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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
by 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 agoDelicious board bonuses.
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- asdfasgasdgasdg 7y agoDoesn'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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- throw0101a 7y agoYou are technically correct, but the GP is alluding to the intent of the companies/executives. In one case the intent is good (proper allocation of cash); in the other it is not-good (engineering financial bonuses for themselves).
- ultraluminous 7y agoIf you're referring to "...investors have been cashing out of US stocks at a record pace", than to further clarify - investors are divesting out of the public stock market entirely. They're not selling their Apple stock in a buyback to invest the proceeds of the sale into an exciting IPO, or a deep value small cap. They're just taking it out of entirely. Think what that implies about the macro structure of a "market economy" when the majority of new money going into stocks is executive/company initiated stock buy backs, and not "investment".
- frockington1 7y agoMacro, it seems to mean that owners believe in their companies and want more equity. Hardly a bad thing unless you're trying to predict the next recession
- papito 7y agoYou don't have to "believe" if you are planning on getting out before the chumps do. It's like robbing a bank, only legally.
- Mikeb85 7y agoInvestors might be cashing out because the stock market is at a high. This is literally investing 101. Buy low sell high.
- ajmurmann 7y agoYeah, 101 for people who think they know more about market timing than the average other person who shares the same believe.
- rootusrootus 7y agoThat's more like Gambling 101. Investing 101 would be dollar cost averaging.
- papito 7y agoThen why are companies buying back at record highs? Surely they are not dumber than Joe the Investor on Main Street.
- Mikeb85 7y agoLow interest rates as well as high cash levels. The whole point of markets is to raise cash then pay it off. Not to tank the price and rip off investors. Also, buying back shares keeps stock prices high, makes each outstanding share worth more (less dilution), so more value for the remaining owners.
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- l2p 7y agoAs costs to borrow continue to fall, the search for yield is exacerbated. Buybacks seem like a rational choice for executives to meet their performance goals/incentive structures given that the list of other options is becoming shorter/harder. Here is link to an updated data set for [a] https://fred.stlouisfed.org/graph/?id=QUSNAM770A https://fred.stlouisfed.org/graph/?id=QUSNAM770A,
- OscarCunningham 7y ago> 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. This plan shouldn't work because buybacks shouldn't cause stocks to rise unless the market thinks they're a good idea. For example, if a company with 1 million shares is worth $90 million and has $10 million of cash on top of that, then each share will be worth $100. If it uses that cash to buy shares it will be able to get 100 thousand of them, so it will become a $90 million company with 900 thousand shares. Each share is still worth $100.
- gbear605 7y agoThat’s only true as long as the buybacks are done using a cash pile. There are a lot of companies that, instead of trying to grow, give dividends to their investors (think utility companies). Their stock prices tend to be pretty stable, since their inherent worths don’t change much. Suppose there is a 100 million dollar power company that instead of giving dividends of 1% per year, they instead bought back stock with that money. We would expect the stock valuation to go up by about 1%, since it’s now 99% of the stocks holding 100% of the 100 million dollar business.
- OscarCunningham 7y agoRight. Buybacks don't raise the shareprice relative to doing nothing, but they do raise the shareprice relative to paying dividends. Maybe it would be better to describe this as "dividends lower the share price".
- gbear605 7y agoI suppose the converse is that any profitable company’s share price will go up continually, as long as they don’t give dividends.
- kgwgk 7y ago> We would expect the stock valuation to go up by about 1% Yes, but not overnight. It will take one year or one quarter or whatever would by the period required for the price to recover if it had distributed the 1% dividend. (You said an annual dividend of 1% but that seems too low for a stable business!)
- clairity 7y agoyup, this is taught in MBA programs as a classic example of a moral hazard/principle agent problem. executives are offloading downside risk to shareholders and locking in profits for themselves. one way to discourage such behavior is the lengthen the time horizons of performance incentives like stock grants and bonuses (to, say, 7 years).
- dv_dt 7y agoWhat do broad buybacks say about the professed benefit of capitalism that it's supposed to reduce prices for customers and society? This cashflow seems like it's representative of rentier leverage against market effects that are supposed to squeeze profits in order to deliver innovation and efficiency.
- corebit 7y agoMeh, seems like a straightforward effect of ultra low interest rate that's been well-known for years. See https://seekingalpha.com/article/3672916-buyback-arbitrage-is-still-in-full-effect https://seekingalpha.com/article/3672916-buyback-arbitrage-i... for several examples of how smart this is. The TLDR is that this is just a company unable/unwilling to lower its dividend yield and arbitraging that yield against low interest rates. Every share it buys back represents a dividend it never has to pay again. A ~2% loan for 30 years in present-value terms is cheaper than a 3% dividend yield into perpetuity for some number of shares it can buy.
- downrightmike 7y agoIn reality, that is the only reason IBM is still floating around $100. It isn't worth that, and if they didn't buy back their stock, they'd crash their value.
- im3w1l 7y agoRetirees cashing out?
- papito 7y agoBoomers discovering one more way to screw the next generation. Hey, they go theirs.