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I read this differently. Disciplined companies return capital. Bad ones squander it on bad projects. All things equal, I would prefer a company invest my capi

I read this differently. Disciplined companies return capital. Bad ones squander it on bad projects. All things equal, I would prefer a company invest my capital in new, good projects. But barring that, I would much prefer it's returned as a dividend/buyback than blown in silly, wasteful spending that doesn't do anything for the firm or its investors. It takes a lot of courage and intellectual honesty to return capital. It's far easier to spend it on bad things.

candiodari 8y ago
What about companies that loan a boatload of money to do buybacks ? Because loaned money effectively creates a preferred share class with buyout option (meaning if the debt can't be paid, company gets owned literally by the lender and shareholders lose everything, but shareholders can buy out the lender if they choose for a fixed amount) I mean, you only answered the very easy questions, so I figured I'd throw a harder one out there.
- abakker 8y ago
  By loaned, I assume you mean borrowed? Usually, a bank does the loaning, a company does the borrowing (I.e. is the recipient of the loan. In effect, you could be right, but, not all loans are secured the same way, and not all loans use equity as collateral. But, in the case of the above, you as a shareholder could be one of those that sells your share instead of keeping it. Corporations that use loans to buy their own stock are changing the picture of how their company is expected to perform. If you do not like this new picture, you are not obligated to own their stock. If the company goes bankrupt, it is frequently true that the equity holders get hurt the most, but, that is reflective of the underlying math of equity ownership in the first place. A stock is worth some discounted value of the company’s future earnings. It is not a guarantee of some payment. A bond/loan is a guarantee of payment, but not reflective of future earning (though its market value may reflect the likelihood that it will be paid back). Put another way, if the loan is a bad idea, and the company is not going to be able to pay it back, then that will probably be reflected in the stock price. For companies that take loans to do share buybacks, the risk of non payment of the loan is also priced in to the stock price by the market. If you don’t agree with this, and feel that the market has mispriced the stock, then there are abundant financial products (options, derivatives, etc) to allow you to express that opinion financially.
  - Retric 8y ago
    If a company borrows money to issue a dividend then fails the owners have already gotten money. Buybacks are slightly more complicated in a subset of owners get that money but it's still often a net win for shareholders on average. Further, low capital costs increase the amount of money that can be extracted and thus make this ever more enticing.
abakker 8y ago
I think we agree. It does take bravery for management to admit that shareholder will achieve better return elsewhere.

candiodari 8y ago

What about companies that loan a boatload of money to do buybacks ? Because loaned money effectively creates a preferred share class with buyout option (meaning if the debt can't be paid, company gets owned literally by the lender and shareholders lose everything, but shareholders can buy out the lender if they choose for a fixed amount) I mean, you only answered the very easy questions, so I figured I'd throw a harder one out there.

abakker 8y ago
By loaned, I assume you mean borrowed? Usually, a bank does the loaning, a company does the borrowing (I.e. is the recipient of the loan. In effect, you could be right, but, not all loans are secured the same way, and not all loans use equity as collateral. But, in the case of the above, you as a shareholder could be one of those that sells your share instead of keeping it. Corporations that use loans to buy their own stock are changing the picture of how their company is expected to perform. If you do not like this new picture, you are not obligated to own their stock. If the company goes bankrupt, it is frequently true that the equity holders get hurt the most, but, that is reflective of the underlying math of equity ownership in the first place. A stock is worth some discounted value of the company’s future earnings. It is not a guarantee of some payment. A bond/loan is a guarantee of payment, but not reflective of future earning (though its market value may reflect the likelihood that it will be paid back). Put another way, if the loan is a bad idea, and the company is not going to be able to pay it back, then that will probably be reflected in the stock price. For companies that take loans to do share buybacks, the risk of non payment of the loan is also priced in to the stock price by the market. If you don’t agree with this, and feel that the market has mispriced the stock, then there are abundant financial products (options, derivatives, etc) to allow you to express that opinion financially.
- Retric 8y ago
  If a company borrows money to issue a dividend then fails the owners have already gotten money. Buybacks are slightly more complicated in a subset of owners get that money but it's still often a net win for shareholders on average. Further, low capital costs increase the amount of money that can be extracted and thus make this ever more enticing.

abakker 8y ago

I think we agree. It does take bravery for management to admit that shareholder will achieve better return elsewhere.