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> after selfishly spending billions on stock buybacks I've been seeing this on twitter a lot. Is there some context you can provide for why these particular re

> after selfishly spending billions on stock buybacks I've been seeing this on twitter a lot. Is there some context you can provide for why these particular repurchases were in bad taste, given no awareness of the upcoming pandemic. I am assuming you don't view repurchases as 'selfish' generally.

rcxdude 7y ago
I think the main thing is the airline industry is boom and bust, while being quite sensitive to a number of factors out of their control, but because they know they'll get bailed out by the public they have no reason to try saving to make their business robust against such things on their own. These talking points seem to be coming from this article: https://www.nytimes.com/2020/03/16/opinion/airlines-bailout.html https://www.nytimes.com/2020/03/16/opinion/airlines-bailout....
totalZero 7y ago
A buyback is a form of capital return to shareholders. Improvements in leg room, amenities, services, infrastructure, etc, are a form of capital return to customers. When executive compensation is tied to operating profit or market capitalization, there is an incentive to reduce the product quality (the air traveler experience, in this case) to the minimum competitive level and boost the share price. A buyback boosts the share price in two inter-related ways. First, it reduces the amount of shares available in the secondary market (the "float"), which distributes the market cap across a smaller number of shares. Second, it provides artificial demand for the stock, impacting the price upward by buying shares. Warren Buffett has stated that he likes investing in equities in part because companies reinvest their profits in their business. A buyback doesn't do that because when you spend $5B on your own stock, you're not spending it on providing a better experience to your customers, and you're not spending it on R&D. You're just spending it on concentrating shareholder ownership and driving up the stock price. Guess who often gets paid in shares? Executives. It's common for a CEO to get a small portion of his compensation as salary and a large portion as shares and options. The point is that these companies could have reinvested that money in their business, but instead they aimed to boost share price and financial optics. That's not to say the airlines don't care about the little guy. Some shareholders are regular folks. Plus, at least Delta paid out a bonus to employees a few months ago. But there is indeed a reason to dislike large buybacks.
- opportune 7y ago
  Why is a buyback worse than a dividend? Both are a form of delivering ROI, it just happens that one is better for shareholders due to the tax system. In fact if airlines had actually reinvested that money, they would be even more fucked up than they are now. At least now they have free cash flow to make a temporary drop in revenue hurt less. Reinvesting money in the corporate world often involves converting cash flow into debt, which they’re probably going to have to do now to meet their existing financial obligations. Much better than if they were midway through financing some large fleet expansion and had less FCF on hand to weather the travel slowdown
  - majormajor 7y ago
    I don't understand who buybacks are better for. A dividend would've returned money to all the people who held onto shares and wasn't paying attention to how much they should be selling off to capture the buyback and just had all the gains wiped out...
    - opportune 7y ago
      Absent a market selloff, they're better for shareholders for two reasons: one, it manifests earnings as capital gains/stock appreciation rather than dividends, and two, it has positive future ROI. Point 1 is not super important because of the existence of qualified dividends. Point 2 is like this: let's say I'm a company with 1000 outstanding shares valued at $100 each and want to pay a yearly dividend (for simplicity) of $5/share. All market movements notwithstanding and absent any changes, that means I'm basically giving investors a 5% yearly ROI. But, let's say I instead bought back my shares with all my earnings. The first year, I buy back 5% of the outstanding shares. Now there are 950 outstanding shares and total earnings are still $5000/year. Next year each remaining shareholder gets an extra 5% of earnings per share (this compounds). And rather than pay tax each year on dividends, shareholders defer all their taxes until they exit their position. One argument is that dividends aren't really worse in this case because investors could still choose to spend the cash on purchasing more shares, accomplishing the same thing. But the deferred taxes change the math.
    - 7y ago
oarabbus_ 7y ago
It is prudent for an individual to have a rainy day fund for emergencies. It is also prudent for a corporation to have a rainy day fund for unpredictable events like an upcoming pandemic. An individual who didn't properly save can go bankrupt in a time of emergency. Likewise, a company which didn't properly save should also go bankrupt in a time of emergency. Look at Apple or Berkshire Hathaway. Both have a massive safety net in the form of liquid cash for hard times.
- tomatocracy 7y ago
  Businesses typically carry insurance (including business interruption insurance) and unused credit lines for this type of risk, not cash. Governments typically then provide some form of insurance for risks which are commercially uninsurable like war. I think Covid probably falls into that category fairly comfortably.
sjg007 7y ago
Wells Fargo literally stole their customers money.

rcxdude 7y ago

I think the main thing is the airline industry is boom and bust, while being quite sensitive to a number of factors out of their control, but because they know they'll get bailed out by the public they have no reason to try saving to make their business robust against such things on their own. These talking points seem to be coming from this article: https://www.nytimes.com/2020/03/16/opinion/airlines-bailout.html https://www.nytimes.com/2020/03/16/opinion/airlines-bailout....

totalZero 7y ago

A buyback is a form of capital return to shareholders. Improvements in leg room, amenities, services, infrastructure, etc, are a form of capital return to customers. When executive compensation is tied to operating profit or market capitalization, there is an incentive to reduce the product quality (the air traveler experience, in this case) to the minimum competitive level and boost the share price. A buyback boosts the share price in two inter-related ways. First, it reduces the amount of shares available in the secondary market (the "float"), which distributes the market cap across a smaller number of shares. Second, it provides artificial demand for the stock, impacting the price upward by buying shares. Warren Buffett has stated that he likes investing in equities in part because companies reinvest their profits in their business. A buyback doesn't do that because when you spend $5B on your own stock, you're not spending it on providing a better experience to your customers, and you're not spending it on R&D. You're just spending it on concentrating shareholder ownership and driving up the stock price. Guess who often gets paid in shares? Executives. It's common for a CEO to get a small portion of his compensation as salary and a large portion as shares and options. The point is that these companies could have reinvested that money in their business, but instead they aimed to boost share price and financial optics. That's not to say the airlines don't care about the little guy. Some shareholders are regular folks. Plus, at least Delta paid out a bonus to employees a few months ago. But there is indeed a reason to dislike large buybacks.

opportune 7y ago
Why is a buyback worse than a dividend? Both are a form of delivering ROI, it just happens that one is better for shareholders due to the tax system. In fact if airlines had actually reinvested that money, they would be even more fucked up than they are now. At least now they have free cash flow to make a temporary drop in revenue hurt less. Reinvesting money in the corporate world often involves converting cash flow into debt, which they’re probably going to have to do now to meet their existing financial obligations. Much better than if they were midway through financing some large fleet expansion and had less FCF on hand to weather the travel slowdown
- majormajor 7y ago
  I don't understand who buybacks are better for. A dividend would've returned money to all the people who held onto shares and wasn't paying attention to how much they should be selling off to capture the buyback and just had all the gains wiped out...
  - opportune 7y ago
    Absent a market selloff, they're better for shareholders for two reasons: one, it manifests earnings as capital gains/stock appreciation rather than dividends, and two, it has positive future ROI. Point 1 is not super important because of the existence of qualified dividends. Point 2 is like this: let's say I'm a company with 1000 outstanding shares valued at $100 each and want to pay a yearly dividend (for simplicity) of $5/share. All market movements notwithstanding and absent any changes, that means I'm basically giving investors a 5% yearly ROI. But, let's say I instead bought back my shares with all my earnings. The first year, I buy back 5% of the outstanding shares. Now there are 950 outstanding shares and total earnings are still $5000/year. Next year each remaining shareholder gets an extra 5% of earnings per share (this compounds). And rather than pay tax each year on dividends, shareholders defer all their taxes until they exit their position. One argument is that dividends aren't really worse in this case because investors could still choose to spend the cash on purchasing more shares, accomplishing the same thing. But the deferred taxes change the math.
  - 7y ago

oarabbus_ 7y ago

It is prudent for an individual to have a rainy day fund for emergencies. It is also prudent for a corporation to have a rainy day fund for unpredictable events like an upcoming pandemic. An individual who didn't properly save can go bankrupt in a time of emergency. Likewise, a company which didn't properly save should also go bankrupt in a time of emergency. Look at Apple or Berkshire Hathaway. Both have a massive safety net in the form of liquid cash for hard times.

tomatocracy 7y ago
Businesses typically carry insurance (including business interruption insurance) and unused credit lines for this type of risk, not cash. Governments typically then provide some form of insurance for risks which are commercially uninsurable like war. I think Covid probably falls into that category fairly comfortably.

sjg007 7y ago

Wells Fargo literally stole their customers money.