14 ms·

End Stock Buybacks, Save the Economy?

132 points by tysone 8y ago

ahelwer 8y ago
If you work for a large public company, it's a fun exercise to add up all the money the corporation has spent on dividends & stock buybacks for the past year (such info is publicly available) then divide it by the number of employees. You often end up with a truly staggering amount, on the order of hundreds of thousands of dollars per employee per year. Some might object to such extravagant handouts to people who (by a vast, vast majority) played no part in the creation of that wealth.
- kgwgk 8y ago
  Extravagant handouts to the people who own the company, you mean?
  - yebyen 8y ago
    Yeah, to those shrewd investors... the lessors, you could call them! What say we split the profits, 50/50? Doesn't sound fair, huh... well, what number would you consider fair?
- amitagrawal 8y ago
  I wish it were that simple but I find your analysis highly flawed. The early employees, founders and investors risked a big chunk of their resources and hence played a huge part in the creation of the company and are all the beneficiaries of those buybacks assuming they stick around for that long.
- graeme 8y ago
  You have to step back a few links in the chain to see the error here. For example, let's say a private owner starts a company, hired employees, pays them the agreed wage, and makes a profit. The owner should get the profit, right? They didn't do all the work, but they directed things, and took the risk that their capital would be lost. Now, suppose you had the same situation, except the owner sold to a private shareholder. This private shareholder wouldn't seem to be in a different position. They risked their capital that the enterprise might succeed. What about a public IPO? Well, the investors are putting their capital at risk to sustain the enterprise. Still seems fair. The objection is that subsequent shareholders have done nothing. They haven't worked on the business, and they haven't injected capital. Instead the stock merely changed hands from the original owners. So, the idea is we don't pay these people, or we don't pay them very much. What are the options: 1. We pay out less to shareholders. But then, this would affect ALL shareholders, including the original owner who put capital in. 2. We reduce payments to shareholders who didn't put capital in. All very good, except this means that those who did put capital in can never sell at the real price. The share is worth more to a capital injector than to subsequent purchaser. So, these people would be more reluctant to invest capital in the first place, knowing the shares could not be adequately resold. 3. Cut payouts for everyone except employees. In this scenario, the business simply doesn't get created. There is no reward for the capital at risk. There's no way I can see to get the outcome you want without wrecking the whole system that creates the wealth in the first place.
  - wdewind 8y ago
    > There's no way I can see to get the outcome you want without wrecking the whole system that creates the wealth in the first place. This really sums up the economic conversation in America these days (and FWIW I agree!).
  - dv_dt 8y ago
    Capital should be rewarded, but it's rewarded as a winner-decide-all manner right now that is also wrecking the whole system.
  - ABCLAW 8y ago
    >You have to step back a few links in the chain to see the error here. What error? He isn't indicating that the mechanics of capital equity valuation are wrong, but that the sheer size of the value extraction from employees which occurs in de-risked large entities far exceeds what most people would expect. You can have all of the conditions leading to wealth creation as in your post in a system where labour has far better leverage to capture a larger portion of their own value creation. The interesting knock-on effect is that reviews of inequality indicate that firm formation is actually amplified in situations where labour has that leverage, as workers are able to get more self-generated capital through labour to finance their own bootstrapped projects/businesses.
    - harryh 8y ago
      "sheer size of the value extraction from employees" It is incorrect to assert that the employees are creating all the value created by a company. Companies are not just people but also a lot of other things: Easy to see and measure things like equipment, facilities and bank account balances. Somewhat harder to quantify but still important things like business relationships, contracts, brands and reputation. Even more effervescent but still important things like corporate culture & values; the so called "DNA" of a company. All of this stuff matters a lot and exists mostly independent of the employees. It is owned (quite literally) by the stockholders so the value accrues to them.
      - 8y ago
- JumpCrisscross 8y ago
  > Some might object to such extravagant handouts to people who (by a vast, vast majority) played no part in the creation of that wealth Then join or start a partnership. In a partnership, all the capital works for the firm. When you make partner, you buy in. (If you can't afford it, you get a loan or don't make partner.) When you retire or die, the stock is bought back. Coöperatives are another example. Corporations aren't the only ownership structure. For private organizations that scale, however, they tend to win against partnerships and co-operatives.
- analognoise 8y ago
  Providing capital doesn't play a major part of wealth creation? Like it carries no risk and deserves no reward, and isn't the fundamental thing that allowed the wealth to be generated in the first place? Are you sure?
  - justonepost 8y ago
    He's slowly re-inventing communism. Give him time.
- testvox 8y ago
  Didn't they play the most key role of all? They paid everyone who works at the company to do what they do.
- gammateam 8y ago
  > Some might object to such extravagant handouts to people who (by a vast, vast majority) played no part in the creation of that wealth. you realize this won't garner much sympathy on the Silicon Valley town crier since employees also have a significant $ value of shareholdings yes this is an outlier in every other industry that employs people for wages
  - ahelwer 8y ago
    If you're working for a large public company, stock grants are dollar-denominated. Say you're given a sizeable stock bonus, $100k. How much of a benefit do you get from stock dividends & buybacks with that quantity of stock? A few thousand dollars per year, at most. Negligible compared to the per-employee dividend & stock buyback number.
    - gammateam 8y ago
      stock grants and stock bonuses are very different. you are conflating issues. lets talk about stock grants, yes, stock grants are dollar denominated and vest. If you get a $100K stock grant that vests over 4 years for a stock currently worth $10, then you have 10,000 shares. The stock goes up to $70 and you still have 10,000 shares, and some of that growth was from buy backs, then your $700,000 isn't negligible at all. I just described Square.
      - ahelwer 8y ago
        You can calculate approximately how much of that growth was from buybacks, because it is near the same as if the company had spent the money on dividends instead except the money was rolled into the stock price instead of disbursed. So again, not very much. Stock grants vs bonuses is irrelevant other than that you are forced to hold grants for longer. Also irrelevant is how much the price has appreciated due to other factors. Are you certain it isn't yourself who is conflating issues?
- spacehome 8y ago
  No it's not "often" that high. Here's the list of the top 20 highest earnings per employee per year: https://www.businessinsider.com/apple-facebook-alphabet-most-profitable-companies-per-employee-2017-12 https://www.businessinsider.com/apple-facebook-alphabet-most... Industrial Bank is #20 at $144k. That means that unless you work at one of the 20 companies on that list, your company is making less than $144k in earnings per employee. That profit is then taxed, and only a fraction of that is returned to shareholders, with the rest re-invested in the business. So there's no way it's often hundreds of thousands.
  - ahelwer 8y ago
    Many corporations have used debt-financed stock buybacks.
    - kgwgk 8y ago
      At least those are not done through the exploitative appropriation of the surplus value produced by the worker.
      - ahelwer 8y ago
        Of course they are! The full debt will be repaid in time, with interest. Where does that money come from?
        kgwgk 8y ago
        Sometimes the full debt is not repaid. In that case the money comes from the lenders and bond-holders and they never get it back. And the shareholders also lose everything in that scenario, of course.
        longtermsec 8y ago
        The money for the interest payments comes from taxes!
    - spacehome 8y ago
- justonepost 8y ago
  That's capitalism, baby. He who controls the capital reaps the rewards.
- justonepost 8y ago
  Venture capital wouldn't exist if this weren't the case. Hell, hacker news wouldn't exist if this weren't the case.
- WalterBright 8y ago
  If you hire a contractor to prep your house so you can sell it at a higher price, is the contractor entitled to a percentage of that gain?
gnicholas 8y ago
I understand that buybacks are good for executives and good for buy-and-hold shareholders. Executives benefit because a large part of their comp is tied to stock performance. So if companies couldn't do buybacks all of a sudden, executives would have less comp. Shareholders benefit because they can defer the taxes until they sell – instead of paying taxes each year on dividends. If companies were prevented from buying back stock, then executives would ask for their compensation packages and targets to be restructured to take this into account. So at the end of the day, executives would get the same amount of benefit, more or less. Ordinary buy-and-hold shareholders wouldn't be able to rejigger their affairs in the same way, so they'd be somewhat worse off. It's not clear to me that this solves any big problems though...
- vkou 8y ago
  For every tax dollars that this structuring saves long-term investers, that's one extra dollar that average Joe, who owns 0-10k in stock, has to pay.
  - Nokinside 8y ago
    Is average Joe in US free from taxes from dividends if he reinvests? If not, then it's bad for him too.
    - vkou 8y ago
      He has very few savings to invest, and derives almost no benefits from this, compared to his wealthy neighbour. Tax advantages for shareholders are a transfer of wealth from the poor to the rich.
      - ryandrake 8y ago
        Around 50% of Americans hold no stock at all, including indirect holdings like pensions, 401k etc.
        8y ago
habosa 8y ago
I wish more big stocks (looking at you, tech giants) paid regular dividends instead of buybacks. It gives me a real, irrevocable return on my investment and benefits all shareholders equally (on a per share basis). The stock market seems to have lost hold of its very basic premise: 1) Companies need money, so they sell equity in public markets 2) The people who buy the equity, if they are rational, value each share as some fraction of the net present value of all future cash flows 3) As the company moves forward and realizes those cash flows, they pay back cash not needed for reinvestment to the investors as dividends. So many stocks have such little dividend (or buyback) activity that it's a rounding error. That means the investors are more likely to be interested in pure speculation, hoping to buy before the peak and sell at highs. When you're only engaging in speculation, there's no reason the stock price has to stay tethered to reality. You end up with companies like TSLA that have insane multiples or TWTR that lose money for a decade without paying a penny back to shareholders and are still somehow "worth" billions. A rational market would be a better market, and more dividends would, in my opinion, increase rationality.
- analognoise 8y ago
  You could only buy stock that produces dividends? (Edited because words)
- JKCalhoun 8y ago
  > I wish more big stocks (looking at you, tech giants) paid regular dividends instead of buybacks. Apple does both. Not sure where that puts it....
  - mmanfrin 8y ago
    That's because they have so much cash that they have no idea what to do with it otherwise. They are also doing buybacks.
  - seanmcdirmid 8y ago
    Microsoft does both also.
- 8y ago
Nokinside 8y ago
I don't see how stock buybacks are meaningfully different from dividends. If anyone cares to explain without any gaping logical holes in their explanation, it would be nice. In buyback the money comes to shareholder in the form of increased stock price (and the investor can choose if he wants to get the value by selling). In the case of dividends, all investors must buy more of the stock. That should be just technical difference, not a substantial issue. For example, if buybacks are forbidden because CEO pay is a problem, obviously the compensations will change to reflect the change. In the end total compensation will stay the same. As a investor look at the total return of stocks (price + dividends reinvested) and it has little effect on my decisions if buybacks change into dividends.
- xapata 8y ago
  Regularity. Dividends are typically given on a frequent, predictable schedule. Buybacks are not.
  - tathougies 8y ago
    Dividends are not always frequent and predictable. There is certainly no requirement that they be. A board can decide to pay a dividend (or not pay one) or to reduce the dividend at any time, unless the corporations bylaws somehow protect it (although they can typically change these as well).
    - xapata 8y ago
      Yes, but would you agree that dividends are typically frequent and predictable? I think that's a fair statement in comparison to stock buybacks.
      - tylerhou 8y ago
        Sure. But that's not a fundamental difference, that's just a difference in normal usage. The only fundamental difference between stocks and dividends from an investor perspective that I'm aware of is tax treatment.
lr4444lr 8y ago
I've asked numerous friends who work in finance and do graduate studies in econ. for their perspective on buybacks, and they truly don't understand why the lay press has become so obsessed with the maneuver as a moral evil. Yeah, it can temporarily juice a stock's price, but other major players in the market and board members at the corporation in question aren't as stupid about short term gain as we've been led to believe by these journalist jeremiads. If a company wants to unleash its pent up capital into more efficient allocations of the economy, i.e. the companies that will grow and invest in workers, and the sellers on the other end of the buyback want to trigger capital gains taxes, by all means let them do it. Let's not leave out that other side of the equation in a rational discussion.
- RandomInteger4 8y ago
  Because they're taking the tax savings from the irresponsible congressional actions and using that to enrich the wealthy rather than raising the pay of their workers by a non-trivial amount.
  - tylerhou 8y ago
    A large number of people who work at, say Apple, the company which bought the most of their stock back, will see very non-trivial increases in effective compensation because of stock price rises.
    - ryandrake 8y ago
      Those increases are only non-trivial and meaningful to employees who have a non-trivial or meaningful amount of equity. In other words a very small percentage of employees.
      - tylerhou 8y ago
        Very small percentage? From a quick Google roughly 17-25% of Apple employees are engineers. Assuming all engineers get options, and that options are around 1/4 of an engineers compensation, and assuming that buybacks raised Apple's stock by 2% (I don't know how accurate that number is, but I'm just throwing it out there), each employee saw a 0.5% bonus per year assuming their options were issued before the buyback was decided. That's definitely non-negligible; it's around $1000/year for the average engineer. To be honest, I wouldn't be surprised if Apple also compensated some high-value non-engineers in stock. To find the actual number of people who benefit, you would have to include them, plus you would have to add in all the people who don't work at Apple but own Apple stock directly or indirectly (for example, while I don't work at Apple, I probably own some stock because of my participation in a mutual fund). I'm pretty certain that there are tens of thousands of people who see an increase in earnings because of Apple buybacks. The majority of them might be well-off since they are engineers or have the luxury of purchasing mutual funds, but I am hardly a millionaire or billionaire. EDIT: Did more Googling; Apple's stock jumped around 12% after announcing their buyback, so the bonus is around 3%. I would love a $6000 bonus/year for the next few years. [0] https://www.forbes.com/sites/chuckjones/2018/05/12/what-impact-could-apples-100-billion-stock-buyback-program-have-to-its-stock-price/#475d2b224c4c https://www.forbes.com/sites/chuckjones/2018/05/12/what-impa... [0]
darawk 8y ago
> The stranglehold of this doctrine of “shareholder-value maximization” over corporate decision making has been a leading cause of ... sagging productivity. lol...maximizing shareholder value is a cause of sagging productivity? Do these people even read their own words before they publish them? This whole 'stock buybacks are evil' meme is beyond silly. The only difference between dividends and stock buybacks is tax efficiency. So yes, corporations are avoiding some tax burden by doing this, and that may be a bad thing - so change the tax policy. But there's no reason to expect stock buybacks are the cause of anything other than a slightly lower tax bill, and, predictably, this article doesn't even bother to try to make the actual case otherwise. It just makes a bunch of blanket, baseless and unsupported assertions. It's seriously irritating the absolute garbage that gets published in places like the NYT these days. This article doesn't even try to make its case. It just pushes a narrative with innuendo and bald assertions. How can something like this possibly get past their editors?
- mlthoughts2018 8y ago
  a naive pursuit of maximizing shareholder value outside of greater context could easily result in failing to maximize shareholder value, let alone worse productivity metrics. I’m not saying the article is faultless, but I don’t agree with the reaction to the quote you selected. It seems very reasonable to me.
  - darawk 8y ago
    You could make a nuanced argument like that, sure. But if you did that, you'd have to actually flush it out, and making an argument like that actually work is quite hard. Which is why this article doesn't bother to attempt it. They just state it, and hope nobody is paying attention.
    - mlthoughts2018 8y ago
      Why is it hard to make such an argument? Intuitively, just from the basic operation observable of most large companies and the ubiquity of corporate dysfunction, it seems obvious. To the degree that the burden of proof would go the other way. It’s exceptional to me to say that companies pursue maximizing shareholder value in a way that generally accomplishes that goal, or to disagree with the conclusion that companies are mostly stagnant in terms of actual productivity measures and have been for a while (something that highlights the current extreme incongruity between aggregate financial metrics and societal productivity metrics). Those positions require extreme, special evidence since they are so at odds with reality.
harryh 8y ago
For a pretty general rebuttal to essays like this (which are pretty ignorant) I recommend Buyback Derangement Syndrome recently published in the WSJ: https://www.wsj.com/articles/buyback-derangement-syndrome-1534460606 https://www.wsj.com/articles/buyback-derangement-syndrome-15...
- RockyMcNuts 8y ago
  Or Harvard Business Review https://hbr.org/2018/03/are-buybacks-really-shortchanging-investment https://hbr.org/2018/03/are-buybacks-really-shortchanging-in... Companies choose how much equity capital to put to work based on - the investment opportunities they have; - the availability and cost of equity capital; - the availability and cost of alternative capital (i.e. debt which is generally cheaper for well-established firms that generate cash flow); - the leverage or financial risk profile that makes sense, (companies with more stable cash flow may use more debt v. equity) When companies have large growth opportunities, have negative cash flow, and the stock price is high/equity cost of capital is low, they increase equity capital. (e.g. Tesla selling stock) When cash flow turns positive, reinvestment opportunities diminish, the stock price is low, they return equity capital. (e.g. Apple paying a dividend and buying back stock) How you return the capital is an accounting/tax decision. There's nothing very special or evil about doing it by buying back stock. Aside from tax issues, no difference vs. paying a dividend. If the tax on capital gains is the same as on dividends, dividend forces the shareholders to have a taxable event, whereas the buyback lets shareholders choose whether to sell back to the company at a given time/price.
- kgwgk 8y ago
  The thesis that Apple got to its one trillion market cap helped by buybacks is so absurd that it hurts to see how many people repeated it. Matt Levine also commented on the issue (https://www.bloomberg.com/view/articles/2018-08-07/buying-your-way-back-to-riches https://www.bloomberg.com/view/articles/2018-08-07/buying-yo...): “The theory here is essentially that if Apple had 220 billion more dollars—roughly the amount of buybacks it has done in the last six years—then it would be worth less money. It doesn’t sound especially plausible. Presumably Apple plus $220 billion would be worth at least, like, a dollar more than Apple alone? And if the buybacks work so well, why not do more? Why not sell off all of Apple’s businesses, use the money to buy back stock, and leave Apple as an empty shell with a reduced share count and a $2 trillion valuation?”
naveen99 8y ago
Do companies have to announce buy backs in advance like large shareholders ? I am annoyed that some of my secondary market purchase attempts are thwarted by right of first refusal exercised by the company. On the other hand, I think dividends reduce volatility, make option pricing a little more complicated and trading less fun.
the_watcher 8y ago
There's a lot of reference to research that the authors claim show that stock buybacks are bad and terrible, but no description or quantification of how exactly their research showed this. The closest I can see is "According to our research, when trillions of dollars of corporate cash are extracted from companies through buybacks, on top of dividends, the result is a dramatic concentration of income among the richest American households and the destruction of middle-class employment opportunities." To me, this is phrased the way politicians phrase descriptions of studies, stats, or findings that they are wildly misusing.
- noelsusman 8y ago
  It's an op-ed, you only have so many words. Here's a much longer article on the same topic written by one of the authors of this op-ed: https://hbr.org/2014/09/profits-without-prosperity https://hbr.org/2014/09/profits-without-prosperity
slg 8y ago
A buyback is just a dividend except instead of cash the stockholder receives more ownership. I never see this type of article written about dividends which makes me wonder why we see them about buybacks.
- WalterBright 8y ago
  Yes, and long term capital gains are taxed at a lower rate than dividends, so long term shareholders prefer it.
  - slg 8y ago
    Are people framing that as a reason for preferring dividends over buybacks? I can see it as a potential negative from the perspective of the working class, but this article certainly isn't making that argument.
  - nilsbunger 8y ago
    Not quite true. Qualified dividends tax rate are 15% nowadays, while capital gains are 20% (or 23.8% if you make a lot of income). However, you can defer the capital gains tax (by not selling), thus allowing that money to compound and work for you.
    - loeg 8y ago
      I don't know where you're getting that from. Qualified dividends are taxed as long-term capital gains. They have the exact same 0-23.8% brackets as LTCG do. Wikipedia: https://en.wikipedia.org/wiki/Qualified_dividend https://en.wikipedia.org/wiki/Qualified_dividend (perhaps not a "legitimate" source, but at least a jumping off point for more information).
      - nilsbunger 8y ago
        thanks, I was definitely wrong. Not sure where I got that from either
bepotts 8y ago
The reason the press is so obsessed with stock buybacks is because the press loves talking about how much the middle class is getting "screwed" by big corporations, no matter how benign the issue at hand is. If you make a lot of money, you probably did/are doing something shady. It's part of the reason why the press has gotten so focused Silicon Valley and "tech bros". The media has a narrative and will promote anything that confirms that narrative, and will ignore anything that doesn't.
- deleted 8y ago
  [deleted]
- koboll 8y ago
  Real wages have been stagnant for decades, while corporate profits have skyrocketed. So I'd say an obsession on the middle class getting screwed is not exactly misplaced.
  - whatshisface 8y ago
    I can have my tin foil and wear it too: both the stagnation of wages and the mis-placement of anger over the stagnation of wages are bad for the middle class and good for the corporate overlords.
  - refurb 8y ago
    Real wages may have stagnated, but overall compensation hasn’t. https://www.cnbc.com/2014/01/29/-wage-stagnationcommentary.html https://www.cnbc.com/2014/01/29/-wage-stagnationcommentary.h...
    - freehunter 8y ago
      There are a lot of instances of "technically true, but wildly missing the point" in that article. A washing machine is cheaper today than it was in 1959 because in 1959 automatic electric washing machines were brand new on the market. Same thing with televisions: it's hard to argue TVs were ubiquitous in 1959 compared to today. It's not a very valid comparison to say that something that was cutting edge technology in 1959 is cheaper now than it was 60 years ago. And more benefits going to health care and daycare merely reflects the astronomical increases in the cost of health care and daycare. That's the entire argument over "real wages": costs have gone up more than or on par with people's ability to pay them. But I wasn't surprised when I got to the bottom and found it was written by someone from the Johnson Center at Troy University, which is backed by the far right-wing Koch Foundation, so much that two years after this CNBC article was written, Troy University put out a statement saying they were going to stop getting involved in politics: https://www.al.com/news/index.ssf/2016/07/troys_johnson_center_steers_aw.html https://www.al.com/news/index.ssf/2016/07/troys_johnson_cent... This CNBC article is a submarine from the very people who created this economic model. Of course they're going to try to put a positive spin on it... because washing machines are cheaper now than they were in 1959! Proof that the average American worker is doing just fine.
ryandrake 8y ago
To me, a stock buyback or dividend is a bad sign. It means the company literally can think of nothing better to do with the money than shrug and return it to shareholders. “We’re out of ideas and innovation, guys! Go find somewhere to invest this where it will be put to good use!” I guess if you’re an electric utility that’s fine. If you’re supposed to be an innovative tech company, and you don’t know what to do with your cash???
- nradov 8y ago
  Since software is eating the world, now every company has been forced to become an innovative tech company just to survive. What we used to think of as "tech" companies are no longer anything special.
- philwelch 8y ago
  There's no such thing as an unbounded exponential growth curve. Any business will inevitably reach a point of diminishing returns, and their hockey-stick growth curves will turn into s-curves. The only alternative would be for a single business to eventually grow to such a size that it essentially becomes the entire world economy.
  - harryh 8y ago
    The only alternative would be for a single business to eventually grow to such a size that it essentially becomes the entire world economy. https://i.kym-cdn.com/photos/images/newsfeed/001/275/986/c57.jpg_large https://i.kym-cdn.com/photos/images/newsfeed/001/275/986/c57... ;-)
    - philwelch 8y ago
      I can't completely rule out the possibility that this is indeed Amazon's business plan.
- erikpukinskis 8y ago
  I don't think your logic makes sense. Let's assume the company has an infinite fountain of moneymaking ideas, as you posit. Why would there need to be any earnings at all to fund those ideas? Why not just take on debt to fund those ideas? Presumably companies are already taking debt to fund all of their good ideas, and any ideas that are left are "not that good". The appearance of earnings should have no effect on the number of good ideas available. Why would it?
Animats 8y ago
Stock buybacks, borrowing, and dividends are all ways of paying for capital. They should all be taxed at the same rate. Whether or not stock buybacks should be prohibited, they should not be encouraged by tax policy.
jl2718 8y ago
I totally disagree with this. A company holding cash is a moral hazard for board members and executives because it’s so easy to extract. Company profits should be paid out or invested quarterly. It’s not pumping the price, it’s just giving the shareholders what they own. Here’s an example. Board members invest in a startup and then use the cash to purchase it at a much higher valuation. In a cash deal, nothing gets reported. If the company uses stock for the transaction, they would have to report it to the SEC as a distribution to an insider. Other than this, there is basically no good reason to use cash for acquisition versus stock equivalent. That’s just one example, but a very common one.
alanlamm 8y ago
One issue Im surprised never comes up in discussion of buybacks vs. dividends is, apart from the tax issue, whether buybacks drive stock prices up because of how large orders to buy stock at market price interact with the outstanding order book - ie that in a buyback you buy specifically from those of the current shareholders who attribute the lowest valuation to the stock at any given time. To simplify lets say 2 mutual funds each hold 50% of the stock of a corp. Mutual Fund A values the stock (ie is willing to sell at) $100, and mutual fund B is willing to sell at $120. Other potential buyers value the stock at $99 or less. The company decides to buyback 50% of its stock. It buys all of A’s stock, and thereby drives the new market price to $120. Meaning it drives up the market price even before you consider the effect of reducing the # of outstanding shares (fewer shares > higher EPS > higher stock price at a given P/E multiple). Of course, in the real world stockholding is less concentrated, the gap between valuations in the order book wouldn’t be so wide, shortsellers would also play a role and over time one would argue that efficient-markets-hypothesis factors in. But still... any thoughts?
- kgwgk 8y ago
  Buybacks are the natural state of the market... They push prices higher, or more likely they support prices if the company takes an opportunistic approach to shares repurchase. The problem is when the reporting season comes and they cannot do it: https://www.bloomberg.com/news/articles/2018-04-02/stocks-lose-critical-buyer-at-worst-time-as-selloff-picks-up https://www.bloomberg.com/news/articles/2018-04-02/stocks-lo...
- OscarCunningham 8y ago
  > Meaning it drives up the market price even before you consider the effect of reducing the # of outstanding shares (fewer shares > higher EPS > higher stock price at a given P/E multiple). These aren't two separate effects. The interaction between the buyback and the order-book is the mechanism through which the stock price is adjusted to take into account the smaller number of shares.
  - kgwgk 8y ago
    Not really. If the company buys $100mn in shares or any other market participant buys $100mn in shares the stock price adjustment caused by the interaction between these orders and the order book will be the same. In one case the market will learn later that the share count has been reduced. In the other case no share count reduction will happen.
phlakaton 8y ago
I too was a little flustered trying to follow the argument here. These additional sources helped a little: Troy Segal, "Why would a company buy back its own shares?", Investopedia, 20 Jun 2018. Annie Lowry, "Are Stock Buybacks Starving the Economy?", The Atlantic, 31 Jul 2018 Katy Milani, Irene Tung, "Curbing Stock Buybacks: A Crucial Step to Raising Worker Pay and Reducing Inequality", Roosevelt Institute, 31 Jul 2018 I'm new to this, so let me share my thinking here and see if I've got it right. The argument is that money that could be going towards investment in growing the company and/or rewarding the employees is instead going towards buybacks. Buybacks have the benefit of increasing the stock price and consolidating ownership, which generally benefit both stockholders and executives, but exclude many classes of workers who don't own shares. Dividends would be a similar thing to plow a company's dollars into. Again: benefiting stockholders, but excluding workers who don't own shares. Companies these days who are involved in feeding money back to investors like to balance between issuing dividends and buying back stock--in many cases, biasing strongly in favor of buybacks. There are a few reasons for this, including investors wigging out far less if you have to cut back on buybacks vs dividends during a recession. Nevertheless, there seems to be an expectation that shareholders will continue to increase their profits--specifically, that dividends will increase if the company is issuing dividends. Indeed, it seems to me that a company runs a risk of activist shareholders taking them over if they don't do a good enough job of satisfying them. So if a company shifts those dollars away from shareholders and into wages, and the shareholders revolt as a result, does that necessarily make those companies or their employees any better off? I can see a problem for sure, since the increase in income inequality in the US is an undeniable problem, a lot of workers are not getting any better off from either stock buybacks or dividends, and the Roosevelt Institute makes some compelling arguments for why stock buybacks are not great for long-term strategy and profitability even among shareholders--including the startling fact that some companies, particularly in the restaurant business, are actually putting themselves significantly into the red to buy back shares! I'm not sure that it's a problem that regulators are obligated to fix by going directly after stock buybacks, though.
simonsarris 8y ago
The most succinct way I've found to explain this to normal humes is this: When you buy stock, to make money, one of two things must happen: * The company pays a dividend regularly * The company's share price increases, then you sell A dividend is just like a salary. A buyback is just like a bonus. Everyone understands salaries and bonuses, there's no reason to lose your mind over thinking buybacks are nefarious unless you thinking giving employees a bonus is nefarious. Then, there are two key plusses to buybacks: * You choose the year in which you sell. This has favorable tax advantages, just like if you could choose the year in which you book a bonus. * Investors punish companies, sometimes heavily, when they decrease dividends. If you cannot guarantee a dividend indefinitely, you probably shouldn't give it out. Instead you should do a buyback. "Things are good right now, so here's a bonus." This is identical to how people think about salaries, so it should come as no surprise. Lowering a dividend later is like giving someone a pay cut, but people don't balk so much if you tell them you're giving them a one time bonus.
- erikpukinskis 8y ago
  It's not a great analogy. A bonus is extra cash in your bank account. A buyback is not extra cash in your account, unless you sell the equivalent amount of stock. Actually, the dividend is more like a bonus. Actually, I don't really see any merit to the analogy at all.
- repsilat 8y ago
  My (half baked) analogy is a sealed fish tank half full of water. The water is the company's non-cash value and the air is its cash. Shares are imaginary vertical slices of cash and non-cash value. A dividend "lowers the lid" of the fish tank. Some amount of air (cash) ends up outside the company, and is returned to each shareholder. A buyback is the same thing, but first you tip the tank on its side before letting some air out. When the tank is on its side, some shares are "all cash" and the others are "all non-cash". Then you shrink the box by taking out some all-cash shares. Then you right the fishtank.
marketgod 8y ago
Less dividends is good. This helps the $SPY $300 targets for this year. Also, helps AAPL go higher, $250 targets as they pay dividends. Everything is coming together for 2018!
paulsutter 8y ago
What happens when the last share is bought back? (yes I know, that share would be worth just more than the company can afford to pay, but what if?) Stock buybacks are better than dividends (shareholders get to choose when they liquidate), and I can see no actual downside. They only goose the per share price because suddenly there are fewer shares to represent the same company. More and more, politicians seem to focus on issues with little actual merit, instead of super important issues like healthcare costs, because no donors can get upset. For example, if buybacks are outlawed, it’s not really a big deal and there won’t be pushback. They can claim a victory without actually changing anything, for better or worse, for anyone.
ohiovr 8y ago
Why should the sole focus of a corporation be making itself expensive?
fipple 8y ago
Without buybacks or dividends every stock is worth $0.
ry4n413 8y ago
stocks would probably crash if this happened due to a sharp increase in the costs of capital and decrease in cash flow profitability.
purplezooey 8y ago
Defenders of buybacks contend that they do no harm because the funds are reallocated through financial markets and used elsewhere in the economy. When is this "rising tide" horse shit argument going to wear out. It's used to justify almost anything now.

132 points by tysone 8y ago

If you work for a large public company, it's a fun exercise to add up all the money the corporation has spent on dividends & stock buybacks for the past year (such info is publicly available) then divide it by the number of employees. You often end up with a truly staggering amount, on the order of hundreds of thousands of dollars per employee per year. Some might object to such extravagant handouts to people who (by a vast, vast majority) played no part in the creation of that wealth.

kgwgk 8y ago
Extravagant handouts to the people who own the company, you mean?
- yebyen 8y ago
  Yeah, to those shrewd investors... the lessors, you could call them! What say we split the profits, 50/50? Doesn't sound fair, huh... well, what number would you consider fair?
amitagrawal 8y ago
I wish it were that simple but I find your analysis highly flawed. The early employees, founders and investors risked a big chunk of their resources and hence played a huge part in the creation of the company and are all the beneficiaries of those buybacks assuming they stick around for that long.
graeme 8y ago
You have to step back a few links in the chain to see the error here. For example, let's say a private owner starts a company, hired employees, pays them the agreed wage, and makes a profit. The owner should get the profit, right? They didn't do all the work, but they directed things, and took the risk that their capital would be lost. Now, suppose you had the same situation, except the owner sold to a private shareholder. This private shareholder wouldn't seem to be in a different position. They risked their capital that the enterprise might succeed. What about a public IPO? Well, the investors are putting their capital at risk to sustain the enterprise. Still seems fair. The objection is that subsequent shareholders have done nothing. They haven't worked on the business, and they haven't injected capital. Instead the stock merely changed hands from the original owners. So, the idea is we don't pay these people, or we don't pay them very much. What are the options: 1. We pay out less to shareholders. But then, this would affect ALL shareholders, including the original owner who put capital in. 2. We reduce payments to shareholders who didn't put capital in. All very good, except this means that those who did put capital in can never sell at the real price. The share is worth more to a capital injector than to subsequent purchaser. So, these people would be more reluctant to invest capital in the first place, knowing the shares could not be adequately resold. 3. Cut payouts for everyone except employees. In this scenario, the business simply doesn't get created. There is no reward for the capital at risk. There's no way I can see to get the outcome you want without wrecking the whole system that creates the wealth in the first place.
- wdewind 8y ago
  > There's no way I can see to get the outcome you want without wrecking the whole system that creates the wealth in the first place. This really sums up the economic conversation in America these days (and FWIW I agree!).
- dv_dt 8y ago
  Capital should be rewarded, but it's rewarded as a winner-decide-all manner right now that is also wrecking the whole system.
- ABCLAW 8y ago
  >You have to step back a few links in the chain to see the error here. What error? He isn't indicating that the mechanics of capital equity valuation are wrong, but that the sheer size of the value extraction from employees which occurs in de-risked large entities far exceeds what most people would expect. You can have all of the conditions leading to wealth creation as in your post in a system where labour has far better leverage to capture a larger portion of their own value creation. The interesting knock-on effect is that reviews of inequality indicate that firm formation is actually amplified in situations where labour has that leverage, as workers are able to get more self-generated capital through labour to finance their own bootstrapped projects/businesses.
  - harryh 8y ago
    "sheer size of the value extraction from employees" It is incorrect to assert that the employees are creating all the value created by a company. Companies are not just people but also a lot of other things: Easy to see and measure things like equipment, facilities and bank account balances. Somewhat harder to quantify but still important things like business relationships, contracts, brands and reputation. Even more effervescent but still important things like corporate culture & values; the so called "DNA" of a company. All of this stuff matters a lot and exists mostly independent of the employees. It is owned (quite literally) by the stockholders so the value accrues to them.
    - 8y ago
JumpCrisscross 8y ago
> Some might object to such extravagant handouts to people who (by a vast, vast majority) played no part in the creation of that wealth Then join or start a partnership. In a partnership, all the capital works for the firm. When you make partner, you buy in. (If you can't afford it, you get a loan or don't make partner.) When you retire or die, the stock is bought back. Coöperatives are another example. Corporations aren't the only ownership structure. For private organizations that scale, however, they tend to win against partnerships and co-operatives.
analognoise 8y ago
Providing capital doesn't play a major part of wealth creation? Like it carries no risk and deserves no reward, and isn't the fundamental thing that allowed the wealth to be generated in the first place? Are you sure?
- justonepost 8y ago
  He's slowly re-inventing communism. Give him time.
testvox 8y ago
Didn't they play the most key role of all? They paid everyone who works at the company to do what they do.
gammateam 8y ago
> Some might object to such extravagant handouts to people who (by a vast, vast majority) played no part in the creation of that wealth. you realize this won't garner much sympathy on the Silicon Valley town crier since employees also have a significant $ value of shareholdings yes this is an outlier in every other industry that employs people for wages
- ahelwer 8y ago
  If you're working for a large public company, stock grants are dollar-denominated. Say you're given a sizeable stock bonus, $100k. How much of a benefit do you get from stock dividends & buybacks with that quantity of stock? A few thousand dollars per year, at most. Negligible compared to the per-employee dividend & stock buyback number.
  - gammateam 8y ago
    stock grants and stock bonuses are very different. you are conflating issues. lets talk about stock grants, yes, stock grants are dollar denominated and vest. If you get a $100K stock grant that vests over 4 years for a stock currently worth $10, then you have 10,000 shares. The stock goes up to $70 and you still have 10,000 shares, and some of that growth was from buy backs, then your $700,000 isn't negligible at all. I just described Square.
    - ahelwer 8y ago
      You can calculate approximately how much of that growth was from buybacks, because it is near the same as if the company had spent the money on dividends instead except the money was rolled into the stock price instead of disbursed. So again, not very much. Stock grants vs bonuses is irrelevant other than that you are forced to hold grants for longer. Also irrelevant is how much the price has appreciated due to other factors. Are you certain it isn't yourself who is conflating issues?
spacehome 8y ago
No it's not "often" that high. Here's the list of the top 20 highest earnings per employee per year: https://www.businessinsider.com/apple-facebook-alphabet-most-profitable-companies-per-employee-2017-12 https://www.businessinsider.com/apple-facebook-alphabet-most... Industrial Bank is #20 at $144k. That means that unless you work at one of the 20 companies on that list, your company is making less than $144k in earnings per employee. That profit is then taxed, and only a fraction of that is returned to shareholders, with the rest re-invested in the business. So there's no way it's often hundreds of thousands.
- ahelwer 8y ago
  Many corporations have used debt-financed stock buybacks.
  - kgwgk 8y ago
    At least those are not done through the exploitative appropriation of the surplus value produced by the worker.
    - ahelwer 8y ago
      Of course they are! The full debt will be repaid in time, with interest. Where does that money come from?
      - kgwgk 8y ago
        Sometimes the full debt is not repaid. In that case the money comes from the lenders and bond-holders and they never get it back. And the shareholders also lose everything in that scenario, of course.
      - longtermsec 8y ago
        The money for the interest payments comes from taxes!
  - spacehome 8y ago
justonepost 8y ago
That's capitalism, baby. He who controls the capital reaps the rewards.
justonepost 8y ago
Venture capital wouldn't exist if this weren't the case. Hell, hacker news wouldn't exist if this weren't the case.
WalterBright 8y ago
If you hire a contractor to prep your house so you can sell it at a higher price, is the contractor entitled to a percentage of that gain?

gnicholas 8y ago

I understand that buybacks are good for executives and good for buy-and-hold shareholders. Executives benefit because a large part of their comp is tied to stock performance. So if companies couldn't do buybacks all of a sudden, executives would have less comp. Shareholders benefit because they can defer the taxes until they sell – instead of paying taxes each year on dividends. If companies were prevented from buying back stock, then executives would ask for their compensation packages and targets to be restructured to take this into account. So at the end of the day, executives would get the same amount of benefit, more or less. Ordinary buy-and-hold shareholders wouldn't be able to rejigger their affairs in the same way, so they'd be somewhat worse off. It's not clear to me that this solves any big problems though...

vkou 8y ago
For every tax dollars that this structuring saves long-term investers, that's one extra dollar that average Joe, who owns 0-10k in stock, has to pay.
- Nokinside 8y ago
  Is average Joe in US free from taxes from dividends if he reinvests? If not, then it's bad for him too.
  - vkou 8y ago
    He has very few savings to invest, and derives almost no benefits from this, compared to his wealthy neighbour. Tax advantages for shareholders are a transfer of wealth from the poor to the rich.
    - ryandrake 8y ago
      Around 50% of Americans hold no stock at all, including indirect holdings like pensions, 401k etc.
      - 8y ago

habosa 8y ago

I wish more big stocks (looking at you, tech giants) paid regular dividends instead of buybacks. It gives me a real, irrevocable return on my investment and benefits all shareholders equally (on a per share basis). The stock market seems to have lost hold of its very basic premise: 1) Companies need money, so they sell equity in public markets 2) The people who buy the equity, if they are rational, value each share as some fraction of the net present value of all future cash flows 3) As the company moves forward and realizes those cash flows, they pay back cash not needed for reinvestment to the investors as dividends. So many stocks have such little dividend (or buyback) activity that it's a rounding error. That means the investors are more likely to be interested in pure speculation, hoping to buy before the peak and sell at highs. When you're only engaging in speculation, there's no reason the stock price has to stay tethered to reality. You end up with companies like TSLA that have insane multiples or TWTR that lose money for a decade without paying a penny back to shareholders and are still somehow "worth" billions. A rational market would be a better market, and more dividends would, in my opinion, increase rationality.

analognoise 8y ago
You could only buy stock that produces dividends? (Edited because words)
JKCalhoun 8y ago
> I wish more big stocks (looking at you, tech giants) paid regular dividends instead of buybacks. Apple does both. Not sure where that puts it....
- mmanfrin 8y ago
  That's because they have so much cash that they have no idea what to do with it otherwise. They are also doing buybacks.
- seanmcdirmid 8y ago
  Microsoft does both also.
8y ago

Nokinside 8y ago

I don't see how stock buybacks are meaningfully different from dividends. If anyone cares to explain without any gaping logical holes in their explanation, it would be nice. In buyback the money comes to shareholder in the form of increased stock price (and the investor can choose if he wants to get the value by selling). In the case of dividends, all investors must buy more of the stock. That should be just technical difference, not a substantial issue. For example, if buybacks are forbidden because CEO pay is a problem, obviously the compensations will change to reflect the change. In the end total compensation will stay the same. As a investor look at the total return of stocks (price + dividends reinvested) and it has little effect on my decisions if buybacks change into dividends.

xapata 8y ago
Regularity. Dividends are typically given on a frequent, predictable schedule. Buybacks are not.
- tathougies 8y ago
  Dividends are not always frequent and predictable. There is certainly no requirement that they be. A board can decide to pay a dividend (or not pay one) or to reduce the dividend at any time, unless the corporations bylaws somehow protect it (although they can typically change these as well).
  - xapata 8y ago
    Yes, but would you agree that dividends are typically frequent and predictable? I think that's a fair statement in comparison to stock buybacks.
    - tylerhou 8y ago
      Sure. But that's not a fundamental difference, that's just a difference in normal usage. The only fundamental difference between stocks and dividends from an investor perspective that I'm aware of is tax treatment.

lr4444lr 8y ago

I've asked numerous friends who work in finance and do graduate studies in econ. for their perspective on buybacks, and they truly don't understand why the lay press has become so obsessed with the maneuver as a moral evil. Yeah, it can temporarily juice a stock's price, but other major players in the market and board members at the corporation in question aren't as stupid about short term gain as we've been led to believe by these journalist jeremiads. If a company wants to unleash its pent up capital into more efficient allocations of the economy, i.e. the companies that will grow and invest in workers, and the sellers on the other end of the buyback want to trigger capital gains taxes, by all means let them do it. Let's not leave out that other side of the equation in a rational discussion.

RandomInteger4 8y ago
Because they're taking the tax savings from the irresponsible congressional actions and using that to enrich the wealthy rather than raising the pay of their workers by a non-trivial amount.
- tylerhou 8y ago
  A large number of people who work at, say Apple, the company which bought the most of their stock back, will see very non-trivial increases in effective compensation because of stock price rises.
  - ryandrake 8y ago
    Those increases are only non-trivial and meaningful to employees who have a non-trivial or meaningful amount of equity. In other words a very small percentage of employees.
    - tylerhou 8y ago
      Very small percentage? From a quick Google roughly 17-25% of Apple employees are engineers. Assuming all engineers get options, and that options are around 1/4 of an engineers compensation, and assuming that buybacks raised Apple's stock by 2% (I don't know how accurate that number is, but I'm just throwing it out there), each employee saw a 0.5% bonus per year assuming their options were issued before the buyback was decided. That's definitely non-negligible; it's around $1000/year for the average engineer. To be honest, I wouldn't be surprised if Apple also compensated some high-value non-engineers in stock. To find the actual number of people who benefit, you would have to include them, plus you would have to add in all the people who don't work at Apple but own Apple stock directly or indirectly (for example, while I don't work at Apple, I probably own some stock because of my participation in a mutual fund). I'm pretty certain that there are tens of thousands of people who see an increase in earnings because of Apple buybacks. The majority of them might be well-off since they are engineers or have the luxury of purchasing mutual funds, but I am hardly a millionaire or billionaire. EDIT: Did more Googling; Apple's stock jumped around 12% after announcing their buyback, so the bonus is around 3%. I would love a $6000 bonus/year for the next few years. [0] https://www.forbes.com/sites/chuckjones/2018/05/12/what-impact-could-apples-100-billion-stock-buyback-program-have-to-its-stock-price/#475d2b224c4c https://www.forbes.com/sites/chuckjones/2018/05/12/what-impa... [0]

darawk 8y ago

> The stranglehold of this doctrine of “shareholder-value maximization” over corporate decision making has been a leading cause of ... sagging productivity. lol...maximizing shareholder value is a cause of sagging productivity? Do these people even read their own words before they publish them? This whole 'stock buybacks are evil' meme is beyond silly. The only difference between dividends and stock buybacks is tax efficiency. So yes, corporations are avoiding some tax burden by doing this, and that may be a bad thing - so change the tax policy. But there's no reason to expect stock buybacks are the cause of anything other than a slightly lower tax bill, and, predictably, this article doesn't even bother to try to make the actual case otherwise. It just makes a bunch of blanket, baseless and unsupported assertions. It's seriously irritating the absolute garbage that gets published in places like the NYT these days. This article doesn't even try to make its case. It just pushes a narrative with innuendo and bald assertions. How can something like this possibly get past their editors?

mlthoughts2018 8y ago
a naive pursuit of maximizing shareholder value outside of greater context could easily result in failing to maximize shareholder value, let alone worse productivity metrics. I’m not saying the article is faultless, but I don’t agree with the reaction to the quote you selected. It seems very reasonable to me.
- darawk 8y ago
  You could make a nuanced argument like that, sure. But if you did that, you'd have to actually flush it out, and making an argument like that actually work is quite hard. Which is why this article doesn't bother to attempt it. They just state it, and hope nobody is paying attention.
  - mlthoughts2018 8y ago
    Why is it hard to make such an argument? Intuitively, just from the basic operation observable of most large companies and the ubiquity of corporate dysfunction, it seems obvious. To the degree that the burden of proof would go the other way. It’s exceptional to me to say that companies pursue maximizing shareholder value in a way that generally accomplishes that goal, or to disagree with the conclusion that companies are mostly stagnant in terms of actual productivity measures and have been for a while (something that highlights the current extreme incongruity between aggregate financial metrics and societal productivity metrics). Those positions require extreme, special evidence since they are so at odds with reality.

harryh 8y ago

For a pretty general rebuttal to essays like this (which are pretty ignorant) I recommend Buyback Derangement Syndrome recently published in the WSJ: https://www.wsj.com/articles/buyback-derangement-syndrome-1534460606 https://www.wsj.com/articles/buyback-derangement-syndrome-15...

RockyMcNuts 8y ago
Or Harvard Business Review https://hbr.org/2018/03/are-buybacks-really-shortchanging-investment https://hbr.org/2018/03/are-buybacks-really-shortchanging-in... Companies choose how much equity capital to put to work based on - the investment opportunities they have; - the availability and cost of equity capital; - the availability and cost of alternative capital (i.e. debt which is generally cheaper for well-established firms that generate cash flow); - the leverage or financial risk profile that makes sense, (companies with more stable cash flow may use more debt v. equity) When companies have large growth opportunities, have negative cash flow, and the stock price is high/equity cost of capital is low, they increase equity capital. (e.g. Tesla selling stock) When cash flow turns positive, reinvestment opportunities diminish, the stock price is low, they return equity capital. (e.g. Apple paying a dividend and buying back stock) How you return the capital is an accounting/tax decision. There's nothing very special or evil about doing it by buying back stock. Aside from tax issues, no difference vs. paying a dividend. If the tax on capital gains is the same as on dividends, dividend forces the shareholders to have a taxable event, whereas the buyback lets shareholders choose whether to sell back to the company at a given time/price.
kgwgk 8y ago
The thesis that Apple got to its one trillion market cap helped by buybacks is so absurd that it hurts to see how many people repeated it. Matt Levine also commented on the issue (https://www.bloomberg.com/view/articles/2018-08-07/buying-your-way-back-to-riches https://www.bloomberg.com/view/articles/2018-08-07/buying-yo...): “The theory here is essentially that if Apple had 220 billion more dollars—roughly the amount of buybacks it has done in the last six years—then it would be worth less money. It doesn’t sound especially plausible. Presumably Apple plus $220 billion would be worth at least, like, a dollar more than Apple alone? And if the buybacks work so well, why not do more? Why not sell off all of Apple’s businesses, use the money to buy back stock, and leave Apple as an empty shell with a reduced share count and a $2 trillion valuation?”

naveen99 8y ago

Do companies have to announce buy backs in advance like large shareholders ? I am annoyed that some of my secondary market purchase attempts are thwarted by right of first refusal exercised by the company. On the other hand, I think dividends reduce volatility, make option pricing a little more complicated and trading less fun.

the_watcher 8y ago

There's a lot of reference to research that the authors claim show that stock buybacks are bad and terrible, but no description or quantification of how exactly their research showed this. The closest I can see is "According to our research, when trillions of dollars of corporate cash are extracted from companies through buybacks, on top of dividends, the result is a dramatic concentration of income among the richest American households and the destruction of middle-class employment opportunities." To me, this is phrased the way politicians phrase descriptions of studies, stats, or findings that they are wildly misusing.

noelsusman 8y ago
It's an op-ed, you only have so many words. Here's a much longer article on the same topic written by one of the authors of this op-ed: https://hbr.org/2014/09/profits-without-prosperity https://hbr.org/2014/09/profits-without-prosperity

slg 8y ago

A buyback is just a dividend except instead of cash the stockholder receives more ownership. I never see this type of article written about dividends which makes me wonder why we see them about buybacks.

WalterBright 8y ago
Yes, and long term capital gains are taxed at a lower rate than dividends, so long term shareholders prefer it.
- slg 8y ago
  Are people framing that as a reason for preferring dividends over buybacks? I can see it as a potential negative from the perspective of the working class, but this article certainly isn't making that argument.
- nilsbunger 8y ago
  Not quite true. Qualified dividends tax rate are 15% nowadays, while capital gains are 20% (or 23.8% if you make a lot of income). However, you can defer the capital gains tax (by not selling), thus allowing that money to compound and work for you.
  - loeg 8y ago
    I don't know where you're getting that from. Qualified dividends are taxed as long-term capital gains. They have the exact same 0-23.8% brackets as LTCG do. Wikipedia: https://en.wikipedia.org/wiki/Qualified_dividend https://en.wikipedia.org/wiki/Qualified_dividend (perhaps not a "legitimate" source, but at least a jumping off point for more information).
    - nilsbunger 8y ago
      thanks, I was definitely wrong. Not sure where I got that from either

bepotts 8y ago

The reason the press is so obsessed with stock buybacks is because the press loves talking about how much the middle class is getting "screwed" by big corporations, no matter how benign the issue at hand is. If you make a lot of money, you probably did/are doing something shady. It's part of the reason why the press has gotten so focused Silicon Valley and "tech bros". The media has a narrative and will promote anything that confirms that narrative, and will ignore anything that doesn't.

deleted 8y ago
[deleted]
koboll 8y ago
Real wages have been stagnant for decades, while corporate profits have skyrocketed. So I'd say an obsession on the middle class getting screwed is not exactly misplaced.
- whatshisface 8y ago
  I can have my tin foil and wear it too: both the stagnation of wages and the mis-placement of anger over the stagnation of wages are bad for the middle class and good for the corporate overlords.
- refurb 8y ago
  Real wages may have stagnated, but overall compensation hasn’t. https://www.cnbc.com/2014/01/29/-wage-stagnationcommentary.html https://www.cnbc.com/2014/01/29/-wage-stagnationcommentary.h...
  - freehunter 8y ago
    There are a lot of instances of "technically true, but wildly missing the point" in that article. A washing machine is cheaper today than it was in 1959 because in 1959 automatic electric washing machines were brand new on the market. Same thing with televisions: it's hard to argue TVs were ubiquitous in 1959 compared to today. It's not a very valid comparison to say that something that was cutting edge technology in 1959 is cheaper now than it was 60 years ago. And more benefits going to health care and daycare merely reflects the astronomical increases in the cost of health care and daycare. That's the entire argument over "real wages": costs have gone up more than or on par with people's ability to pay them. But I wasn't surprised when I got to the bottom and found it was written by someone from the Johnson Center at Troy University, which is backed by the far right-wing Koch Foundation, so much that two years after this CNBC article was written, Troy University put out a statement saying they were going to stop getting involved in politics: https://www.al.com/news/index.ssf/2016/07/troys_johnson_center_steers_aw.html https://www.al.com/news/index.ssf/2016/07/troys_johnson_cent... This CNBC article is a submarine from the very people who created this economic model. Of course they're going to try to put a positive spin on it... because washing machines are cheaper now than they were in 1959! Proof that the average American worker is doing just fine.

ryandrake 8y ago

To me, a stock buyback or dividend is a bad sign. It means the company literally can think of nothing better to do with the money than shrug and return it to shareholders. “We’re out of ideas and innovation, guys! Go find somewhere to invest this where it will be put to good use!” I guess if you’re an electric utility that’s fine. If you’re supposed to be an innovative tech company, and you don’t know what to do with your cash???

nradov 8y ago
Since software is eating the world, now every company has been forced to become an innovative tech company just to survive. What we used to think of as "tech" companies are no longer anything special.
philwelch 8y ago
There's no such thing as an unbounded exponential growth curve. Any business will inevitably reach a point of diminishing returns, and their hockey-stick growth curves will turn into s-curves. The only alternative would be for a single business to eventually grow to such a size that it essentially becomes the entire world economy.
- harryh 8y ago
  The only alternative would be for a single business to eventually grow to such a size that it essentially becomes the entire world economy. https://i.kym-cdn.com/photos/images/newsfeed/001/275/986/c57.jpg_large https://i.kym-cdn.com/photos/images/newsfeed/001/275/986/c57... ;-)
  - philwelch 8y ago
    I can't completely rule out the possibility that this is indeed Amazon's business plan.
erikpukinskis 8y ago
I don't think your logic makes sense. Let's assume the company has an infinite fountain of moneymaking ideas, as you posit. Why would there need to be any earnings at all to fund those ideas? Why not just take on debt to fund those ideas? Presumably companies are already taking debt to fund all of their good ideas, and any ideas that are left are "not that good". The appearance of earnings should have no effect on the number of good ideas available. Why would it?

Animats 8y ago

Stock buybacks, borrowing, and dividends are all ways of paying for capital. They should all be taxed at the same rate. Whether or not stock buybacks should be prohibited, they should not be encouraged by tax policy.

jl2718 8y ago

I totally disagree with this. A company holding cash is a moral hazard for board members and executives because it’s so easy to extract. Company profits should be paid out or invested quarterly. It’s not pumping the price, it’s just giving the shareholders what they own. Here’s an example. Board members invest in a startup and then use the cash to purchase it at a much higher valuation. In a cash deal, nothing gets reported. If the company uses stock for the transaction, they would have to report it to the SEC as a distribution to an insider. Other than this, there is basically no good reason to use cash for acquisition versus stock equivalent. That’s just one example, but a very common one.

alanlamm 8y ago

One issue Im surprised never comes up in discussion of buybacks vs. dividends is, apart from the tax issue, whether buybacks drive stock prices up because of how large orders to buy stock at market price interact with the outstanding order book - ie that in a buyback you buy specifically from those of the current shareholders who attribute the lowest valuation to the stock at any given time. To simplify lets say 2 mutual funds each hold 50% of the stock of a corp. Mutual Fund A values the stock (ie is willing to sell at) $100, and mutual fund B is willing to sell at $120. Other potential buyers value the stock at $99 or less. The company decides to buyback 50% of its stock. It buys all of A’s stock, and thereby drives the new market price to $120. Meaning it drives up the market price even before you consider the effect of reducing the # of outstanding shares (fewer shares > higher EPS > higher stock price at a given P/E multiple). Of course, in the real world stockholding is less concentrated, the gap between valuations in the order book wouldn’t be so wide, shortsellers would also play a role and over time one would argue that efficient-markets-hypothesis factors in. But still... any thoughts?

kgwgk 8y ago
Buybacks are the natural state of the market... They push prices higher, or more likely they support prices if the company takes an opportunistic approach to shares repurchase. The problem is when the reporting season comes and they cannot do it: https://www.bloomberg.com/news/articles/2018-04-02/stocks-lose-critical-buyer-at-worst-time-as-selloff-picks-up https://www.bloomberg.com/news/articles/2018-04-02/stocks-lo...
OscarCunningham 8y ago
> Meaning it drives up the market price even before you consider the effect of reducing the # of outstanding shares (fewer shares > higher EPS > higher stock price at a given P/E multiple). These aren't two separate effects. The interaction between the buyback and the order-book is the mechanism through which the stock price is adjusted to take into account the smaller number of shares.
- kgwgk 8y ago
  Not really. If the company buys $100mn in shares or any other market participant buys $100mn in shares the stock price adjustment caused by the interaction between these orders and the order book will be the same. In one case the market will learn later that the share count has been reduced. In the other case no share count reduction will happen.

phlakaton 8y ago

I too was a little flustered trying to follow the argument here. These additional sources helped a little: Troy Segal, "Why would a company buy back its own shares?", Investopedia, 20 Jun 2018. Annie Lowry, "Are Stock Buybacks Starving the Economy?", The Atlantic, 31 Jul 2018 Katy Milani, Irene Tung, "Curbing Stock Buybacks: A Crucial Step to Raising Worker Pay and Reducing Inequality", Roosevelt Institute, 31 Jul 2018 I'm new to this, so let me share my thinking here and see if I've got it right. The argument is that money that could be going towards investment in growing the company and/or rewarding the employees is instead going towards buybacks. Buybacks have the benefit of increasing the stock price and consolidating ownership, which generally benefit both stockholders and executives, but exclude many classes of workers who don't own shares. Dividends would be a similar thing to plow a company's dollars into. Again: benefiting stockholders, but excluding workers who don't own shares. Companies these days who are involved in feeding money back to investors like to balance between issuing dividends and buying back stock--in many cases, biasing strongly in favor of buybacks. There are a few reasons for this, including investors wigging out far less if you have to cut back on buybacks vs dividends during a recession. Nevertheless, there seems to be an expectation that shareholders will continue to increase their profits--specifically, that dividends will increase if the company is issuing dividends. Indeed, it seems to me that a company runs a risk of activist shareholders taking them over if they don't do a good enough job of satisfying them. So if a company shifts those dollars away from shareholders and into wages, and the shareholders revolt as a result, does that necessarily make those companies or their employees any better off? I can see a problem for sure, since the increase in income inequality in the US is an undeniable problem, a lot of workers are not getting any better off from either stock buybacks or dividends, and the Roosevelt Institute makes some compelling arguments for why stock buybacks are not great for long-term strategy and profitability even among shareholders--including the startling fact that some companies, particularly in the restaurant business, are actually putting themselves significantly into the red to buy back shares! I'm not sure that it's a problem that regulators are obligated to fix by going directly after stock buybacks, though.

simonsarris 8y ago

The most succinct way I've found to explain this to normal humes is this: When you buy stock, to make money, one of two things must happen: * The company pays a dividend regularly * The company's share price increases, then you sell A dividend is just like a salary. A buyback is just like a bonus. Everyone understands salaries and bonuses, there's no reason to lose your mind over thinking buybacks are nefarious unless you thinking giving employees a bonus is nefarious. Then, there are two key plusses to buybacks: * You choose the year in which you sell. This has favorable tax advantages, just like if you could choose the year in which you book a bonus. * Investors punish companies, sometimes heavily, when they decrease dividends. If you cannot guarantee a dividend indefinitely, you probably shouldn't give it out. Instead you should do a buyback. "Things are good right now, so here's a bonus." This is identical to how people think about salaries, so it should come as no surprise. Lowering a dividend later is like giving someone a pay cut, but people don't balk so much if you tell them you're giving them a one time bonus.

erikpukinskis 8y ago
It's not a great analogy. A bonus is extra cash in your bank account. A buyback is not extra cash in your account, unless you sell the equivalent amount of stock. Actually, the dividend is more like a bonus. Actually, I don't really see any merit to the analogy at all.
repsilat 8y ago
My (half baked) analogy is a sealed fish tank half full of water. The water is the company's non-cash value and the air is its cash. Shares are imaginary vertical slices of cash and non-cash value. A dividend "lowers the lid" of the fish tank. Some amount of air (cash) ends up outside the company, and is returned to each shareholder. A buyback is the same thing, but first you tip the tank on its side before letting some air out. When the tank is on its side, some shares are "all cash" and the others are "all non-cash". Then you shrink the box by taking out some all-cash shares. Then you right the fishtank.

marketgod 8y ago

Less dividends is good. This helps the $SPY $300 targets for this year. Also, helps AAPL go higher, $250 targets as they pay dividends. Everything is coming together for 2018!

paulsutter 8y ago

What happens when the last share is bought back? (yes I know, that share would be worth just more than the company can afford to pay, but what if?) Stock buybacks are better than dividends (shareholders get to choose when they liquidate), and I can see no actual downside. They only goose the per share price because suddenly there are fewer shares to represent the same company. More and more, politicians seem to focus on issues with little actual merit, instead of super important issues like healthcare costs, because no donors can get upset. For example, if buybacks are outlawed, it’s not really a big deal and there won’t be pushback. They can claim a victory without actually changing anything, for better or worse, for anyone.

ohiovr 8y ago

Why should the sole focus of a corporation be making itself expensive?

fipple 8y ago

Without buybacks or dividends every stock is worth $0.

ry4n413 8y ago

stocks would probably crash if this happened due to a sharp increase in the costs of capital and decrease in cash flow profitability.

purplezooey 8y ago

Defenders of buybacks contend that they do no harm because the funds are reallocated through financial markets and used elsewhere in the economy. When is this "rising tide" horse shit argument going to wear out. It's used to justify almost anything now.