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For a pretty general rebuttal to essays like this (which are pretty ignorant) I recommend Buyback Derangement Syndrome recently published in the WSJ: https://w

by 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?”
- philwelch 8y ago
  Increasing your market cap by buying back stock is the economic version of a perpetual motion machine.
tptacek 8y ago
This is a good rebuttal but one of the key arguments in it (it's even in the subhed) seems to me to miss the point. The corporation has the same assets before and after the buyback. But the corporation is controlled by management, which has an agent/principal relationship with the company. A decision can be better for management and worse for the company.

by harryh 8y ago

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?”

philwelch 8y ago
Increasing your market cap by buying back stock is the economic version of a perpetual motion machine.

tptacek 8y ago

This is a good rebuttal but one of the key arguments in it (it's even in the subhed) seems to me to miss the point. The corporation has the same assets before and after the buyback. But the corporation is controlled by management, which has an agent/principal relationship with the company. A decision can be better for management and worse for the company.