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I keep an eye on a lot of tech stocks, and I think it's crazy how much crap companies like IBM and Oracle got 3-5 years ago for their stock buybacks [1] contras

I keep an eye on a lot of tech stocks, and I think it's crazy how much crap companies like IBM and Oracle got 3-5 years ago for their stock buybacks [1] contrasted to how praised stock buybacks are now [2]. The impact back then was the market was great but IBM/Oracle/etc's share prices weren't doing great. The impact now is the market is not doing great, and stock buybacks are a band-aid over the inevitable decline. Anyone who doesn't see that is going to be caught off guard when the money runs out, the buybacks stop, and the market crashes "overnight". In reality, the market is crashing right now, it's just hidden behind trickery designed to artificially inflate the value of the market. It's like if I lost my job but kept financing my same lifestyle out of my savings account. Eventually that savings will run out and reality will hit like a ton of bricks, and no one will have seen it coming. [1] https://www.fool.com/investing/general/2014/12/05/share-buybacks-are-killing-ibm.aspx https://www.fool.com/investing/general/2014/12/05/share-buyb... [2] https://www.fool.com/investing/2018/12/09/why-investors-should-cheer-facebooks-stock-buyback.aspx https://www.fool.com/investing/2018/12/09/why-investors-shou...

shaki-dora 8y ago
I think you are operating from a seriously mistaken assumption of how stock buybacks work. When a company buys their own stock, there are simply fewer shares free-floating, in the hands of owners. The company's profits therefore are divided among a smaller group, and each share receives a larger percentage of those profits. Imagine an extreme case where McDonald's buys every single share but one. That remaining stock-owner will therefore own 100% of McDonald's, and get every last profit made from the world's obese. All this requires no ongoing buybacks from the company. You do it once, and because the denominator shrinks, each stock appraises. After that, as long as profits remain stable, earnings per share will, and so should, absent external factors, the stock price.
- Jimpulse 8y ago
  The kicker is that these buybacks were financed with debt,
- freehunter 8y ago
  None of what you said conflicts with my understanding of how stock buybacks work. I never said it was an ongoing activity, just criticizing companies who do stock buybacks to artificially inflate their share price in a down market. My argument has nothing to do with profits or dividends or ownership, just share price. >a company buys their own stock... [and] each stock appraises That lines up exactly with what I've described. If you're saying I'm wrong, you're going to have to be more specific because I don't see where we disagree.
  - daneyh 8y ago
    >just criticizing companies who do stock buybacks to artificially inflate their share price in a down market. My argument has nothing to do with profits or dividends or ownership, just share price. There is nothing inherently wrong with performing stock buybacks, from a cashflow perspective it is equivalent of paying a dividend, in fact it can be prudent from a tax perspective. You did imply that it is a continuous process when you suggested: > when the money runs out, the buybacks stop Performing a stock buyback based off the proceeds of debt in a down market makes perfect sense actually because you can significantly reduce your cost of capital if you believe your future cashflow will be strong enough to continue making coupon payments. You can issue debt at say 3.5% and buy out shares that require 7% cost of capital and as long as interest rate and credit risk don't drastically deteriorate significantly increase the value of your company from a simple capital markets operation.
    - freehunter 8y ago
      If that's what people understood as implied, it was not what I meant to imply and I apologize. What I meant by that was, you can only buy back stocks up until the point where you run out of money. Not that you HAVE to, but if your goal is to manipulate your share price, you can only do it up to the point where you're out of money. If I'm spending money from my savings account, there is no law saying I have to spend all the money in my savings account, just a law saying I can only spent up to the balance in my savings account. I guess you assumed I was arguing that companies who do buybacks must dump all of their money into buybacks, which I certainly did not mean to imply. Big difference between "able to" and "must". The point is, if you as a company are trying to manipulate your share price in a down market by buying back stocks and you choose to continue buying your stock until the market rises again, you're taking the risk that you will run out of money before the stock market rises again. At that point your share prices fall no matter what.
- deckar01 8y ago
  A company regains the control and share of profit from the stock they buy back. The one remaining stock holder in that example would not hold 100% of profit or control of McDonalds, they would hold the same percentage of profit and control that their stock certificate was originally issued for. Edit: Downvoted? Source: > A buyback occurs when the issuing company pays shareholders the market value per share and re-absorbs that portion of its ownership that was previously distributed among public and private investors. https://www.investopedia.com/ask/answers/042015/why-would-company-buyback-its-own-shares.asp https://www.investopedia.com/ask/answers/042015/why-would-co...
  - matt4077 8y ago
    So, then, with only a single owner left, owning the last remaining share: Who else gets parts of the profits, and which other people get to cast votes in elections to the board? Edit: Quote from your link By reducing the number of outstanding shares, a company's earnings per share (EPS) ratio is automatically increased – because its annual earnings are now divided by a lower number of outstanding shares.
    - deckar01 8y ago
      > While EPS is widely used as a way to track a company’s performance, shareholders do not have direct access to those profits. A portion of the earnings may be distributed as a dividend, but all or a portion of the EPS will be retained by the company. https://www.investopedia.com/terms/e/eps.asp https://www.investopedia.com/terms/e/eps.asp
      - matt4077 8y ago
        This is getting insane... Would you, please, apply your point to the original statement, namely: they would hold the same percentage of profit and control that their stock certificate was originally issued for. Then, pray tell, in your opinion, when a company buys back one of two remaining shares, making you the sole owner of the company, does this a) Have absolutely no effect on your share b) makes your share more valuable, because it has become a rare collectors' item or c) doubles the future percentage of profits your receive, from 50% to 100%, because irrespective of any profits distributed via dividends or not, the question was only about the share of those profits and not their absolute amount, and even under that strange misreading, even the profits you receive in absolute terms would double under the typical assumption of "all else being equal" and "nobody is really that stupid"
- gamblor956 8y ago
  When a company buys their own stock, there are simply fewer shares free-floating, in the hands of owners. The company's profits therefore are divided among a smaller group, and each share receives a larger percentage of those profits. Technically true, but the company had a choice about how to return profits to investors and chose the buyback over the dividend, so the remaining owners don't get a larger percentage of profits unless the company also issues a dividend. It's generally an either-or these days. Imagine an extreme case where McDonald's buys every single share but one. That remaining stock-owner will therefore own 100% of McDonald's, and get every last profit made from the world's obese. Not all McD's stock is publicly traded. Moreover, a fair amount of McD's stock cannot be legally sold due to it being owned by ESOPs. That being said, the remaining stock owner would not own 100% of McDs, they would own 1 share of McDs (and 100% of then-outstanding stock). There would still be several million shares authorized and in reserve that could be sold or re-issued at a moment's notice. The decision to sell/re-issue those shares is made by the company, not the owner, and the fact that he theoretically owns 100% of the company at that time is meaningless because he owns only a fractional percent of the company's authorized shares and thus has no actual power.
  - ringshall 8y ago
    I’ve always been curious about this. Who, if anyone, owns the shares that are held in reserve? Surely they can’t be used to vote, unless they are held as an asset by the company in the same way the company might hold shares in other companies as assets. Do they exist on the balance sheet?
    - gamblor956 8y ago
      Nobody owns the shares in reserve and while in reserve they have no voting or dividend rights. While in reserve, they are neither assets or liabilities or really even anything other than a hypothetical number. Many companies used to disclose the number of shares in reserve, so that shareholders were aware of the potential dilution of their investment, but in an era of buybacks, that has become less popular.
AJ007 8y ago
As others have pointed out, it is important to evaluate these actions on a company by company basis. On the other hand, if you invest in index funds, then the proportion of who is doing them and why matters a lot. The worst case scenario is a company with declining market share, that is cash flow negative, and is buying back shares with debt because the executives set their bonuses based on an earnings per share target. I strongly suggest novice investors is to look at shares outstanding for a company over time. Just as one could claim share buybacks mask a companies problems, you can make a case that issuing new shares steals money from existing shareholders. Indeed, there are public companies which have been around 10+ years and stay afloat solely by creating new shares and have generated 0 return for long term shareholders.
- warrenm 8y ago
  Which is part of why stock buybacks (of one format) have some major upsides: if/when the company decides it wants/needs capital, it can sell shares from its own holdings, and not be issuing new shares
pmart123 8y ago
Companies with low growth have a few options (assuming strong cash flow). 1. Distribute cash back to shareholders via buybacks or dividends 2. Increase R&D spending on new initiatives 3. Acquisitions Buybacks are at least much more tax effective than issuing dividends. Large acquisitions tend to fail and I imagine it could be hard for an established company to regain the "growth mindset" of a startup. Should a company load up on debt or pursue buybacks way above intrinsic value? Probably not. But, if a company is paying a 4% dividend, and can borrow at 3.5%, buying back stock reduces the dividend payout, and the company avoids lowering the dividend per share (something that is considered sacrilegious in America).
- AnthonyMouse 8y ago
  > But, if a company is paying a 4% dividend, and can borrow at 3.5%, buying back stock reduces the dividend payout, and the company avoids lowering the dividend per share (something that is considered sacrilegious in America). It's also essentially an arbitrage opportunity at 0.5% gain. The company is borrowing money, buying its own shares, and then using less than 100% of the dividend it would have paid on those shares to pay the interest on the debt, and having the rest left over. That revenue stream goes away as interest rates rise -- you can't arbitrage 4% ROI against 4.5% borrowing costs -- but it takes time before that has to happen. If the company borrowed by issuing ten year bonds, they're effectively still paying the original (e.g. 3.5%) interest rate until the bonds mature. At that point they either have to re-borrow the money (which only makes sense if interest rates are still low) or re-issue the shares. But even if they re-issue the shares at that point, they're still better off than having not done it, because they still have the ten years worth of arbitrage profits. This makes even more sense for the companies that have a pile of cash sitting around making <1% returns, because then the arbitrage profits are even higher (and continue to exist even if interest rates rise more), and they don't even have to pay anything back at the end.
- tboyd47 8y ago
  Why does a company have to grow, if it's doing what it does well, workers are happy, and customers are happy, and growth is not occurring naturally? Could it be that the expectation for all companies, everywhere to grow at a constant rate is not reasonable?
neffy 8y ago
@freehunter Yes, you were and are quite right. We´re looking at a feedback loop not entirely dissimilar to the one that caused the '29 crash. Only then it was corporates lending to banks to lend to investors to buy shares. I guess this one is a little more direct.

shaki-dora 8y ago

I think you are operating from a seriously mistaken assumption of how stock buybacks work. When a company buys their own stock, there are simply fewer shares free-floating, in the hands of owners. The company's profits therefore are divided among a smaller group, and each share receives a larger percentage of those profits. Imagine an extreme case where McDonald's buys every single share but one. That remaining stock-owner will therefore own 100% of McDonald's, and get every last profit made from the world's obese. All this requires no ongoing buybacks from the company. You do it once, and because the denominator shrinks, each stock appraises. After that, as long as profits remain stable, earnings per share will, and so should, absent external factors, the stock price.

Jimpulse 8y ago
The kicker is that these buybacks were financed with debt,
freehunter 8y ago
None of what you said conflicts with my understanding of how stock buybacks work. I never said it was an ongoing activity, just criticizing companies who do stock buybacks to artificially inflate their share price in a down market. My argument has nothing to do with profits or dividends or ownership, just share price. >a company buys their own stock... [and] each stock appraises That lines up exactly with what I've described. If you're saying I'm wrong, you're going to have to be more specific because I don't see where we disagree.
- daneyh 8y ago
  >just criticizing companies who do stock buybacks to artificially inflate their share price in a down market. My argument has nothing to do with profits or dividends or ownership, just share price. There is nothing inherently wrong with performing stock buybacks, from a cashflow perspective it is equivalent of paying a dividend, in fact it can be prudent from a tax perspective. You did imply that it is a continuous process when you suggested: > when the money runs out, the buybacks stop Performing a stock buyback based off the proceeds of debt in a down market makes perfect sense actually because you can significantly reduce your cost of capital if you believe your future cashflow will be strong enough to continue making coupon payments. You can issue debt at say 3.5% and buy out shares that require 7% cost of capital and as long as interest rate and credit risk don't drastically deteriorate significantly increase the value of your company from a simple capital markets operation.
  - freehunter 8y ago
    If that's what people understood as implied, it was not what I meant to imply and I apologize. What I meant by that was, you can only buy back stocks up until the point where you run out of money. Not that you HAVE to, but if your goal is to manipulate your share price, you can only do it up to the point where you're out of money. If I'm spending money from my savings account, there is no law saying I have to spend all the money in my savings account, just a law saying I can only spent up to the balance in my savings account. I guess you assumed I was arguing that companies who do buybacks must dump all of their money into buybacks, which I certainly did not mean to imply. Big difference between "able to" and "must". The point is, if you as a company are trying to manipulate your share price in a down market by buying back stocks and you choose to continue buying your stock until the market rises again, you're taking the risk that you will run out of money before the stock market rises again. At that point your share prices fall no matter what.
deckar01 8y ago
A company regains the control and share of profit from the stock they buy back. The one remaining stock holder in that example would not hold 100% of profit or control of McDonalds, they would hold the same percentage of profit and control that their stock certificate was originally issued for. Edit: Downvoted? Source: > A buyback occurs when the issuing company pays shareholders the market value per share and re-absorbs that portion of its ownership that was previously distributed among public and private investors. https://www.investopedia.com/ask/answers/042015/why-would-company-buyback-its-own-shares.asp https://www.investopedia.com/ask/answers/042015/why-would-co...
- matt4077 8y ago
  So, then, with only a single owner left, owning the last remaining share: Who else gets parts of the profits, and which other people get to cast votes in elections to the board? Edit: Quote from your link By reducing the number of outstanding shares, a company's earnings per share (EPS) ratio is automatically increased – because its annual earnings are now divided by a lower number of outstanding shares.
  - deckar01 8y ago
    > While EPS is widely used as a way to track a company’s performance, shareholders do not have direct access to those profits. A portion of the earnings may be distributed as a dividend, but all or a portion of the EPS will be retained by the company. https://www.investopedia.com/terms/e/eps.asp https://www.investopedia.com/terms/e/eps.asp
    - matt4077 8y ago
      This is getting insane... Would you, please, apply your point to the original statement, namely: they would hold the same percentage of profit and control that their stock certificate was originally issued for. Then, pray tell, in your opinion, when a company buys back one of two remaining shares, making you the sole owner of the company, does this a) Have absolutely no effect on your share b) makes your share more valuable, because it has become a rare collectors' item or c) doubles the future percentage of profits your receive, from 50% to 100%, because irrespective of any profits distributed via dividends or not, the question was only about the share of those profits and not their absolute amount, and even under that strange misreading, even the profits you receive in absolute terms would double under the typical assumption of "all else being equal" and "nobody is really that stupid"
gamblor956 8y ago
When a company buys their own stock, there are simply fewer shares free-floating, in the hands of owners. The company's profits therefore are divided among a smaller group, and each share receives a larger percentage of those profits. Technically true, but the company had a choice about how to return profits to investors and chose the buyback over the dividend, so the remaining owners don't get a larger percentage of profits unless the company also issues a dividend. It's generally an either-or these days. Imagine an extreme case where McDonald's buys every single share but one. That remaining stock-owner will therefore own 100% of McDonald's, and get every last profit made from the world's obese. Not all McD's stock is publicly traded. Moreover, a fair amount of McD's stock cannot be legally sold due to it being owned by ESOPs. That being said, the remaining stock owner would not own 100% of McDs, they would own 1 share of McDs (and 100% of then-outstanding stock). There would still be several million shares authorized and in reserve that could be sold or re-issued at a moment's notice. The decision to sell/re-issue those shares is made by the company, not the owner, and the fact that he theoretically owns 100% of the company at that time is meaningless because he owns only a fractional percent of the company's authorized shares and thus has no actual power.
- ringshall 8y ago
  I’ve always been curious about this. Who, if anyone, owns the shares that are held in reserve? Surely they can’t be used to vote, unless they are held as an asset by the company in the same way the company might hold shares in other companies as assets. Do they exist on the balance sheet?
  - gamblor956 8y ago
    Nobody owns the shares in reserve and while in reserve they have no voting or dividend rights. While in reserve, they are neither assets or liabilities or really even anything other than a hypothetical number. Many companies used to disclose the number of shares in reserve, so that shareholders were aware of the potential dilution of their investment, but in an era of buybacks, that has become less popular.

AJ007 8y ago

As others have pointed out, it is important to evaluate these actions on a company by company basis. On the other hand, if you invest in index funds, then the proportion of who is doing them and why matters a lot. The worst case scenario is a company with declining market share, that is cash flow negative, and is buying back shares with debt because the executives set their bonuses based on an earnings per share target. I strongly suggest novice investors is to look at shares outstanding for a company over time. Just as one could claim share buybacks mask a companies problems, you can make a case that issuing new shares steals money from existing shareholders. Indeed, there are public companies which have been around 10+ years and stay afloat solely by creating new shares and have generated 0 return for long term shareholders.

warrenm 8y ago
Which is part of why stock buybacks (of one format) have some major upsides: if/when the company decides it wants/needs capital, it can sell shares from its own holdings, and not be issuing new shares

pmart123 8y ago

Companies with low growth have a few options (assuming strong cash flow). 1. Distribute cash back to shareholders via buybacks or dividends 2. Increase R&D spending on new initiatives 3. Acquisitions Buybacks are at least much more tax effective than issuing dividends. Large acquisitions tend to fail and I imagine it could be hard for an established company to regain the "growth mindset" of a startup. Should a company load up on debt or pursue buybacks way above intrinsic value? Probably not. But, if a company is paying a 4% dividend, and can borrow at 3.5%, buying back stock reduces the dividend payout, and the company avoids lowering the dividend per share (something that is considered sacrilegious in America).

AnthonyMouse 8y ago
> But, if a company is paying a 4% dividend, and can borrow at 3.5%, buying back stock reduces the dividend payout, and the company avoids lowering the dividend per share (something that is considered sacrilegious in America). It's also essentially an arbitrage opportunity at 0.5% gain. The company is borrowing money, buying its own shares, and then using less than 100% of the dividend it would have paid on those shares to pay the interest on the debt, and having the rest left over. That revenue stream goes away as interest rates rise -- you can't arbitrage 4% ROI against 4.5% borrowing costs -- but it takes time before that has to happen. If the company borrowed by issuing ten year bonds, they're effectively still paying the original (e.g. 3.5%) interest rate until the bonds mature. At that point they either have to re-borrow the money (which only makes sense if interest rates are still low) or re-issue the shares. But even if they re-issue the shares at that point, they're still better off than having not done it, because they still have the ten years worth of arbitrage profits. This makes even more sense for the companies that have a pile of cash sitting around making <1% returns, because then the arbitrage profits are even higher (and continue to exist even if interest rates rise more), and they don't even have to pay anything back at the end.
tboyd47 8y ago
Why does a company have to grow, if it's doing what it does well, workers are happy, and customers are happy, and growth is not occurring naturally? Could it be that the expectation for all companies, everywhere to grow at a constant rate is not reasonable?

neffy 8y ago

@freehunter Yes, you were and are quite right. We´re looking at a feedback loop not entirely dissimilar to the one that caused the '29 crash. Only then it was corporates lending to banks to lend to investors to buy shares. I guess this one is a little more direct.