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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 wh

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...

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...