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S&P 500 Buybacks Now Outpace All R&D Spending in the US

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nabla9 7y ago
> drowning out real investment. The conclusion that buybacks are alternative for real investments is wrong. The aggregate change between R&D and capex versus buybacks and dividends is not just some arbitrary decision. ROI from R&D and investments is slowing down for various reasons. Instead of investing more without reason to do so, companies should give profits to owners or pay off excess debt. There is wrong and right way to use buybacks. When company is not overvalued relative to its earnings, buyback is viable alternative for dividends. Taking debt to do buybacks or pay dividends is insane.
- baronmunchausen 7y ago
  Corporate debt-to-GDP has never been higher
  - nabla9 7y ago
    I'm aware.
- Junk_Collector 7y ago
  I've never understood this take. Buybacks cannot be analogous to dividends because they require you to relinquish your stake in the company to realize the gains. It's a public buyout offer, not profit sharing.
  - baronmunchausen 7y ago
    +1 million
  - rhino369 7y ago
    That’s a difference, but they are still analogous. Not realizing the gain is actually a helpful tax avoidance strategy. I’m investing long term, I’d rather not realize the gain.
  - pedrocr 7y ago
    That's only true if you own single shares that you can't divide. If the market cap of the company is divided in enough shares that everyone can sell their portion of the buyback then it can be exactly like the dividend. And investors often directly reinvest the dividends so if you are holding an index fund that reinvests dividends, buybacks or dividends are the same except for any tax differences. If you're holding an index fund you also don't have the problem of the shares not being divisible, because someone else is managing that in aggregate for you.
  - gimmeThaBeet 7y ago
    Mmm, that perspective doesn't really reflect the, I guess, party liquidity in a practical scenario. The company has money, they trade at $X. In a trivial sense it means you can buy a share for $X +- some spread. The capital return mechanism is that the company now owns the share, and can retire it, the part that really isn't important is who they got it from. It's sort of like electrons in a metal, they're just sort of around. Worrying about the behavior in specific instances doesn't paint the picture of the aggregate behavior.
  - nabla9 7y ago
    They are analogous to dividends. Example: You own 10% of company with market cap $100M. You have $10M. Dividend scenario: company pays 3% dividend, you get $300k. You have $10M + $300k = $10.3 million. Buyback scenario: company buys it's own stock for the same amount. You own 10.3% of the company. You have $10.3 million. If you want, you can sell stock to get $300k in cash. The only difference is that in the buyback scenario you can decide when to sell (and pay taxes).
    - AnthonyMouse 7y ago
      Slight nit: The math you're using is creating money from nothing. You started off with $10M and by dark magic you now have $10.3M. What really happens is that you start off with $10M in stock. With dividends you get $300K in cash, but now the company doesn't have that cash anymore so its value is reduced by $300K, so you end up with $300K in cash and stock which is now only worth $9.7M. With buybacks you sell $300K worth of stock to the company. Then you have $300K in cash and the $9.7M in shares you didn't sell which are still worth the same amount because even though the company has less cash it also has fewer outstanding shares and those cancel out. This is ignoring the effect on valuation of separating the business from the cash -- if the business is more productive than the cash then that may indeed make the share price increase, because then you have a more concentrated investment in the more productive business instead of having the investment diluted by being forced to also invest in an ordinary pile of cash that happens to be part of the same corporation.
      - kgwgk 7y ago
        > The math you're using is creating money from nothing. You started off with $10M and by dark magic you now have $10.3M. I think the idea was that the company is worth $100mn at the beginning and it accumulates $3mn of cash over the year that it wants to distribute somehow to remain a $100mn company.
      - cellular 7y ago
        >> and the $9.7M in shares you didn't sell which are still worth the same amount "Worth the same amount" as what value? 10 million? If so, then doesn't that also create 10.3M in value (ie created 300k from nothing)?
- stopads 7y ago
  It is drowning out real investment, this conclusion is correct because the companies themselves are saying so in their statements. Some companies are taking on huge debt to keep up in the buyback races despite having bad products that are losing market share. Oracle is probably the biggest example of this buyback insanity via debt, but there are many other companies doing the same thing. https://www.cnbc.com/2019/12/05/oracle-shows-buybacks-can-go-too-far.html https://www.cnbc.com/2019/12/05/oracle-shows-buybacks-can-go... Other companies have committed in their financial statements to "returning 100% of free cash flow to investors via buybacks and dividends", so they are actually committing to not invest in the company at all regardless of how much money they make. Chevron and Texas Instruments are two big examples of this, there are dozens of other companies with similar buyback first strategies.
  - whatshisface 7y ago
    That's very interesting because that is what you would do if you wanted to liquidate a company and shut it down (on a leisurely timescale). Exactly how much of the US economy is being wound down? Maybe this is a great opportunity for new businesses with an appetite for R&D risk, maybe this is the US laying down so that China will replace it faster.
    - stopads 7y ago
      Absolutely. What we are witnessing is people extracting as much money as possible from healthy and unhealthy companies just because they can. This has been going on in the private equity/hedge fund world for decades, buybacks are the mechanism that is now being used on the public markets in similar, unethical ways. Oracle is betting on not having a future, they are extracting as much money as possible from the vehicle before it goes off a cliff.
      - whatshisface 7y ago
        Based on what I know about Oracle's software quality to customer inertia ratio, they're probably betting right. I wonder if the future is as legitimately bleak for all of the other buyback companies.
- jvanderbot 7y ago
  OK. You're probably right. I still hate it. There's not a viable explanation that doesn't make it seem shortsighted and greedy (personally, and possibly due to HN filter). Why is R&D not a good investment suddenly? Shortage of tech workers (blah blah) ...?
  - bob33212 7y ago
    There are a lot of different reasons. The cynical take is that the time to ROI is too long. If it is going to take 10 years to turn a profit the executives do not want to pull the trigger on that because they will be out the door in 5 and never get the payments. Another possibility is that all the low hanging fruit is gone. So the marginal improvements do not return large financial gains.
    - foobarian 7y ago
      Sadly both of the reasons you listed ring true.
  - sigstoat 7y ago
    you’re on a board very nearly dedicated to startups. perhaps the s&p500 is no longer a good place to do r&d, compared to smaller, vc-backed startups. if they see significantly reduced gains from r&d compared to smaller companies then we should be crying years of joy that money is flowing out of them so it can be reinvested into smaller firms.
  - papito 7y ago
    Toxic individualism. Me above all. Consequences are for chumps. And it's all so cynical. We see this in politics as well. One last dash pillaging the world for money and power, burning it down to the ground in the process.
    - deleted 7y ago
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  - svachalek 7y ago
- coldcode 7y ago
  Companies (often ones with business both in and outside the US) generally borrow money to pay for buybacks (Apple as an example). So corporate debt goes up, paid out of future earnings if they exist, to keep the stock price up and keep shareholders happy. But it is not making business value which ultimately is what business exists for and should reflect in the stock price. So the price is propped up for some time period based on distant profits that may never happen, instead of reflecting company value improvements in the more near future.
  - christophilus 7y ago
    Apple is probably a bad example, here. It's got more cash than it knows what to do with-- nearly as much cash as debt. And its debt is at a relatively low interest rate. It's arguable that while interest rates are so low, it makes sense to take on a bit more debt than usual, and when interest rates get high, it makes sense to reduce your debt ratios.
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  - Nokinside 7y ago
    Apple is really bad example. Apple did buyback for a right reason. They are drowning in cash. Their debt is not an issue at all.
zebrafish 7y ago
Read an idea in American Affairs in support of taxing buybacks. The logic goes that if all companies have a fiduciary duty to shareholders because the market is the most efficient capital allocator, AND all companies are giving their cash back to shareholders, THEN it must be true that the market can not figure out how to efficiently allocate this $1T of capital. Thus, the government should have “next dibs” for items on the agenda that it knows need capital, namely infrastructure and healthcare. Thought that was an interesting take. Edit: here is the link but it may be behind a paywall. https://americanaffairsjournal.org/2018/12/share-buybacks-and-the-contradictions-of-shareholder-capitalism/ https://americanaffairsjournal.org/2018/12/share-buybacks-an...
- rjkennedy98 7y ago
  At the very minimum it should be taxed the same as dividends. Essentially tax buybacks are a tax loophole for giving money back to the shareholder.
  - pc86 7y ago
    What would this look like from a practical standpoint, though? Dividends are a taxable event because you're giving someone money. In a buyback, the value of the stock simply goes up, which isn't a taxable event. How do you determine the cost basis on something like that? If there's a stock buyback over the course of 6 months, how do you determine which proportion of the price increase is due to the buyback, as opposed to inflation or normal growth?
    - entropicdrifter 7y ago
      You tax the buyback itself, right? You tax the money the company is spending on its own stock. That's the only step of the transaction where money is changing hands
      - pc86 7y ago
        I'm not trying to be obtuse, I'm genuinely curious how this would work and what changes to tax law would need to be made. Would you tax the entity buying the stock (in case always a company since it's a buyback; which I think would be the only example of taxing a stock purchase), or the entity selling the stock (either an individual or a company, which is already potentially taxed as capital gains)? If the goal is to tax it similar to dividends you would tax the person selling the stock but it's already taxed as capital gains, either long term (0%/15%/20%) or short term (marginal bracket rate).
cs702 7y ago
Large US corporations have been buying back their own stock in record amounts, while investors have been cashing out of US stocks at a record pace, recent data shows: https://www.msn.com/en-us/money/markets/investors-bail-on-stock-market-rally-fleeing-funds-at-record-pace/ar-BBXVrnh https://www.msn.com/en-us/money/markets/investors-bail-on-st... -- money is not being plowed back into IPOs, secondary offerings, etc. According to orthodox economic theory, large US corporations must be buying back stock with earned profits and new debt[a] because they don't have better uses for that money. Rational executives and company boards looking out mainly for shareholders must have concluded that buying back shares at current prices is a better use of money than investing, you know, in the business. Maybe. In reality, executives and directors could very well be authorizing stock buy-backs to keep share prices up so their stock options remain in-the-money for as long as possible. If that's the case, the buybacks are meant more for the benefit of executives and directors than for the benefit of the business or its shareholders. [a] Corporate debt to GDP is now at an all-time high: https://ei.marketwatch.com/Multimedia/2018/11/29/Photos/NS/MW-GZ344_corpde_20181129133702_NS.jpg https://ei.marketwatch.com/Multimedia/2018/11/29/Photos/NS/M...
- ainiriand 7y ago
  Delicious board bonuses.
- deleted 7y ago
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- asdfasgasdgasdg 7y ago
  Doesn't one require the other? You have to buy back the stock from someone. That someone is necessarily divesting themselves of the stock as a result.
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jshaqaw 7y ago
Companies that can productively reinvest capital at attractive rates of return get a strong valuation premium in the market. Every company would love to be in this position. Companies that can make a compelling case to shareholders for long-term investments get to make long-term investments and like Amazon often get super valuation premiums. If a company can't reinvest capital at attractive rates then returning it to shareholders is the best option. Forcing companies to invest in unattractive investments is the path to a zombie economy. I can't count the number of companies that should have returned money rather than going on some unprofitable growth binge.
hew 7y ago
Intrinsic value of the company > devaluing cash pile (Presenting as "record stock growth" but in reality just trying to hold even value.)
nine_zeros 7y ago
Hey, the fed's giving free money. Why wouldn't execs do this? Imagine being at the top of a public company, with unlimited borrowing ability and retirement in a few years. Why wouldn't they?
mrfusion 7y ago
I’m not getting this headline. Buy backs are something done with profit. So replace the headline with “s&p 500 Profits now outpace all R&D spending in the US”.
- rogerkirkness 7y ago
  Technically you can borrow money very cheaply and do buybacks with it, which is actually happening as much as using profit.
- nrb 7y ago
  Buy backs are increasingly being done with debt[1] and corporate debt-to-gdp ratios are way out of whack [2]. 1: https://www.cnbc.com/2019/07/29/buybacks-companies-increasingly-using-debt-to-repurchase-stocks.html https://www.cnbc.com/2019/07/29/buybacks-companies-increasin... 2: https://www.forbes.com/sites/mayrarodriguezvalladares/2019/07/25/u-s-corporate-debt-continues-to-rise-as-do-problem-leveraged-loans/#6eba9bea3596 https://www.forbes.com/sites/mayrarodriguezvalladares/2019/0...
- CyanLite2 7y ago
  Buybacks are happening without profit. Companies are borrowing money to conduct buybacks.
  - derision 7y ago
    source?
jcims 7y ago
Every time i read these threads i feel criminally incompetent in finance. You would think that putting your money to work for you would be incentive enough to dig deep, but i don’t seem to have the mental stamina to figure it all out. There’s probably a latent fear that I’ll also realize just how much money i haven’t made and regret that too. I need a course or something that i can walk into with $20k or whatever and do all the things. Self-directed education doesn’t seem to help and Edward Jones just wants to sell me their shit.
- thekingofh 7y ago
  The game wasn't designed for you and me. It was designed for the ones that can take advantage of it with massive amounts of cash, connections, and staff to exploit it for them. Bet on the companies to figure it out for themselves and just stick to index funds over the long haul. That way at least you're not playing a game that was designed to take your money.
  - 0x262d 7y ago
    this is good advice but also ordinary people should be able to understand why the economy is breaking. most economists treat it as a mystical thing only they can divine the meaning of, so it can be pretty hard to find clearly written stuff for lay people.
- rwmurrayVT 7y ago
  I'm sure there are many courses available at your local convention center where they'll be happy to tell you what to do with your $20k!
- scresswell 7y ago
  I was in a similar position. The following helped. https://www.amazon.co.uk/Millionaire-Teacher-Wealth-Should-Learned-ebook/dp/B01NADAJ3X https://www.amazon.co.uk/Millionaire-Teacher-Wealth-Should-L... https://canadiancouchpotato.com/ https://canadiancouchpotato.com/
- sigstoat 7y ago
loourr 7y ago
This is robbery by the management class, and who can blame them. If I can take on debt at a corporate level and personally enrich myself, by increasing the value of the stock through buybacks and then selling it, why wouldn't I? This is all made a whole lot worse by stock option packages that give managers equity at major discounts. I think we'll look back at this as the largest heists in history. Should serve as a good lesson to central bankers in creating wack incentive schemes (but it probably won't)
- Bostonian 7y ago
  It's no such thing. As a shareholder I am happy for companies to buy back shares and thereby increase the value of the remaining shares.
  - loourr 7y ago
    Sure as a shareholder I also like stock buybacks. For instance, when Berkshire Hatheway does it, it's almost certainly a good thing. I don't think that's what we're seeing in the vast majority of cases though. I think what we're seeing is managers personally enriching themselves by taking on corporate debt and doing so in a very tax-advantaged way. Keep in mind they're not buying the stock they own in the first place, they're being given it via stock options at crazy discounts.
    - dahdum 7y ago
      If this were true, why aren’t we seeing an incredible surge of shareholder lawsuits? Those managers are ripping off all those long hedge funds and activist investors, and none of them are crying foul?
    - sigstoat 7y ago
      > Keep in mind they're not buying the stock they own in the first place, they're being given it via stock options at crazy discounts. ...is your salary received from the company at a "crazy discount"? the equity is part of the agreed upon compensation for the manager's work. this is easily the most absurd statement on this entire page.
jumbopapa 7y ago
Interesting that the market is at an all-time high and companies still feel their stock is cheap enough to warrant investing in. When will this bull stop?
rbavocadotree 7y ago
AQR published a paper on share buybacks last year [0] with the opening sentence "People seem to forget some of the very basic lessons of financial economics when it comes to share repurchases". One of the big things missed by all the articles covering share repurchases, is that they are increasing at a rate similar to company market cap. That shouldn't be too surprising. The real story is why is R&D not keeping up? It's worth a read for a more nuanced view. [0] https://pdfs.semanticscholar.org/dcc3/e0d7288395c2891f1fee194e67fb7102dfea.pdf https://pdfs.semanticscholar.org/dcc3/e0d7288395c2891f1fee19...
- bob_theslob646 7y ago
  Thank you for sharing this. There's a great thread on Twitter about share buybacks criticisms particularly by Cliff Asness who is the founder of AQR. https://twitter.com/CliffordAsness/status/1188277333859418112?s=19 https://twitter.com/CliffordAsness/status/118827733385941811...
- mdorazio 7y ago
  I strongly agree that the real story is in why R&D spending is stagnating or dropping in comparison to earnings. Personally, I think there a number of contributing factors including less competition from new businesses (new businesses starts with employees are way down from previous decades), decreased competition from large competitors (see Disney buying up everyone in the entertainment industry as an example), regulatory capture, increased risk aversion in the corporate world, and just the fact that low hanging fruit are mostly picked at this point so that the next major improvement might require way more investment than a lot of companies are comfortable with (see the massive increase in new semiconductor fabs and drug discovery as examples).
1-6 7y ago
I've watched somewhere that these buybacks is to keep the stock prices afloat lest their employee stock options get hammered and they lose employees. Tech workers are operating on fumes.
phendrenad2 7y ago
There's two ways to look at everything. Buybacks can be seen as companies giving money back to the shareholders. Or if you decouple the company from it's stock, you'll see that buybacks are an investment in the company's own future, since they believe that their own stock is at a discount now, and they'll make more selling it later.
- sfblah 7y ago
  Buybacks are to increase mgmt comp because they hold options. It’s a scam.
Thriptic 7y ago
Perhaps I'm being simple, but I don't really understand the problem here. Companies are sitting on too much cash that they don't know what to do with. There is only so much that can productively be spent on R&D. If they don't do something with their cash, investors will start demanding a dividend. Once you start giving dividends it becomes hard to stop giving them. To prevent perpetual dividends, companies perform a buy back which also helps out investors but is a one time thing which doesn't need to be repeated.
- habosa 7y ago
  But what's wrong with perpetual dividends? I think the relationship between investors and dividend-paying companies is a lot healthier than non-dividend-paying companies. If buy 1 share of DividendCorp I can rationalize it as a stream of future dividends generated by the company's profits. I want the company to succeed in the short term and the long term. If I buy 1 share of OtherCorp which pays no dividends I am purely speculating on the price. I don't even have to care what the company does I could just be one of those "technical analysis" people riding chart waves. I just need to pass the bag to someone else at a gain.
  - Thriptic 7y ago
    You're not speculating on price, you are trusting that the company will make sound decisions which will result in growth and future profits, thereby increasing the stock's value. People mostly invest in stocks that don't pay dividends as opposed to instruments that pay fixed returns or companies that pay dividends because there is far more upside potential. I don't want all the companies I invest in to start being big dividend paying companies because that impedes their ability to grow.
  - tenpies 7y ago
    This will depending on your tax jurisdiction, but it's almost certainly a consequence of taxes: If the company buys its own shares, there are usually no taxes on the purchase. If the company issues dividends, it has to pay taxes on dividends distributed. The shareholders may also have to pay a small amount of taxes on dividends they receive.
partiallypro 7y ago
Why do people think that if you pour more money into something like R&D you'll get more results? That isn't how it works. You get diminishing returns on anything, do you not think internal statisticians and economists at the company haven't calculated that?
- 3pt14159 7y ago
  Sometimes it's about timelines, not sheer ROI. Apple is in a position to make long term R&D bets because they don't face the same board pressure that many other companies do. Also, it's not only R&D. Long term capital outlays like building new factories are also something that buybacks compete against, and some companies like Telsa do the opposite: Raise more from the capital markets and invest in long term spending in both R&D and capital outlays. Looking at the system as a whole, though, board pressure aside, we should want companies like Tesla raising cash for longterm spending while other companies issue share buybacks or dividends.
iav 7y ago
1. For mature tech companies selling high margin products, R&D is typically 8-16% of revenue while operating profit margins are 20-40% of revenue. Even after taxes and interest, it’s natural for buybacks to exceed R&D 2. Not all R&D spent is booked as accounting GAAP R&D. Any internal tool for example can not be booked as R&D because it’s not sold to end customers. 3. Companies outside of tech do not report their amount of R&D spend but include it with SG&A. If deemed immaterial then you don’t see it
LatteLazy 7y ago
R&D spending is a badly understood black box. we incentivise miss measuring it with weird tax breaks and complex rules. From an economic point of view, it's not clear that existing firms should be engaging in it: many industries follow model where specialists create new products which are then available to industry via a mix of buying out small firms, licensing their products or imitating them (that seems to be how big chunks of silicon Valley work and also drug discovery and fashion for instance, three quite innovative sectors). The result is the number being inflated up by firms dodging taxes, down by people working in their garages, sideways by including things and excluding other things based on weird regulations. Share buybacks are similarly in a weird place: tax rules favour them twice, once when buying back and again when borrrowing to fund that. Plus interest rates are at a record low so that encourages them too. People have a 1950s model that assumes research is something AT&T do and that the amount they spend is an honest reliable value. But they don't and its not. Some where someone is building WhatsApp 2.0 or 6G comms equipment in their basement in weekends. Their time and energy is counted for nothing in these numbers. And when they sell their company ro Facebook who issues shares to buy it and then buy those shares back (as that's the tax efficient way to buy things), they value they created will be a "buy back" not an "invention"...
- mNovak 7y ago
  I suppose some amount of this line of reasoning (R&D is hidden under acquisitions) would be observable if changes in R&D spending were compensated by changes in total acquisitions (of smaller firms)
paulpauper 7y ago
The economy is becoming increasingly automated and dominated by a handful of large, hugely successful companies that can keep printing out the same widget or service over and over , generating reliable, recurring revenue streams. There is no need for research when your competitors are tiny and or non-existent, with no hope of closing the gap.
Bostonian 7y ago
When shares of stock owned by an equity mutual fund are bought back by the company, the fund uses that money to buy shares of other companies. The money does not disappear or immediately go to consumption. Buybacks allow money to be transferred from companies with poor growth prospects to companies with better growth prospects.
JMTQp8lwXL 7y ago
Amazon has done 0 buybacks in the past 30 quarters [0] and is one of the best-performing components of the S&P 500 index. I'm not convinced that all corporate executives are right to assume that the best use of capital is to simply repurchase stock. Look what it's done for Amazon: it's delivered great economic value. [0]: https://www.marketwatch.com/story/amazon-doesnt-buy-back-any-stock-for-30th-straight-quarter-2019-10-25 https://www.marketwatch.com/story/amazon-doesnt-buy-back-any...
- jcfrei 7y ago
  Amazon is in a growing market: e-commerce. Lots of other companies are not.
Mikeb85 7y ago
Good. Markets without buybacks and dividends are a ponzi scheme. The whole point of selling equity in a business is to raise funds, use it to grow, then return funds to investors.
acd 7y ago
Its probably a bubble coming what happens when the stock market goes down? Ie tradewar causes price inflation of goods on imported goods from China. Central bank then increases interest rate to fight higher inflation. Price of new money goes up, stock market goes down.
zxienin 7y ago
For technology companies, buybacks signal to me that they have dying (or dead) engineering. It is rather financial engineering at work. One of the kpi at play here is EPS [1], typically used to evaluate CEO performances. To me, this was about numerator increasing over a rather static base. What instead happens, is that denominator is reduced (with buybacks) to jack up EPS value. It amazes me, that most of run-of-mill (non analyst) folks simply buy into EPS↑ story. [1] https://www.investopedia.com/terms/e/eps.asp https://www.investopedia.com/terms/e/eps.asp
- Redoubts 7y ago
  I can understand this. I know my company has a bug backlog a mile long, and some real issues we should put substantial time into; but it would rather have HR put downwards pressure on compensation while pursuing record buybacks. It gives a sense for what the priorities are.
  - frockington1 7y ago
    Well a bug backlog that long isn't going to motivate execs to improve compensation. If there are too many bugs it might be time to pivot the business
    - Redoubts 7y ago
      Of course I don't mean more money for existing players, but to encourage strong new hires. But good talent tends to cost money, so...
JumpCrisscross 7y ago
Companies are buying back shares. Individual investors are selling shares [1]. Private equity [2] and VC are raising record sums [3]. Alternate title: financial markets shifting capital from public to private companies. The economy’s R&D engine has shifted. Financial markets are following. [1] https://www.wsj.com/articles/investors-bail-on-stock-market-rally-fleeing-funds-at-record-pace-11575801002 https://www.wsj.com/articles/investors-bail-on-stock-market-... [2] https://www.wsj.com/articles/private-equity-firms-are-raising-bigger-and-bigger-funds-they-often-dont-deliver-11560859200 https://www.wsj.com/articles/private-equity-firms-are-raisin... [3] https://news.crunchbase.com/news/the-q2-2019-global-venture-capital-report-a-market-gone-sideways/ https://news.crunchbase.com/news/the-q2-2019-global-venture-...
- dcolkitt 7y ago
  Yeah, I don't really understand the negative sentiment here. If a company's buying back stock, then someone's selling those shares. That investor now has extra cash on hand to invest somewhere else. It's not like that capital just gets thrown into an empty pit. Mature companies returning money is a pretty natural state of affairs. Unless you believe that all growth and investment over the next 25 years is going to be done by exactly the same set of companies from the last 25 years. That's a recipe for stodgy sprawling monopolistic conglomerates. Competition and innovation is only possible when new entrants challenge entrenched players. And turnover in firms is only possible when capital is transferred from the large, pre-estabilished firms to small, growing ones. That transfer of capital to innovative challengers necessarily involves large, mature companies returning money to shareholders either in the form of dividends or buybacks.
  - JumpCrisscross 7y ago
    Prohibiting buybacks might increase dividends. It’s more likely to boost M&A. What it unlikely is for internal R&D, capital investment or hiring to benefit.
eloff 7y ago
This supports Peter Theil's theory that innovation has stagnated. When companies give their profits back to the shareholders instead of investing in continued innovation, because they can't figure out a way to innovate with that capital. The world needs more Elon Musk type of entrepreneurs.
- marvin 7y ago
  Your praise for Musk can't be repeated enough. Whatever you think of the guy, he is completely fearless regarding big investments in things that are possible in principle, but with a large risk of failure. Most people shy away from those kinds of risks. I really wish we had more people with capital that took big risks on things that are unlikely to succeed, but would materially bring the world forward if they did.
  - minikites 7y ago
    >I really wish we had more people with capital that took big risks on things that are unlikely to succeed, but would materially bring the world forward if they did. If this is the desired outcome, how do you tell the difference between an entrepreneur and a con-man?
    - marvin 7y ago
      Savvy investors should know the laws of physics and be able to make a decent educated guess regarding what limitations are caused by fundamental limits, and what are instead the result of a e.g. any random local maximum, institutional inertia, lack of imagination, a long-standing duopoly and so on. Plus factor changing technological possibilities into this. I don't think it's such a big deal if a few private investors lose their investment to a con, but there are a lot of smart people out there. Not everyone stated boldly that reusable rockets are impossible, that no social network could have better success than MySpace, that mobile phones had to have a keypad and only run pre-installed software or that electric cars could never be a viable competitor.
- AWildC182 7y ago
AnthonyMouse 7y ago
This is a misleading comparison. When you spend money on R&D, it's spent. Somebody is actually consuming man-hours to do work that then can't be used for something else. When you "spend" money on buybacks, it's just moving money around. No scarce resources are consumed, it's just a meta-determination of who gets to decide how to actually spend the money. And moving the money from huge risk-averse corporations to investors that may have a higher risk tolerance may increase investment into innovative new ventures.
- onlyrealcuzzo 7y ago
  There's the bit about 60% of money being managed passively, and these passive funds will buy Microsoft stock at $100 or $1M (proportionally). The stock buybacks shouldn't affect the market cap (it's just moving money). It's impossible to know if the buybacks have actually affected market caps, but consensus seems to be that it's increasing market caps. That means you're getting free money from passive funds. Seems like a problem for pensions and most 401ks.
  - AnthonyMouse 7y ago
    That's assuming "passive funds" aren't what huge corporations hold their liquid assets in when they're not used for buybacks. At least 60% is less than ~100%.
typeformer 7y ago
This will not end well...
LudwigNagasena 7y ago
I don’t get the comparison. I don’t see why it should be a good or a bad thing. Seems like two completely arbitrary numbers being compared.
bullen 7y ago
All change requires energy, and we're going to have less energy, so the speed of change inevitably has to go down. Because the only energy added to the planet comes from the sun and the only viable option to collect that energy are trees and plants.
- sigstoat 7y ago
  and the only energy that comes into the sun-earth system is weak background radiation! it's not enough for _anything_! we're doomed.
sriram_sun 7y ago
R&D is an investment. So are buybacks. The powers that be have made the call that at this moment in time buybacks happen to be more lucrative than R&D. There is significant investment in R&D going on - happening in the form of investments in startups which will be targets of acquisition later on. Tangential thought: Startups are experiments that validate theories on product - market fit by generating positive cash flow. As a corollary, if you are a startup, your developers should be focused on validating that theory (iterating on MVP) and not fondly reminiscing and recreating Ginfrastructure(TM). Post acquisition, there will be a rewrite. As there is a drop in internal R&D, there will be a corresponding rise in acquisitions now or in the next few years. So it is a good time to be working in a startup - preferably one that is making money!
topherPedersen 7y ago
This is a disturbing trend that's been developing over the past 100 years, and I believe it is the main reason for our country's stagnating economic growth. Let's take a look! 100 years ago, companies on average dispersed 90% of their earnings back to shareholders as dividends. But by the 1970's however that number fell to below 50%. Fast forward to the 2000's and the payout ratio is down to around ~30%. What happened? Companies used to distribute their profits back to their owners, the shareholders. But that isn't what's happening anymore. In my amateur historical analysis, I believe there are two causes for this disastrous trend: 1) Tax dodging 2) The Casino/Gambling Mentality of Stock Market Investing My theory is that the trend started with investors 50 to 100 years ago looking to dodge taxes, and gain a little free compounding. Makes sense! Right? But it's just gone too far. Now investors receive almost nothing for owning a stock. Take Apple Inc. for example. In 2019 Apple made a profit of $55 billion. How much of that did they pay back to their shareholders? $14 billion. And Apple isn't even the most egregious case. They at least pay a dividend. Google, Amazon, and Facebook combined paid $0 back to their shareholders this year! So how has this insanity continued to go on for so long? The answer is simple: Adults don't know what stocks are. They think that a stock is a thing that you buy, its price goes up and down, and the game is to try and sell the stock when the price goes up, and hope that the price doesn't go down. And the machine that keeps the whole thing moving along is the Stock Buyback. REFERENCE: https://web.archive.org/web/20070106223644/https://www.eatonvance.com/mutual_funds/dividend_story.php https://web.archive.org/web/20070106223644/https://www.eaton...
- esoterica 7y ago
  Buybacks also represent profits being returned to the shareholders. They aren’t different from dividends in that respect. Companies are still paying out shareholders, they are just doing it in a different way.
grandinj 7y ago
Another way of saying this: S&P 500 profits now about 10% of all R&D spending in the US. (Assuming buybacks return 10% to shareholders, which is optimistic) Because buybacks are just another way of returning profits to shareholders.
Balanceinfinity 7y ago
Totally amazed that share buybacks are controversial. If a company believes its shares are undervalued, and the best place to use its capital, then it should buy them back. In the same way, if a company decides retiring debt is in its best interest, then it should use the money that way instead (and that often happens when it has high priced debt in the markets that's callable and interest rates fall). Comparing share buy back and R&D makes no sense. Would we rather have Apple invest in R&D that it doesn't believe in, just so it has a place to put its money? If companies couldn't buy back their stocks, they most likely would pay dividends or just bank it (which is what Apple did for decades), and the share price would rise anyway. Share buybacks don't dodge taxes - at least not directly. They allow the price to rise for those people who aren't selling (in the same way that banking the money would).
donjigweed 7y ago
https://mobile.twitter.com/CliffordAsness/status/1197897208106045442 https://mobile.twitter.com/CliffordAsness/status/11978972081...
killjoywashere 7y ago
Can someone explain this to me with beans? Like, let's literally count some beans...
deleted 7y ago
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maerF0x0 7y ago
a dividend gives back the capital w/o having to lose any voting rights. When a buy back occurs you have to give up votes to gain liquidity.
nabla9 7y ago
US R&D Spending Has Reached a Post War Record High https://thesoundingline.com/us-rd-spending-has-reached-a-post-war-record-high/ https://thesoundingline.com/us-rd-spending-has-reached-a-pos...
finfun234 7y ago
I have built a site which allows you to see whether individual companies are buying back stock or diluting e.g. buying back https://shareseer.com/search?q=hd https://shareseer.com/search?q=hd diluting https://shareseer.com/search?q=t https://shareseer.com/search?q=t
tick_tock_tick 7y ago
If we could just get rid of the silly taxation issues for dividends we wouldn't have this issue.
nhangen 7y ago
Buybacks are mostly evil, and used to make their managers/c level wealthy: https://www.epsilontheory.com/the-rake/ https://www.epsilontheory.com/the-rake/
kerkeslager 7y ago
I've said this before and I'll say it again: in the absence of a tight coupling between profit and payouts (either buybacks or dividends) the value of a stock becomes detached from the value of the company, and approaches pure opinion. When profitable companies don't pay out dividends or buy back stock, their stock price growth has nothing to peg it to the actual profit of the company. Likewise, when unprofitable companies pay dividends and buy back stock, their stock price begins to directly contradict their (lack of) growth. In short, with tricks like this available, the stock market is a bad way of measuring how the economy is doing. It's not clear from the article whether or not the companies borrowing money are the same companies buying back their own stock. But if they are, then it's clear that the economy (as indicated by real value being produced) has already crashed, and this is just a hack to delay admitting this, so that execs and the financial sector can continue to profit. It's become clear that the government will bail out companies when this strategy inevitably fails, so it's average people who will pay the cost. To be honest, I am a bit surprised this hasn't happened sooner. It's a fairly obvious hack: if you fail to produce value, just borrow money and prop up your stock price. Perhaps that's why: maybe it's too obvious--the people who make their money by finding new and creative ways to move money around have to at least create the appearance of investing in real value.
- AznHisoka 7y ago
  “in the absence of a tight coupling between profit and payouts (either buybacks or dividends) the value of a stock becomes detached from the value of the company, and approaches pure opinion.” I think I can agree with that. Whenever I hear someone say that a stock is overvalued because it’s market cap is 15 or 20 times sales, I always ask so what? Who says 15 to 20 is too high. Why not 100 or some arbitrary number? I mean, the stock has no dividend and they never have done buybacks and you aren’t going to get a piece of their sales in the form of a paycheck! Why should you care what multiple the market cap is over sales??!! It’s all opinion. You are just valuing it based on what other analysts think is the “right” multiple. Sometimes I wish the stock market worked like a blind bidding auction. You can’t see the current price nor the other bids. And nobody is allowed to publish any articles expressing their opinions on any stock.
badpun 7y ago
Hypothetical question: what happens if a company buys back 100% of its stock and hence has no owners? For example, who would choose a CEO in such case?
aussiegreenie 7y ago
Buybacks have only been legal for the last few years. There was/is a very good reason that they should be illegal. Buyback hurt the company but enrich the CEO and other executives.

deleted 7y ago

[deleted]

> drowning out real investment. The conclusion that buybacks are alternative for real investments is wrong. The aggregate change between R&D and capex versus buybacks and dividends is not just some arbitrary decision. ROI from R&D and investments is slowing down for various reasons. Instead of investing more without reason to do so, companies should give profits to owners or pay off excess debt. There is wrong and right way to use buybacks. When company is not overvalued relative to its earnings, buyback is viable alternative for dividends. Taking debt to do buybacks or pay dividends is insane.

baronmunchausen 7y ago
Corporate debt-to-GDP has never been higher
- nabla9 7y ago
  I'm aware.
Junk_Collector 7y ago
I've never understood this take. Buybacks cannot be analogous to dividends because they require you to relinquish your stake in the company to realize the gains. It's a public buyout offer, not profit sharing.
- baronmunchausen 7y ago
  +1 million
- rhino369 7y ago
  That’s a difference, but they are still analogous. Not realizing the gain is actually a helpful tax avoidance strategy. I’m investing long term, I’d rather not realize the gain.
- pedrocr 7y ago
  That's only true if you own single shares that you can't divide. If the market cap of the company is divided in enough shares that everyone can sell their portion of the buyback then it can be exactly like the dividend. And investors often directly reinvest the dividends so if you are holding an index fund that reinvests dividends, buybacks or dividends are the same except for any tax differences. If you're holding an index fund you also don't have the problem of the shares not being divisible, because someone else is managing that in aggregate for you.
- gimmeThaBeet 7y ago
  Mmm, that perspective doesn't really reflect the, I guess, party liquidity in a practical scenario. The company has money, they trade at $X. In a trivial sense it means you can buy a share for $X +- some spread. The capital return mechanism is that the company now owns the share, and can retire it, the part that really isn't important is who they got it from. It's sort of like electrons in a metal, they're just sort of around. Worrying about the behavior in specific instances doesn't paint the picture of the aggregate behavior.
- nabla9 7y ago
  They are analogous to dividends. Example: You own 10% of company with market cap $100M. You have $10M. Dividend scenario: company pays 3% dividend, you get $300k. You have $10M + $300k = $10.3 million. Buyback scenario: company buys it's own stock for the same amount. You own 10.3% of the company. You have $10.3 million. If you want, you can sell stock to get $300k in cash. The only difference is that in the buyback scenario you can decide when to sell (and pay taxes).
  - AnthonyMouse 7y ago
    Slight nit: The math you're using is creating money from nothing. You started off with $10M and by dark magic you now have $10.3M. What really happens is that you start off with $10M in stock. With dividends you get $300K in cash, but now the company doesn't have that cash anymore so its value is reduced by $300K, so you end up with $300K in cash and stock which is now only worth $9.7M. With buybacks you sell $300K worth of stock to the company. Then you have $300K in cash and the $9.7M in shares you didn't sell which are still worth the same amount because even though the company has less cash it also has fewer outstanding shares and those cancel out. This is ignoring the effect on valuation of separating the business from the cash -- if the business is more productive than the cash then that may indeed make the share price increase, because then you have a more concentrated investment in the more productive business instead of having the investment diluted by being forced to also invest in an ordinary pile of cash that happens to be part of the same corporation.
    - kgwgk 7y ago
      > The math you're using is creating money from nothing. You started off with $10M and by dark magic you now have $10.3M. I think the idea was that the company is worth $100mn at the beginning and it accumulates $3mn of cash over the year that it wants to distribute somehow to remain a $100mn company.
    - cellular 7y ago
      >> and the $9.7M in shares you didn't sell which are still worth the same amount "Worth the same amount" as what value? 10 million? If so, then doesn't that also create 10.3M in value (ie created 300k from nothing)?
stopads 7y ago
It is drowning out real investment, this conclusion is correct because the companies themselves are saying so in their statements. Some companies are taking on huge debt to keep up in the buyback races despite having bad products that are losing market share. Oracle is probably the biggest example of this buyback insanity via debt, but there are many other companies doing the same thing. https://www.cnbc.com/2019/12/05/oracle-shows-buybacks-can-go-too-far.html https://www.cnbc.com/2019/12/05/oracle-shows-buybacks-can-go... Other companies have committed in their financial statements to "returning 100% of free cash flow to investors via buybacks and dividends", so they are actually committing to not invest in the company at all regardless of how much money they make. Chevron and Texas Instruments are two big examples of this, there are dozens of other companies with similar buyback first strategies.
- whatshisface 7y ago
  That's very interesting because that is what you would do if you wanted to liquidate a company and shut it down (on a leisurely timescale). Exactly how much of the US economy is being wound down? Maybe this is a great opportunity for new businesses with an appetite for R&D risk, maybe this is the US laying down so that China will replace it faster.
  - stopads 7y ago
    Absolutely. What we are witnessing is people extracting as much money as possible from healthy and unhealthy companies just because they can. This has been going on in the private equity/hedge fund world for decades, buybacks are the mechanism that is now being used on the public markets in similar, unethical ways. Oracle is betting on not having a future, they are extracting as much money as possible from the vehicle before it goes off a cliff.
    - whatshisface 7y ago
      Based on what I know about Oracle's software quality to customer inertia ratio, they're probably betting right. I wonder if the future is as legitimately bleak for all of the other buyback companies.
jvanderbot 7y ago
OK. You're probably right. I still hate it. There's not a viable explanation that doesn't make it seem shortsighted and greedy (personally, and possibly due to HN filter). Why is R&D not a good investment suddenly? Shortage of tech workers (blah blah) ...?
- bob33212 7y ago
  There are a lot of different reasons. The cynical take is that the time to ROI is too long. If it is going to take 10 years to turn a profit the executives do not want to pull the trigger on that because they will be out the door in 5 and never get the payments. Another possibility is that all the low hanging fruit is gone. So the marginal improvements do not return large financial gains.
  - foobarian 7y ago
    Sadly both of the reasons you listed ring true.
- sigstoat 7y ago
  you’re on a board very nearly dedicated to startups. perhaps the s&p500 is no longer a good place to do r&d, compared to smaller, vc-backed startups. if they see significantly reduced gains from r&d compared to smaller companies then we should be crying years of joy that money is flowing out of them so it can be reinvested into smaller firms.
- papito 7y ago
  Toxic individualism. Me above all. Consequences are for chumps. And it's all so cynical. We see this in politics as well. One last dash pillaging the world for money and power, burning it down to the ground in the process.
  - deleted 7y ago
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- svachalek 7y ago
coldcode 7y ago
Companies (often ones with business both in and outside the US) generally borrow money to pay for buybacks (Apple as an example). So corporate debt goes up, paid out of future earnings if they exist, to keep the stock price up and keep shareholders happy. But it is not making business value which ultimately is what business exists for and should reflect in the stock price. So the price is propped up for some time period based on distant profits that may never happen, instead of reflecting company value improvements in the more near future.
- christophilus 7y ago
  Apple is probably a bad example, here. It's got more cash than it knows what to do with-- nearly as much cash as debt. And its debt is at a relatively low interest rate. It's arguable that while interest rates are so low, it makes sense to take on a bit more debt than usual, and when interest rates get high, it makes sense to reduce your debt ratios.
- deleted 7y ago
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- Nokinside 7y ago
  Apple is really bad example. Apple did buyback for a right reason. They are drowning in cash. Their debt is not an issue at all.

zebrafish 7y ago

Read an idea in American Affairs in support of taxing buybacks. The logic goes that if all companies have a fiduciary duty to shareholders because the market is the most efficient capital allocator, AND all companies are giving their cash back to shareholders, THEN it must be true that the market can not figure out how to efficiently allocate this $1T of capital. Thus, the government should have “next dibs” for items on the agenda that it knows need capital, namely infrastructure and healthcare. Thought that was an interesting take. Edit: here is the link but it may be behind a paywall. https://americanaffairsjournal.org/2018/12/share-buybacks-and-the-contradictions-of-shareholder-capitalism/ https://americanaffairsjournal.org/2018/12/share-buybacks-an...

rjkennedy98 7y ago
At the very minimum it should be taxed the same as dividends. Essentially tax buybacks are a tax loophole for giving money back to the shareholder.
- pc86 7y ago
  What would this look like from a practical standpoint, though? Dividends are a taxable event because you're giving someone money. In a buyback, the value of the stock simply goes up, which isn't a taxable event. How do you determine the cost basis on something like that? If there's a stock buyback over the course of 6 months, how do you determine which proportion of the price increase is due to the buyback, as opposed to inflation or normal growth?
  - entropicdrifter 7y ago
    You tax the buyback itself, right? You tax the money the company is spending on its own stock. That's the only step of the transaction where money is changing hands
    - pc86 7y ago
      I'm not trying to be obtuse, I'm genuinely curious how this would work and what changes to tax law would need to be made. Would you tax the entity buying the stock (in case always a company since it's a buyback; which I think would be the only example of taxing a stock purchase), or the entity selling the stock (either an individual or a company, which is already potentially taxed as capital gains)? If the goal is to tax it similar to dividends you would tax the person selling the stock but it's already taxed as capital gains, either long term (0%/15%/20%) or short term (marginal bracket rate).

cs702 7y ago

Large US corporations have been buying back their own stock in record amounts, while investors have been cashing out of US stocks at a record pace, recent data shows: https://www.msn.com/en-us/money/markets/investors-bail-on-stock-market-rally-fleeing-funds-at-record-pace/ar-BBXVrnh https://www.msn.com/en-us/money/markets/investors-bail-on-st... -- money is not being plowed back into IPOs, secondary offerings, etc. According to orthodox economic theory, large US corporations must be buying back stock with earned profits and new debt[a] because they don't have better uses for that money. Rational executives and company boards looking out mainly for shareholders must have concluded that buying back shares at current prices is a better use of money than investing, you know, in the business. Maybe. In reality, executives and directors could very well be authorizing stock buy-backs to keep share prices up so their stock options remain in-the-money for as long as possible. If that's the case, the buybacks are meant more for the benefit of executives and directors than for the benefit of the business or its shareholders. [a] Corporate debt to GDP is now at an all-time high: https://ei.marketwatch.com/Multimedia/2018/11/29/Photos/NS/MW-GZ344_corpde_20181129133702_NS.jpg https://ei.marketwatch.com/Multimedia/2018/11/29/Photos/NS/M...

ainiriand 7y ago
Delicious board bonuses.
deleted 7y ago
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asdfasgasdgasdg 7y ago
Doesn't one require the other? You have to buy back the stock from someone. That someone is necessarily divesting themselves of the stock as a result.
- deleted 7y ago
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- 7y ago

jshaqaw 7y ago

Companies that can productively reinvest capital at attractive rates of return get a strong valuation premium in the market. Every company would love to be in this position. Companies that can make a compelling case to shareholders for long-term investments get to make long-term investments and like Amazon often get super valuation premiums. If a company can't reinvest capital at attractive rates then returning it to shareholders is the best option. Forcing companies to invest in unattractive investments is the path to a zombie economy. I can't count the number of companies that should have returned money rather than going on some unprofitable growth binge.

hew 7y ago

Intrinsic value of the company > devaluing cash pile (Presenting as "record stock growth" but in reality just trying to hold even value.)

nine_zeros 7y ago

Hey, the fed's giving free money. Why wouldn't execs do this? Imagine being at the top of a public company, with unlimited borrowing ability and retirement in a few years. Why wouldn't they?

mrfusion 7y ago

I’m not getting this headline. Buy backs are something done with profit. So replace the headline with “s&p 500 Profits now outpace all R&D spending in the US”.

rogerkirkness 7y ago
Technically you can borrow money very cheaply and do buybacks with it, which is actually happening as much as using profit.
nrb 7y ago
Buy backs are increasingly being done with debt[1] and corporate debt-to-gdp ratios are way out of whack [2]. 1: https://www.cnbc.com/2019/07/29/buybacks-companies-increasingly-using-debt-to-repurchase-stocks.html https://www.cnbc.com/2019/07/29/buybacks-companies-increasin... 2: https://www.forbes.com/sites/mayrarodriguezvalladares/2019/07/25/u-s-corporate-debt-continues-to-rise-as-do-problem-leveraged-loans/#6eba9bea3596 https://www.forbes.com/sites/mayrarodriguezvalladares/2019/0...
CyanLite2 7y ago
Buybacks are happening without profit. Companies are borrowing money to conduct buybacks.
- derision 7y ago
  source?

jcims 7y ago

Every time i read these threads i feel criminally incompetent in finance. You would think that putting your money to work for you would be incentive enough to dig deep, but i don’t seem to have the mental stamina to figure it all out. There’s probably a latent fear that I’ll also realize just how much money i haven’t made and regret that too. I need a course or something that i can walk into with $20k or whatever and do all the things. Self-directed education doesn’t seem to help and Edward Jones just wants to sell me their shit.

thekingofh 7y ago
The game wasn't designed for you and me. It was designed for the ones that can take advantage of it with massive amounts of cash, connections, and staff to exploit it for them. Bet on the companies to figure it out for themselves and just stick to index funds over the long haul. That way at least you're not playing a game that was designed to take your money.
- 0x262d 7y ago
  this is good advice but also ordinary people should be able to understand why the economy is breaking. most economists treat it as a mystical thing only they can divine the meaning of, so it can be pretty hard to find clearly written stuff for lay people.
rwmurrayVT 7y ago
I'm sure there are many courses available at your local convention center where they'll be happy to tell you what to do with your $20k!
scresswell 7y ago
I was in a similar position. The following helped. https://www.amazon.co.uk/Millionaire-Teacher-Wealth-Should-Learned-ebook/dp/B01NADAJ3X https://www.amazon.co.uk/Millionaire-Teacher-Wealth-Should-L... https://canadiancouchpotato.com/ https://canadiancouchpotato.com/
sigstoat 7y ago

loourr 7y ago

This is robbery by the management class, and who can blame them. If I can take on debt at a corporate level and personally enrich myself, by increasing the value of the stock through buybacks and then selling it, why wouldn't I? This is all made a whole lot worse by stock option packages that give managers equity at major discounts. I think we'll look back at this as the largest heists in history. Should serve as a good lesson to central bankers in creating wack incentive schemes (but it probably won't)

Bostonian 7y ago
It's no such thing. As a shareholder I am happy for companies to buy back shares and thereby increase the value of the remaining shares.
- loourr 7y ago
  Sure as a shareholder I also like stock buybacks. For instance, when Berkshire Hatheway does it, it's almost certainly a good thing. I don't think that's what we're seeing in the vast majority of cases though. I think what we're seeing is managers personally enriching themselves by taking on corporate debt and doing so in a very tax-advantaged way. Keep in mind they're not buying the stock they own in the first place, they're being given it via stock options at crazy discounts.
  - dahdum 7y ago
    If this were true, why aren’t we seeing an incredible surge of shareholder lawsuits? Those managers are ripping off all those long hedge funds and activist investors, and none of them are crying foul?
  - sigstoat 7y ago
    > Keep in mind they're not buying the stock they own in the first place, they're being given it via stock options at crazy discounts. ...is your salary received from the company at a "crazy discount"? the equity is part of the agreed upon compensation for the manager's work. this is easily the most absurd statement on this entire page.

jumbopapa 7y ago

Interesting that the market is at an all-time high and companies still feel their stock is cheap enough to warrant investing in. When will this bull stop?

rbavocadotree 7y ago

AQR published a paper on share buybacks last year [0] with the opening sentence "People seem to forget some of the very basic lessons of financial economics when it comes to share repurchases". One of the big things missed by all the articles covering share repurchases, is that they are increasing at a rate similar to company market cap. That shouldn't be too surprising. The real story is why is R&D not keeping up? It's worth a read for a more nuanced view. [0] https://pdfs.semanticscholar.org/dcc3/e0d7288395c2891f1fee194e67fb7102dfea.pdf https://pdfs.semanticscholar.org/dcc3/e0d7288395c2891f1fee19...

bob_theslob646 7y ago
Thank you for sharing this. There's a great thread on Twitter about share buybacks criticisms particularly by Cliff Asness who is the founder of AQR. https://twitter.com/CliffordAsness/status/1188277333859418112?s=19 https://twitter.com/CliffordAsness/status/118827733385941811...
mdorazio 7y ago
I strongly agree that the real story is in why R&D spending is stagnating or dropping in comparison to earnings. Personally, I think there a number of contributing factors including less competition from new businesses (new businesses starts with employees are way down from previous decades), decreased competition from large competitors (see Disney buying up everyone in the entertainment industry as an example), regulatory capture, increased risk aversion in the corporate world, and just the fact that low hanging fruit are mostly picked at this point so that the next major improvement might require way more investment than a lot of companies are comfortable with (see the massive increase in new semiconductor fabs and drug discovery as examples).

1-6 7y ago

I've watched somewhere that these buybacks is to keep the stock prices afloat lest their employee stock options get hammered and they lose employees. Tech workers are operating on fumes.

phendrenad2 7y ago

There's two ways to look at everything. Buybacks can be seen as companies giving money back to the shareholders. Or if you decouple the company from it's stock, you'll see that buybacks are an investment in the company's own future, since they believe that their own stock is at a discount now, and they'll make more selling it later.

sfblah 7y ago
Buybacks are to increase mgmt comp because they hold options. It’s a scam.

Thriptic 7y ago

Perhaps I'm being simple, but I don't really understand the problem here. Companies are sitting on too much cash that they don't know what to do with. There is only so much that can productively be spent on R&D. If they don't do something with their cash, investors will start demanding a dividend. Once you start giving dividends it becomes hard to stop giving them. To prevent perpetual dividends, companies perform a buy back which also helps out investors but is a one time thing which doesn't need to be repeated.

habosa 7y ago
But what's wrong with perpetual dividends? I think the relationship between investors and dividend-paying companies is a lot healthier than non-dividend-paying companies. If buy 1 share of DividendCorp I can rationalize it as a stream of future dividends generated by the company's profits. I want the company to succeed in the short term and the long term. If I buy 1 share of OtherCorp which pays no dividends I am purely speculating on the price. I don't even have to care what the company does I could just be one of those "technical analysis" people riding chart waves. I just need to pass the bag to someone else at a gain.
- Thriptic 7y ago
  You're not speculating on price, you are trusting that the company will make sound decisions which will result in growth and future profits, thereby increasing the stock's value. People mostly invest in stocks that don't pay dividends as opposed to instruments that pay fixed returns or companies that pay dividends because there is far more upside potential. I don't want all the companies I invest in to start being big dividend paying companies because that impedes their ability to grow.
- tenpies 7y ago
  This will depending on your tax jurisdiction, but it's almost certainly a consequence of taxes: If the company buys its own shares, there are usually no taxes on the purchase. If the company issues dividends, it has to pay taxes on dividends distributed. The shareholders may also have to pay a small amount of taxes on dividends they receive.

partiallypro 7y ago

Why do people think that if you pour more money into something like R&D you'll get more results? That isn't how it works. You get diminishing returns on anything, do you not think internal statisticians and economists at the company haven't calculated that?

3pt14159 7y ago
Sometimes it's about timelines, not sheer ROI. Apple is in a position to make long term R&D bets because they don't face the same board pressure that many other companies do. Also, it's not only R&D. Long term capital outlays like building new factories are also something that buybacks compete against, and some companies like Telsa do the opposite: Raise more from the capital markets and invest in long term spending in both R&D and capital outlays. Looking at the system as a whole, though, board pressure aside, we should want companies like Tesla raising cash for longterm spending while other companies issue share buybacks or dividends.

iav 7y ago

1. For mature tech companies selling high margin products, R&D is typically 8-16% of revenue while operating profit margins are 20-40% of revenue. Even after taxes and interest, it’s natural for buybacks to exceed R&D 2. Not all R&D spent is booked as accounting GAAP R&D. Any internal tool for example can not be booked as R&D because it’s not sold to end customers. 3. Companies outside of tech do not report their amount of R&D spend but include it with SG&A. If deemed immaterial then you don’t see it

LatteLazy 7y ago

R&D spending is a badly understood black box. we incentivise miss measuring it with weird tax breaks and complex rules. From an economic point of view, it's not clear that existing firms should be engaging in it: many industries follow model where specialists create new products which are then available to industry via a mix of buying out small firms, licensing their products or imitating them (that seems to be how big chunks of silicon Valley work and also drug discovery and fashion for instance, three quite innovative sectors). The result is the number being inflated up by firms dodging taxes, down by people working in their garages, sideways by including things and excluding other things based on weird regulations. Share buybacks are similarly in a weird place: tax rules favour them twice, once when buying back and again when borrrowing to fund that. Plus interest rates are at a record low so that encourages them too. People have a 1950s model that assumes research is something AT&T do and that the amount they spend is an honest reliable value. But they don't and its not. Some where someone is building WhatsApp 2.0 or 6G comms equipment in their basement in weekends. Their time and energy is counted for nothing in these numbers. And when they sell their company ro Facebook who issues shares to buy it and then buy those shares back (as that's the tax efficient way to buy things), they value they created will be a "buy back" not an "invention"...

mNovak 7y ago
I suppose some amount of this line of reasoning (R&D is hidden under acquisitions) would be observable if changes in R&D spending were compensated by changes in total acquisitions (of smaller firms)

paulpauper 7y ago

The economy is becoming increasingly automated and dominated by a handful of large, hugely successful companies that can keep printing out the same widget or service over and over , generating reliable, recurring revenue streams. There is no need for research when your competitors are tiny and or non-existent, with no hope of closing the gap.

Bostonian 7y ago

When shares of stock owned by an equity mutual fund are bought back by the company, the fund uses that money to buy shares of other companies. The money does not disappear or immediately go to consumption. Buybacks allow money to be transferred from companies with poor growth prospects to companies with better growth prospects.

JMTQp8lwXL 7y ago

Amazon has done 0 buybacks in the past 30 quarters [0] and is one of the best-performing components of the S&P 500 index. I'm not convinced that all corporate executives are right to assume that the best use of capital is to simply repurchase stock. Look what it's done for Amazon: it's delivered great economic value. [0]: https://www.marketwatch.com/story/amazon-doesnt-buy-back-any-stock-for-30th-straight-quarter-2019-10-25 https://www.marketwatch.com/story/amazon-doesnt-buy-back-any...

jcfrei 7y ago
Amazon is in a growing market: e-commerce. Lots of other companies are not.

Mikeb85 7y ago

Good. Markets without buybacks and dividends are a ponzi scheme. The whole point of selling equity in a business is to raise funds, use it to grow, then return funds to investors.

acd 7y ago

Its probably a bubble coming what happens when the stock market goes down? Ie tradewar causes price inflation of goods on imported goods from China. Central bank then increases interest rate to fight higher inflation. Price of new money goes up, stock market goes down.

zxienin 7y ago

For technology companies, buybacks signal to me that they have dying (or dead) engineering. It is rather financial engineering at work. One of the kpi at play here is EPS [1], typically used to evaluate CEO performances. To me, this was about numerator increasing over a rather static base. What instead happens, is that denominator is reduced (with buybacks) to jack up EPS value. It amazes me, that most of run-of-mill (non analyst) folks simply buy into EPS↑ story. [1] https://www.investopedia.com/terms/e/eps.asp https://www.investopedia.com/terms/e/eps.asp

Redoubts 7y ago
I can understand this. I know my company has a bug backlog a mile long, and some real issues we should put substantial time into; but it would rather have HR put downwards pressure on compensation while pursuing record buybacks. It gives a sense for what the priorities are.
- frockington1 7y ago
  Well a bug backlog that long isn't going to motivate execs to improve compensation. If there are too many bugs it might be time to pivot the business
  - Redoubts 7y ago
    Of course I don't mean more money for existing players, but to encourage strong new hires. But good talent tends to cost money, so...

JumpCrisscross 7y ago

Companies are buying back shares. Individual investors are selling shares [1]. Private equity [2] and VC are raising record sums [3]. Alternate title: financial markets shifting capital from public to private companies. The economy’s R&D engine has shifted. Financial markets are following. [1] https://www.wsj.com/articles/investors-bail-on-stock-market-rally-fleeing-funds-at-record-pace-11575801002 https://www.wsj.com/articles/investors-bail-on-stock-market-... [2] https://www.wsj.com/articles/private-equity-firms-are-raising-bigger-and-bigger-funds-they-often-dont-deliver-11560859200 https://www.wsj.com/articles/private-equity-firms-are-raisin... [3] https://news.crunchbase.com/news/the-q2-2019-global-venture-capital-report-a-market-gone-sideways/ https://news.crunchbase.com/news/the-q2-2019-global-venture-...

dcolkitt 7y ago
Yeah, I don't really understand the negative sentiment here. If a company's buying back stock, then someone's selling those shares. That investor now has extra cash on hand to invest somewhere else. It's not like that capital just gets thrown into an empty pit. Mature companies returning money is a pretty natural state of affairs. Unless you believe that all growth and investment over the next 25 years is going to be done by exactly the same set of companies from the last 25 years. That's a recipe for stodgy sprawling monopolistic conglomerates. Competition and innovation is only possible when new entrants challenge entrenched players. And turnover in firms is only possible when capital is transferred from the large, pre-estabilished firms to small, growing ones. That transfer of capital to innovative challengers necessarily involves large, mature companies returning money to shareholders either in the form of dividends or buybacks.
- JumpCrisscross 7y ago
  Prohibiting buybacks might increase dividends. It’s more likely to boost M&A. What it unlikely is for internal R&D, capital investment or hiring to benefit.

eloff 7y ago

This supports Peter Theil's theory that innovation has stagnated. When companies give their profits back to the shareholders instead of investing in continued innovation, because they can't figure out a way to innovate with that capital. The world needs more Elon Musk type of entrepreneurs.

marvin 7y ago
Your praise for Musk can't be repeated enough. Whatever you think of the guy, he is completely fearless regarding big investments in things that are possible in principle, but with a large risk of failure. Most people shy away from those kinds of risks. I really wish we had more people with capital that took big risks on things that are unlikely to succeed, but would materially bring the world forward if they did.
- minikites 7y ago
  >I really wish we had more people with capital that took big risks on things that are unlikely to succeed, but would materially bring the world forward if they did. If this is the desired outcome, how do you tell the difference between an entrepreneur and a con-man?
  - marvin 7y ago
    Savvy investors should know the laws of physics and be able to make a decent educated guess regarding what limitations are caused by fundamental limits, and what are instead the result of a e.g. any random local maximum, institutional inertia, lack of imagination, a long-standing duopoly and so on. Plus factor changing technological possibilities into this. I don't think it's such a big deal if a few private investors lose their investment to a con, but there are a lot of smart people out there. Not everyone stated boldly that reusable rockets are impossible, that no social network could have better success than MySpace, that mobile phones had to have a keypad and only run pre-installed software or that electric cars could never be a viable competitor.
AWildC182 7y ago

AnthonyMouse 7y ago

This is a misleading comparison. When you spend money on R&D, it's spent. Somebody is actually consuming man-hours to do work that then can't be used for something else. When you "spend" money on buybacks, it's just moving money around. No scarce resources are consumed, it's just a meta-determination of who gets to decide how to actually spend the money. And moving the money from huge risk-averse corporations to investors that may have a higher risk tolerance may increase investment into innovative new ventures.

onlyrealcuzzo 7y ago
There's the bit about 60% of money being managed passively, and these passive funds will buy Microsoft stock at $100 or $1M (proportionally). The stock buybacks shouldn't affect the market cap (it's just moving money). It's impossible to know if the buybacks have actually affected market caps, but consensus seems to be that it's increasing market caps. That means you're getting free money from passive funds. Seems like a problem for pensions and most 401ks.
- AnthonyMouse 7y ago
  That's assuming "passive funds" aren't what huge corporations hold their liquid assets in when they're not used for buybacks. At least 60% is less than ~100%.

typeformer 7y ago

This will not end well...

LudwigNagasena 7y ago

I don’t get the comparison. I don’t see why it should be a good or a bad thing. Seems like two completely arbitrary numbers being compared.

bullen 7y ago

All change requires energy, and we're going to have less energy, so the speed of change inevitably has to go down. Because the only energy added to the planet comes from the sun and the only viable option to collect that energy are trees and plants.

sigstoat 7y ago
and the only energy that comes into the sun-earth system is weak background radiation! it's not enough for _anything_! we're doomed.

sriram_sun 7y ago

R&D is an investment. So are buybacks. The powers that be have made the call that at this moment in time buybacks happen to be more lucrative than R&D. There is significant investment in R&D going on - happening in the form of investments in startups which will be targets of acquisition later on. Tangential thought: Startups are experiments that validate theories on product - market fit by generating positive cash flow. As a corollary, if you are a startup, your developers should be focused on validating that theory (iterating on MVP) and not fondly reminiscing and recreating Ginfrastructure(TM). Post acquisition, there will be a rewrite. As there is a drop in internal R&D, there will be a corresponding rise in acquisitions now or in the next few years. So it is a good time to be working in a startup - preferably one that is making money!

topherPedersen 7y ago

This is a disturbing trend that's been developing over the past 100 years, and I believe it is the main reason for our country's stagnating economic growth. Let's take a look! 100 years ago, companies on average dispersed 90% of their earnings back to shareholders as dividends. But by the 1970's however that number fell to below 50%. Fast forward to the 2000's and the payout ratio is down to around ~30%. What happened? Companies used to distribute their profits back to their owners, the shareholders. But that isn't what's happening anymore. In my amateur historical analysis, I believe there are two causes for this disastrous trend: 1) Tax dodging 2) The Casino/Gambling Mentality of Stock Market Investing My theory is that the trend started with investors 50 to 100 years ago looking to dodge taxes, and gain a little free compounding. Makes sense! Right? But it's just gone too far. Now investors receive almost nothing for owning a stock. Take Apple Inc. for example. In 2019 Apple made a profit of $55 billion. How much of that did they pay back to their shareholders? $14 billion. And Apple isn't even the most egregious case. They at least pay a dividend. Google, Amazon, and Facebook combined paid $0 back to their shareholders this year! So how has this insanity continued to go on for so long? The answer is simple: Adults don't know what stocks are. They think that a stock is a thing that you buy, its price goes up and down, and the game is to try and sell the stock when the price goes up, and hope that the price doesn't go down. And the machine that keeps the whole thing moving along is the Stock Buyback. REFERENCE: https://web.archive.org/web/20070106223644/https://www.eatonvance.com/mutual_funds/dividend_story.php https://web.archive.org/web/20070106223644/https://www.eaton...

esoterica 7y ago
Buybacks also represent profits being returned to the shareholders. They aren’t different from dividends in that respect. Companies are still paying out shareholders, they are just doing it in a different way.

grandinj 7y ago

Another way of saying this: S&P 500 profits now about 10% of all R&D spending in the US. (Assuming buybacks return 10% to shareholders, which is optimistic) Because buybacks are just another way of returning profits to shareholders.

Balanceinfinity 7y ago

Totally amazed that share buybacks are controversial. If a company believes its shares are undervalued, and the best place to use its capital, then it should buy them back. In the same way, if a company decides retiring debt is in its best interest, then it should use the money that way instead (and that often happens when it has high priced debt in the markets that's callable and interest rates fall). Comparing share buy back and R&D makes no sense. Would we rather have Apple invest in R&D that it doesn't believe in, just so it has a place to put its money? If companies couldn't buy back their stocks, they most likely would pay dividends or just bank it (which is what Apple did for decades), and the share price would rise anyway. Share buybacks don't dodge taxes - at least not directly. They allow the price to rise for those people who aren't selling (in the same way that banking the money would).

donjigweed 7y ago

https://mobile.twitter.com/CliffordAsness/status/1197897208106045442 https://mobile.twitter.com/CliffordAsness/status/11978972081...

killjoywashere 7y ago

Can someone explain this to me with beans? Like, let's literally count some beans...

deleted 7y ago

[deleted]

maerF0x0 7y ago

a dividend gives back the capital w/o having to lose any voting rights. When a buy back occurs you have to give up votes to gain liquidity.

nabla9 7y ago

US R&D Spending Has Reached a Post War Record High https://thesoundingline.com/us-rd-spending-has-reached-a-post-war-record-high/ https://thesoundingline.com/us-rd-spending-has-reached-a-pos...

finfun234 7y ago

I have built a site which allows you to see whether individual companies are buying back stock or diluting e.g. buying back https://shareseer.com/search?q=hd https://shareseer.com/search?q=hd diluting https://shareseer.com/search?q=t https://shareseer.com/search?q=t

tick_tock_tick 7y ago

If we could just get rid of the silly taxation issues for dividends we wouldn't have this issue.

nhangen 7y ago

Buybacks are mostly evil, and used to make their managers/c level wealthy: https://www.epsilontheory.com/the-rake/ https://www.epsilontheory.com/the-rake/

kerkeslager 7y ago

I've said this before and I'll say it again: in the absence of a tight coupling between profit and payouts (either buybacks or dividends) the value of a stock becomes detached from the value of the company, and approaches pure opinion. When profitable companies don't pay out dividends or buy back stock, their stock price growth has nothing to peg it to the actual profit of the company. Likewise, when unprofitable companies pay dividends and buy back stock, their stock price begins to directly contradict their (lack of) growth. In short, with tricks like this available, the stock market is a bad way of measuring how the economy is doing. It's not clear from the article whether or not the companies borrowing money are the same companies buying back their own stock. But if they are, then it's clear that the economy (as indicated by real value being produced) has already crashed, and this is just a hack to delay admitting this, so that execs and the financial sector can continue to profit. It's become clear that the government will bail out companies when this strategy inevitably fails, so it's average people who will pay the cost. To be honest, I am a bit surprised this hasn't happened sooner. It's a fairly obvious hack: if you fail to produce value, just borrow money and prop up your stock price. Perhaps that's why: maybe it's too obvious--the people who make their money by finding new and creative ways to move money around have to at least create the appearance of investing in real value.

AznHisoka 7y ago
“in the absence of a tight coupling between profit and payouts (either buybacks or dividends) the value of a stock becomes detached from the value of the company, and approaches pure opinion.” I think I can agree with that. Whenever I hear someone say that a stock is overvalued because it’s market cap is 15 or 20 times sales, I always ask so what? Who says 15 to 20 is too high. Why not 100 or some arbitrary number? I mean, the stock has no dividend and they never have done buybacks and you aren’t going to get a piece of their sales in the form of a paycheck! Why should you care what multiple the market cap is over sales??!! It’s all opinion. You are just valuing it based on what other analysts think is the “right” multiple. Sometimes I wish the stock market worked like a blind bidding auction. You can’t see the current price nor the other bids. And nobody is allowed to publish any articles expressing their opinions on any stock.

badpun 7y ago

Hypothetical question: what happens if a company buys back 100% of its stock and hence has no owners? For example, who would choose a CEO in such case?

aussiegreenie 7y ago

Buybacks have only been legal for the last few years. There was/is a very good reason that they should be illegal. Buyback hurt the company but enrich the CEO and other executives.