to investors "okay we're cutting our dividend for 2 years to compete with amazon by funneling it into growth." They'd get crushed. tl;dr, buybacks are wiser than dividends for any company that might want to spend the money on growth in following years, instead of doling it out to shareholders, as is done with dividends. Another reply already explained the tax implication reason.
- maerF0x0 8y agoStock buybacks disproportionately benefit option holders and executives. That's why they're doing it. They're robbing shareholders of future growth or returned cash. https://www.reuters.com/investigates/special-report/usa-buybacks-pay/ https://www.reuters.com/investigates/special-report/usa-buyb...
- cs702 8y agoQuoting Steve Perlstein of the Washington Post, who recently wrote: Let’s recall those heady days of 2006 when home prices were rising 10, 15, even 20 percent a year, allowing millions of homeowners to refinance mortgages and collectively take out more than $300 billion in cash from the increased value of their properties. Some spent the money on furniture, appliances, cars and vacations, adding fuel to an already roaring economy. Others reinvested it in the already booming real estate and stock markets. When it finally occurred to everyone that those houses and those stocks weren’t really worth what the debt-fueled market said they were, markets crashed, banks flirted with insolvency, and the economy sank into a deep global recession. Now, 12 years later, it’s happening again. This time, however, it’s not households using cheap debt to take cash out of their overvalued homes. Rather, it is giant corporations using cheap debt — and a one-time tax windfall — to take cash from their balance sheets and send it to shareholders in the form of increased dividends and, in particular, stock buybacks. As before, the cash-outs are helping to drive debt — corporate debt — to record levels. As before, they are adding a short-term sugar high to an already booming economy. And once again, they are diverting capital from productive long-term investment to further inflate a financial bubble — this one in corporate stocks and bonds — that, when it bursts, will send the economy into another recession. Go read the whole piece. Whether you agree or not, it will make you think: https://www.washingtonpost.com/business/economy/beware-the-mother-of-all-credit-bubbles/2018/06/08/940f467c-69af-11e8-9e38-24e693b38637_story.html https://www.washingtonpost.com/business/economy/beware-the-m...
- JohnTHaller 8y agoWait... the majority of the corporate tax cuts wound up going to the 1% and not to create new jobs? If I had pearls, I'd be clutching them.