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Dividends and Buybacks Now Larger Than Total Reported Earnings for Entire S&P500

92 points by Fifth_Star 7y ago

llamataboot 7y ago
Can't see this ending without a lot of pain. Credit is so easy that it becomes easier to reduce the amount of shares out there to prop up their price than do what capital markets are supposedly designed for - offering more shares to invest in capital. Yet raising interest rates would crash the market. At some point true price signals will leak through and the tiny hole in the wall will become a flood...
- kortilla 7y ago
  Where are there companies using credit to issue dividends? If companies just took on debt to issue a dividend, the share price would be devalued by the market by the dividend amount due to the debt so it would be a pointless exercise.
  - padobson 7y ago
    I think it's more about the trade-off. There's no obvious opportunity to deploy the capital, and if one pops up later, easy credit makes it trivial to take advantage of the new investment.
  - ProfessorLayton 7y ago
    IIRC Apple is borrowing hundreds of billions to pay as dividends/buybacks because it's cheaper to pay interest than it is to pay taxes on money earned overseas.
    - javagram 7y ago
      They were doing that but I believe this is not something that makes sense any longer. The TCJA passed by the republicans got rid of the tax system that was causing the problem and switched the USA to a territorial income tax system like other countries have. https://www.taxpolicycenter.org/taxvox/explaining-tcjas-international-reforms https://www.taxpolicycenter.org/taxvox/explaining-tcjas-inte... > The TCJA’s international reforms are significant. Combined with the reduced corporate rate, they largely eliminate the incentive for US firms to accrue assets overseas, while seeking to protect the tax base from avoidance by both US and foreign-based multinationals.
- __blockcipher__ 7y ago
  Once a company has no need for more cash, there is no point to sell shares. The whole point of a IPO is to fund growth / give founders and early employees a payout. Share buybacks aren’t about propping up the price (when done correctly). They’re about tax efficiently increasing your ownership share. Or you can think of it as paying money now to reduce the amount you need to pay in dividends, all else equal. Share repurchasing is just a tax efficient way to return money to shareholders. People love dividends yet look at buybacks as insane. Why? * Note: buying back shares when your company is overvalued is insanity. I’m not endorsing that. But if you’re in a situation like AAPL, they are hands down the correct move.
  - georgeburdell 7y ago
    If companies were throwing off dividends exceeding their collective earnings, wouldn’t you be concerned?
    - AnthonyMouse 7y ago
      Not if they've been sitting on a pile of cash for years and doing nothing with it. What are they supposed to do with money they don't need? Store it in a mattress forever?
  - lovich 7y ago
    Because it's difficult to distinguish between executive leadership trying to efficiently return money to shareholders vs propping up the share price so that they see a personal benefit via their own shares increasing or via contractual bonuses. Given that there's an incentive to spend other peoples money(shareholders who bought shares) to increase their own(via bonuses, salary, or granted shares) it's fairly safe to assume that execs are following the incentive
    - AnthonyMouse 7y ago
      > via their own shares increasing This isn't any more true for the executives than any other shareholder, and doesn't really work that way anyway. Buybacks don't increase the value of shares unless the company was undervalued or making less efficient use of the cash than their other capital, and in that case they're smart to have done it. > via contractual bonuses The way to solve this is to do accounting for buybacks (and, for that matter, dividends) when calculating bonuses. You obviously don't want to have executives choosing whether to do these things based on that, so don't.
- sonnyblarney 7y ago
  This is just what it is. Given an interest rate regime, CFO's will react accordingly and this is that reaction. Also, it's odd to see dividends and buybacks in the same data. Finally - both activities are not bad at all. Buybacks are a strong signal to the market the company believes in it's valuation (FYI investors have access to the same 'cheap capital') and dividends are profits getting out. None of this is bad, but it's going to get hard to get off of the sugar addiction.
  - llamataboot 7y ago
    Don't get me wrong, don't think there is anything wrong in principal with a buyback - but when we are talking about macro-economics and not any specific business, data like this is a bit strange...
mdorazio 7y ago
If you need evidence that our economy is at least partly broken, this is it right here. Companies that are swimming in cash reserves are using their money to artificially boost shareholder returns instead of actually investing in things like capital expenditures, R&D, or higher salaries. On one hand (as the article points out), this is driven by cheap credit, but on the other hand I think the question needs to be asked: have large corporations just run out of things worth investing in?
- kortilla 7y ago
  You think returning money to investors is a sign the economy is broken? IMO it’s a sign companies are doing the intelligent thing and are assuming investors are better investors than throwing money at random shit.
  - povertyworld 7y ago
    Right. Wouldn't it be great if Google would start paying a dividend instead of throwing away money on goofy acquisitions like Boston Dynamics? How the hell is a robot dog that does flips or whatever supposed to improve their advertising business exactly? Give me a break.
    - ForHackernews 7y ago
      ...it was supposed to get them into the highly lucrative world of military contracting. But then it caused too much of a PR stink, so they had to back off from that idea.
    - sonnyblarney 7y ago
      " How the hell is a robot dog that does flips or whatever supposed to improve their advertising business exactly?" Because a robot that does flips can also flip burgers, pick inventory, sneak up on people (i.e. military) and ultimately that stuff will be worth a lot. One of their lesser goofy investments.
      - 7y ago
eej71 7y ago
For some counterpoints, consider this paper from Cliff Asness of AQR fame. https://www.aqr.com/Insights/Research/Journal-Article/Buyback-Derangement-Syndrome https://www.aqr.com/Insights/Research/Journal-Article/Buybac...
jjwhitaker 7y ago
After the 2017 tax bill this was bound to happen. consolidating stocks allows greater control over the corporation by the high % owners, minimizes activist investors, reduces accountability, and further funnels profit to the top. Whatever that "poll" advertisement is at the bottom with a caricature of AOC was misleading and dishonest at best. What agenda is this site pushing i that's their biggest ad on this article?
- twoquestions 7y ago
  The site probably doesn't control the ads that appear, and such an ideological slant doesn't look evident looking at the titles of their other articles. The first bit is bang-on.
deleted 7y ago
[deleted]
nostrademons 7y ago
This is how its supposed to work. The whole reason stocks have fundamental value in the first place is because they're claims on the future profits of the company. 100% of a company's earnings legally belongs to the shareholders; it's nice to see them actually returned to the shareholders (vs. blown on overpriced acquisitions) for a change. It does mean the end of a cycle, though, and not just a "stocks go up, stocks go down" cycle. It's rational for corporate management to retain earnings and invest in future growth opportunities when the expected returns from those growth opportunities are greater than the cost of capital. That they're returning capital to shareholders, even in an era of historically low capital costs, indicates that they can't find growth opportunities at any price.
- y96V89C668e7Q74 7y ago
  > indicates that they can't find growth opportunities at any price. This is a great way to put it! Thank you. Would it be fair to say that this suggests the market isn't really expanding and has essentially become zero-sum (or technically I guess it could mean that expansion is free, but that seems unlikely)?
  - bluecalm 7y ago
    Even if the companies never expand and the stocks are priced perfectly the market is not zero-sum. It's still an asset that produces value and pays back every year. There are people for whom it makes sense to own something that gives steady returns and there are people who for whom it makes sense to have cash on hand. Trading might be zero-sum which is great for everyone but owning stocks isn't.
    - y96V89C668e7Q74 7y ago
      Fair point, stocks do have inherent value even if they are just paying dividends. I guess that in that case it's market growth that is zero sum (eg, one company growing must mean that another company is shrinking).
  - nostrademons 7y ago
y96V89C668e7Q74 7y ago
I was taught in economics classes that buybacks make sense when there is nothing the company believes it can spend the money on instead to increase its profit. If this is true, should we be concerned that this is a market signal that the economy as a whole is running out of opportunities to invest in new technologies and instead just trying to hold onto its own value? If that is the case, I imagine that buybacks could be viewed as a signal that the market is moving more in the direction of being zero-sum and less in the direction of expanding. And if that is true, does that suggest that this phase of growth in the business cycle is coming to a close? I agree with the logic behind the arguments that a company buying its own stock should be a signal that the company believes in its business and valuation, but it also seems that many companies that also believe in their business and valuation also sell stock to raise money in order to expand, with the belief that the sale will result in individual stocks increasing in value even after the dilution. It seems hard for both cases to be true, but perhaps they are. If this logic is sound, it seems that we should be at least somewhat concerned about this. Also, I didn't understand how cheap credit is encouraging buybacks if companies aren't buying their own shares on credit. Would someone be able to explain this better than the article? (Thanks!)
- CydeWeys 7y ago
  I was taught in economics classes that buybacks shouldn't increase the stock price at all, which clearly isn't true in practice. It ends up being more complicated than the simple models would suggest.
  - guelo 7y ago
    How could the price not go up? I understand buybacks as reverse dilution. Each share represents a larger percentage of the company, therefore it is more valuable and it's price should be higher. Is that wrong?
    - y96V89C668e7Q74 7y ago
      I recall learning this too. I never heard that prices shouldn't go up. Maybe the above person meant that the total valuation shouldn't go up? If so, that logic does check out.
anigbrowl 7y ago
This sounds very sustainable and rational.
mikhailfranco 7y ago
Surely it ends when the corporate Credit Default Swap (CDS) rate rises, and credit rating drops, so the interest rate paid by the company rises when they have to refinance their bonds. Eventually, interest on bonds exceeds cashflow, and they have to borrow more to pay interest (Ponzi phase). At the margin, the lowest investment-grade BBB company drops one notch and becomes High Yield 'junk'. Then insurance companies and pension funds with fiduciary obligations must divest themselves of the bonds, so they sell and force the yield (interest rate) even higher. Companies have borrowed too much to perpetuate buybacks, jack up the share price, and reward executives with profits on share options. Half of all bonds are at BBB, just one downgrade from junk [1]. This situation is highly unstable, just one snowflake will create an avalanche of downgrades, and a true Black Swan will bankrupt many companies [2]. These companies have run off the cliff, and if they look down into the abyss, they will fall (e.g. GE [3], IBM). As with sub-prime mortgages, CDOs and MBSs during the Great Financial Crisis, pulling the trigger depends on the ratings agencies. Last time they were asleep, or perhaps complicit (euphemism for corrupt). Let's see what they do this time. [1] https://www.marketwatch.com/story/half-of-investment-grade-bonds-are-only-one-step-away-from-junk-status-2019-01-07 https://www.marketwatch.com/story/half-of-investment-grade-b... [2] https://www.zerohedge.com/news/2019-03-05/bis-warns-market-crash-risk-looming-fire-sales-over-mass-bbb-downgrades https://www.zerohedge.com/news/2019-03-05/bis-warns-market-c... [3] https://www.zerohedge.com/news/2018-11-13/collapse-has-begun-ge-now-trading-junk https://www.zerohedge.com/news/2018-11-13/collapse-has-begun...
mikhailfranco 7y ago
Credit is attractive for two reasons: 1. Interest rates have been held artificially low by the Fed and other Central Banks, which have also flooded the financial markets with trillions of new dollars/euros/yen. 2. Interest payments are tax deductible, but dividends are not. Debt and equity should be treated equally. Also, there are now many weak corporate bonds (CoCo, convenant-light), which mean that bondholders have fewer rights and priorities in the line of creditors, should the company get into financial difficulties. So the debts are treated as bonds for the purposes of taxation, but the rights of the bondholders are little more than shareholders - a double whammy for the company makes it a simple decision.
donjigweed 7y ago
Buyback Derangement Syndrome https://www.wsj.com/articles/buyback-derangement-syndrome-1534460606 https://www.wsj.com/articles/buyback-derangement-syndrome-15...
thisisit 7y ago
This is not a good sign. One of the important things for companies to do is to turn the total earnings into a stable flow of cash. But if cash outflow is larger than inflow then companies are mostly sitting on negative cash flow. The difference is being covered up by borrowing at low rates. These loans put strain on the future cash flow. Without any reserves to fall back on there might come a time when these companies will be strapped for cash.
ohiovr 7y ago
1. Companies are borrowing money and going into debt to buy their own stocks. 2. Some stock holders and insiders have huge holdings, a perfect supplier for the stocks to buy. 3. Stock volume exploded soon after trump was elected in the s&p 500 and the Dow. But a comparable surge in volume in the Russel 2000 and NASDAQ is not there. 4. As a result of the buying pressure, stocks rise, the market looks to rise in value. 5. Eventually money is not cheap to borrow any more. 6. More than 50% of the buying power suddenly stops.

92 points by Fifth_Star 7y ago

Can't see this ending without a lot of pain. Credit is so easy that it becomes easier to reduce the amount of shares out there to prop up their price than do what capital markets are supposedly designed for - offering more shares to invest in capital. Yet raising interest rates would crash the market. At some point true price signals will leak through and the tiny hole in the wall will become a flood...

kortilla 7y ago
Where are there companies using credit to issue dividends? If companies just took on debt to issue a dividend, the share price would be devalued by the market by the dividend amount due to the debt so it would be a pointless exercise.
- padobson 7y ago
  I think it's more about the trade-off. There's no obvious opportunity to deploy the capital, and if one pops up later, easy credit makes it trivial to take advantage of the new investment.
- ProfessorLayton 7y ago
  IIRC Apple is borrowing hundreds of billions to pay as dividends/buybacks because it's cheaper to pay interest than it is to pay taxes on money earned overseas.
  - javagram 7y ago
    They were doing that but I believe this is not something that makes sense any longer. The TCJA passed by the republicans got rid of the tax system that was causing the problem and switched the USA to a territorial income tax system like other countries have. https://www.taxpolicycenter.org/taxvox/explaining-tcjas-international-reforms https://www.taxpolicycenter.org/taxvox/explaining-tcjas-inte... > The TCJA’s international reforms are significant. Combined with the reduced corporate rate, they largely eliminate the incentive for US firms to accrue assets overseas, while seeking to protect the tax base from avoidance by both US and foreign-based multinationals.
__blockcipher__ 7y ago
Once a company has no need for more cash, there is no point to sell shares. The whole point of a IPO is to fund growth / give founders and early employees a payout. Share buybacks aren’t about propping up the price (when done correctly). They’re about tax efficiently increasing your ownership share. Or you can think of it as paying money now to reduce the amount you need to pay in dividends, all else equal. Share repurchasing is just a tax efficient way to return money to shareholders. People love dividends yet look at buybacks as insane. Why? * Note: buying back shares when your company is overvalued is insanity. I’m not endorsing that. But if you’re in a situation like AAPL, they are hands down the correct move.
- georgeburdell 7y ago
  If companies were throwing off dividends exceeding their collective earnings, wouldn’t you be concerned?
  - AnthonyMouse 7y ago
    Not if they've been sitting on a pile of cash for years and doing nothing with it. What are they supposed to do with money they don't need? Store it in a mattress forever?
- lovich 7y ago
  Because it's difficult to distinguish between executive leadership trying to efficiently return money to shareholders vs propping up the share price so that they see a personal benefit via their own shares increasing or via contractual bonuses. Given that there's an incentive to spend other peoples money(shareholders who bought shares) to increase their own(via bonuses, salary, or granted shares) it's fairly safe to assume that execs are following the incentive
  - AnthonyMouse 7y ago
    > via their own shares increasing This isn't any more true for the executives than any other shareholder, and doesn't really work that way anyway. Buybacks don't increase the value of shares unless the company was undervalued or making less efficient use of the cash than their other capital, and in that case they're smart to have done it. > via contractual bonuses The way to solve this is to do accounting for buybacks (and, for that matter, dividends) when calculating bonuses. You obviously don't want to have executives choosing whether to do these things based on that, so don't.
sonnyblarney 7y ago
This is just what it is. Given an interest rate regime, CFO's will react accordingly and this is that reaction. Also, it's odd to see dividends and buybacks in the same data. Finally - both activities are not bad at all. Buybacks are a strong signal to the market the company believes in it's valuation (FYI investors have access to the same 'cheap capital') and dividends are profits getting out. None of this is bad, but it's going to get hard to get off of the sugar addiction.
- llamataboot 7y ago
  Don't get me wrong, don't think there is anything wrong in principal with a buyback - but when we are talking about macro-economics and not any specific business, data like this is a bit strange...

mdorazio 7y ago

If you need evidence that our economy is at least partly broken, this is it right here. Companies that are swimming in cash reserves are using their money to artificially boost shareholder returns instead of actually investing in things like capital expenditures, R&D, or higher salaries. On one hand (as the article points out), this is driven by cheap credit, but on the other hand I think the question needs to be asked: have large corporations just run out of things worth investing in?

kortilla 7y ago
You think returning money to investors is a sign the economy is broken? IMO it’s a sign companies are doing the intelligent thing and are assuming investors are better investors than throwing money at random shit.
- povertyworld 7y ago
  Right. Wouldn't it be great if Google would start paying a dividend instead of throwing away money on goofy acquisitions like Boston Dynamics? How the hell is a robot dog that does flips or whatever supposed to improve their advertising business exactly? Give me a break.
  - ForHackernews 7y ago
    ...it was supposed to get them into the highly lucrative world of military contracting. But then it caused too much of a PR stink, so they had to back off from that idea.
  - sonnyblarney 7y ago
    " How the hell is a robot dog that does flips or whatever supposed to improve their advertising business exactly?" Because a robot that does flips can also flip burgers, pick inventory, sneak up on people (i.e. military) and ultimately that stuff will be worth a lot. One of their lesser goofy investments.
    - 7y ago

eej71 7y ago

For some counterpoints, consider this paper from Cliff Asness of AQR fame. https://www.aqr.com/Insights/Research/Journal-Article/Buyback-Derangement-Syndrome https://www.aqr.com/Insights/Research/Journal-Article/Buybac...

jjwhitaker 7y ago

After the 2017 tax bill this was bound to happen. consolidating stocks allows greater control over the corporation by the high % owners, minimizes activist investors, reduces accountability, and further funnels profit to the top. Whatever that "poll" advertisement is at the bottom with a caricature of AOC was misleading and dishonest at best. What agenda is this site pushing i that's their biggest ad on this article?

twoquestions 7y ago
The site probably doesn't control the ads that appear, and such an ideological slant doesn't look evident looking at the titles of their other articles. The first bit is bang-on.

deleted 7y ago

[deleted]

nostrademons 7y ago

This is how its supposed to work. The whole reason stocks have fundamental value in the first place is because they're claims on the future profits of the company. 100% of a company's earnings legally belongs to the shareholders; it's nice to see them actually returned to the shareholders (vs. blown on overpriced acquisitions) for a change. It does mean the end of a cycle, though, and not just a "stocks go up, stocks go down" cycle. It's rational for corporate management to retain earnings and invest in future growth opportunities when the expected returns from those growth opportunities are greater than the cost of capital. That they're returning capital to shareholders, even in an era of historically low capital costs, indicates that they can't find growth opportunities at any price.

y96V89C668e7Q74 7y ago
> indicates that they can't find growth opportunities at any price. This is a great way to put it! Thank you. Would it be fair to say that this suggests the market isn't really expanding and has essentially become zero-sum (or technically I guess it could mean that expansion is free, but that seems unlikely)?
- bluecalm 7y ago
  Even if the companies never expand and the stocks are priced perfectly the market is not zero-sum. It's still an asset that produces value and pays back every year. There are people for whom it makes sense to own something that gives steady returns and there are people who for whom it makes sense to have cash on hand. Trading might be zero-sum which is great for everyone but owning stocks isn't.
  - y96V89C668e7Q74 7y ago
    Fair point, stocks do have inherent value even if they are just paying dividends. I guess that in that case it's market growth that is zero sum (eg, one company growing must mean that another company is shrinking).
- nostrademons 7y ago

y96V89C668e7Q74 7y ago

I was taught in economics classes that buybacks make sense when there is nothing the company believes it can spend the money on instead to increase its profit. If this is true, should we be concerned that this is a market signal that the economy as a whole is running out of opportunities to invest in new technologies and instead just trying to hold onto its own value? If that is the case, I imagine that buybacks could be viewed as a signal that the market is moving more in the direction of being zero-sum and less in the direction of expanding. And if that is true, does that suggest that this phase of growth in the business cycle is coming to a close? I agree with the logic behind the arguments that a company buying its own stock should be a signal that the company believes in its business and valuation, but it also seems that many companies that also believe in their business and valuation also sell stock to raise money in order to expand, with the belief that the sale will result in individual stocks increasing in value even after the dilution. It seems hard for both cases to be true, but perhaps they are. If this logic is sound, it seems that we should be at least somewhat concerned about this. Also, I didn't understand how cheap credit is encouraging buybacks if companies aren't buying their own shares on credit. Would someone be able to explain this better than the article? (Thanks!)

CydeWeys 7y ago
I was taught in economics classes that buybacks shouldn't increase the stock price at all, which clearly isn't true in practice. It ends up being more complicated than the simple models would suggest.
- guelo 7y ago
  How could the price not go up? I understand buybacks as reverse dilution. Each share represents a larger percentage of the company, therefore it is more valuable and it's price should be higher. Is that wrong?
  - y96V89C668e7Q74 7y ago
    I recall learning this too. I never heard that prices shouldn't go up. Maybe the above person meant that the total valuation shouldn't go up? If so, that logic does check out.

anigbrowl 7y ago

This sounds very sustainable and rational.

mikhailfranco 7y ago

Surely it ends when the corporate Credit Default Swap (CDS) rate rises, and credit rating drops, so the interest rate paid by the company rises when they have to refinance their bonds. Eventually, interest on bonds exceeds cashflow, and they have to borrow more to pay interest (Ponzi phase). At the margin, the lowest investment-grade BBB company drops one notch and becomes High Yield 'junk'. Then insurance companies and pension funds with fiduciary obligations must divest themselves of the bonds, so they sell and force the yield (interest rate) even higher. Companies have borrowed too much to perpetuate buybacks, jack up the share price, and reward executives with profits on share options. Half of all bonds are at BBB, just one downgrade from junk [1]. This situation is highly unstable, just one snowflake will create an avalanche of downgrades, and a true Black Swan will bankrupt many companies [2]. These companies have run off the cliff, and if they look down into the abyss, they will fall (e.g. GE [3], IBM). As with sub-prime mortgages, CDOs and MBSs during the Great Financial Crisis, pulling the trigger depends on the ratings agencies. Last time they were asleep, or perhaps complicit (euphemism for corrupt). Let's see what they do this time. [1] https://www.marketwatch.com/story/half-of-investment-grade-bonds-are-only-one-step-away-from-junk-status-2019-01-07 https://www.marketwatch.com/story/half-of-investment-grade-b... [2] https://www.zerohedge.com/news/2019-03-05/bis-warns-market-crash-risk-looming-fire-sales-over-mass-bbb-downgrades https://www.zerohedge.com/news/2019-03-05/bis-warns-market-c... [3] https://www.zerohedge.com/news/2018-11-13/collapse-has-begun-ge-now-trading-junk https://www.zerohedge.com/news/2018-11-13/collapse-has-begun...

mikhailfranco 7y ago

Credit is attractive for two reasons: 1. Interest rates have been held artificially low by the Fed and other Central Banks, which have also flooded the financial markets with trillions of new dollars/euros/yen. 2. Interest payments are tax deductible, but dividends are not. Debt and equity should be treated equally. Also, there are now many weak corporate bonds (CoCo, convenant-light), which mean that bondholders have fewer rights and priorities in the line of creditors, should the company get into financial difficulties. So the debts are treated as bonds for the purposes of taxation, but the rights of the bondholders are little more than shareholders - a double whammy for the company makes it a simple decision.

donjigweed 7y ago

Buyback Derangement Syndrome https://www.wsj.com/articles/buyback-derangement-syndrome-1534460606 https://www.wsj.com/articles/buyback-derangement-syndrome-15...

thisisit 7y ago

This is not a good sign. One of the important things for companies to do is to turn the total earnings into a stable flow of cash. But if cash outflow is larger than inflow then companies are mostly sitting on negative cash flow. The difference is being covered up by borrowing at low rates. These loans put strain on the future cash flow. Without any reserves to fall back on there might come a time when these companies will be strapped for cash.

ohiovr 7y ago

1. Companies are borrowing money and going into debt to buy their own stocks. 2. Some stock holders and insiders have huge holdings, a perfect supplier for the stocks to buy. 3. Stock volume exploded soon after trump was elected in the s&p 500 and the Dow. But a comparable surge in volume in the Russel 2000 and NASDAQ is not there. 4. As a result of the buying pressure, stocks rise, the market looks to rise in value. 5. Eventually money is not cheap to borrow any more. 6. More than 50% of the buying power suddenly stops.