6 ms·

is there an explanation for stock buybacks that isn't ' evil stockholders'? edit: this was an actual question not a rhetorical one. curious why the downvotes?

sdenton4 7y ago
Evil CEOs?
deleted 7y ago
[deleted]
SmokyD 7y ago
Evil senior mgmt.
bigmanwalter 7y ago
Executive compensation is tied to stock prices. By buying back stock, they are increasing demand and decreasing available supply of their stock. This results in the stock price rising, along with executive compensation going up as well. By allowing stock buybacks, we are directly incentivizing this perverse behaviour.
brockwhittaker 7y ago
Sure — what are your other options if you have lots of cash? 1. Keep it in cash and get sub-inflationary levels on it, and perform poorly due to your lack of leverage. 2. Invest it in other market securities, effectively running some hedge fund. Not a great idea, distracting from your core biz, and shareholders may not appreciate the exposure to outside risk. 3. Buy back your own stock, which gives back to shareholders. I'm not saying it was the best thing companies could have done with their money, but there aren't a ton of amazing ways to deploy billions of dollars in cash unless you're expanding operations outside your area of core competency. I think that lots of people here are creating a lot of revisionist history right now. Almost nobody had any problem with share buybacks for the past five to ten years. The biggest note was that it would increase stock price over time due to the lower availability of shares and higher earnings per share, but hardly the critique most people have these days.
- markharper 7y ago
  There's also option 4: - Increase worker pay and benefits
  - ff317 7y ago
    And Option 5 - Invest in research and development: better engines? Lighter materials? Better interior arrangements so that flyers can feel comfortable while you still turn a profit? I get that airlines don't directly create these things, but they could throw their excess cash into R&D contracts for manufacturers...
  - kube-system 7y ago
    You can really only increase base compensation when you have the cash and you expect to have that cash down the road as well. Employees are not happy with incomes that are as cyclical as business income is. A bonus could be a good option.
- ceejayoz 7y ago
  "Keep it in cash" isn't looking like such a bad idea right now.
  - seiferteric 7y ago
    Having just finished "Black Swan" I am convinced companies need to start thinking that these "once in a lifetime" events are actually pretty common. Having cash on hand to weather a storm should be mandated by shareholders.
    - ff317 7y ago
      Not to mention the airline industry in particular routinely has adverse events that affect it. Just to run down a list of random things airline execs should be considering as "normal" risks they need to plan some buffer for, all of which have caused significantly impactful events on a regular basis for the industry, even to the point of causing some airlines to go bankrupt and/or be bought out by competitors over time: * Government regulation impacts * Union strikes * Aircraft groundings due to faulty (or less-long-lived than anticipated) parts * Ticket search companies undercutting their profits * Oil (and thus fuel, one of their main costs) price surges * Wars and conflicts that decrease travel demand or cause large unsafe-to-fly zones over the world. * Volcano eruptions that fill regions of the globe's sky with engine-killing volcanic dust. * Terrorism (the reduction in passenger demand in the wake, groundings while implementing new safeguards, related lawsuits in the aftermath, etc) * Now-obviously: Pandemics (but even smaller epidemics have shown effects several times in the past couple of decades!)
johnbrodie 7y ago
The most convincing argument I've heard is centered around just how much cash flow and expenses goes through the airlines on a daily basis, meaning they'd need some extraordinary amount of cash in the bank to weather something unprecedented like this. If they _did_ have that much cash, it'd be bad for the economy since that capital is effectively "locked up". Instead, give the proceeds back to the shareholders that will likely do something else with it - invest in new businesses, buy more goods and services, etc. I don't have any links handy, but Ross Perot railed against companies hoarding cash for decades.
- blackguardx 7y ago
  Cash in a bank isn't "locked up." The bank uses it to make loans. In a sense, it expands the supply of money because a bank isn't required to have 100% cash reserves. So $50 billion in bank accounts generates more than $50 billion in loans.
- dlp211 7y ago
  Holding cash does not lock it up. Banks make deposited funds available as capital for investment. This can lead to a liquidity problem during a crunch, but that's literally why we have a central bank. There are plenty of companies that have large cash reserves. Stock buybacks should be made illegal again except as market operations to provide compensation. You can return to shareholders through dividends.
dustingetz 7y ago
interest rates have been so low that biggest players have infinity money and nowhere to invest it ... which also explains venture capital activity of the last decade
kcorbitt 7y ago
The reason most people invest money in public companies is because they expect to get money back at some point. Otherwise, why invest at all? There are two primary ways that companies can return money to shareholders: dividends and stock buybacks. Financially, the two are exactly equivalent. Tax-wise, they're mostly equivalent (there are a few exceptions around the edges). When a company issues a dividend, all the stockholders end up with a bit less equity and a bit more cash. Many stockholders would rather decide whether they value the cash or the equity more, which is why buybacks are attractive. In a buyback, you get to decide whether you value equity, in which case you keep your stock, or cash, in which case you can sell it back.
- ghaff 7y ago
  I mostly agree. Although dividends arguably are a bit more reliable than stock appreciation because of buy backs. However, the basic point is entirely correct. If you think stock buy backs are evil then you must logically agree that dividends are also evil. Which doesn't really make any sense given that, under classic finance theory, the share price is the discounted present value of dividends.
liquidise 7y ago
At a meta level i am shocked this is getting downvotes. It is a legitimate question that pokes around what could be considered generally accepted wisdom. It concerns me that HN is starting to frown upon this sort of thing.
rhino369 7y ago
It's how companies give profits back to their shareholders. It's just tax advantaged compared to dividends.
sudosteph 7y ago
Sure. When you combine hyper-competitive capitalism with a market that lacks regulation - taking steps that ensure you are privatizing profits and socializing losses is just good for business. Arguably, some of these corporations believe it is also necessary to stay in business. Airlines exist in a space with ample competition, limited differentiation, and high price-sensitivity for customers. When that happens, they live or die on number of passengers and valuation compared to competitors. It's hard to increase demand for flights past what is already available. So they pump their numbers for the short term because that's what everyone else is doing, and because the cost of saving money for a rainy day means spooking investors or ceding more passengers to a competitor.
bb2018 7y ago
Buybacks serve the same role as dividends. A company takes money they have no need for and instead of giving it to investors in the form of dividends (which is taxed) they buyback stock. As a shareholder you don't end up with cash but the value of the stock increases by the same amount but there is no tax. I own Google stock. They don't have a dividend at all and buyback massive amounts of stock. It is just efficient. If the government taxed buybacks then they would likely start giving a dividend, as people would prefer deciding what to do with the money. One additional issue is that company's have chosen often times to do stock buybacks even when taking on debt. This is because they can borrow money cheaply and believe the buybacks are good for the value of the shareholders overall. This isn't necessarily a bad thing for anyone - but in times like this it puts a real stress on them that may even bankrupt them. I think it is a bit of question of risk. In theory I'd like the company's I own to be prepared for an emergency, but I' also be annoyed if I invested in a company and they just let the money sit in a bank account for years instead of finding a way to return profits to the shareholders immediately.
cactus2093 7y ago
They have nothing better to do with that money.
maverick2007 7y ago
Correct me if I'm wrong but isn't it also a bet on the future in the sense of "I think our stock is undervalued right now and that it will go up in the future, so I should buy it cheap right now and then I can reissue the stock and raise a significantly more amount of money"? At least that's how I've thought about it
amylene 7y ago
Matt Levine has a good take from a few weeks ago. Basically he argues the buybacks were the only sensible play, if you were the airlines.
tathougies 7y ago
It's the exact same thing as dividends, with slightly better tax implications (you can choose when to receive them, rather than be taxed whenever you do receive them).
btilly 7y ago
Investors invest in companies because they expect to receive money back in the future. Therefore investment won't happen unless companies have ways to pay back investors. When a company has extra money, their options are to keep a rainy day fund, invest in growth, pay dividends or do a stock buyback. Rainy day funds are generally not big enough for extreme events. Investment opportunities only sometimes exist. Dividends are received as ordinary income by all investors, whether they wanted it or not. Stock buybacks as capital gains only by the investors who wanted it. Incidentally, contrary to most reporting on the topic, a stock buyback should not appreciably change the price of the company. Here is why not. Suppose that a company is worth $50 billion today, has $10 billion in cash reserves, and has a billion shares outstanding. It's stock price is $50/share. Now we do a $5 billion stock buyback. The company loses $5 billion in value (the amount of the buyback) and so is now worth $45 billion. For that $5 billion it purchases 100 million shares and destroys them. You now have a $45 billion dollar company with 900 million outstanding shares, and the stock price should still be $45 billion. You can enter different numbers, but the same result holds. Performing the stock buyback reduces the value of the company, and destroys shares in an equal proportion. Therefore the company price should be approximately the same. The theory here ignores higher order complications. For example dividends require more paperwork. But stock buybacks increase the volatility of the stock price, which increases the value of options. (Particularly long-term calls that are mostly held by people in the company.) The increased value of options comes out of the stock price. But still it mostly comes down to a choice of how to receive money.
asdfadsfgfdda 7y ago
It doesn't seem significantly different from issuing a dividend, both return money to investors. But a buyback allows investors to defer taxes.
jldugger 7y ago
Stock buybacks are touted as a tax efficient means of providing returns to shareholders as capital gains. The other option being a dividend. If you don't think dividends are evil then you shouldn't have too much problem with buybacks. The argument against buybacks are that they aren't very efficient -- CFOs tend to buy back when the stock price is high, and that it rewards people for not holding shares.

sdenton4 7y ago

Evil CEOs?

deleted 7y ago

[deleted]

SmokyD 7y ago

Evil senior mgmt.

bigmanwalter 7y ago

Executive compensation is tied to stock prices. By buying back stock, they are increasing demand and decreasing available supply of their stock. This results in the stock price rising, along with executive compensation going up as well. By allowing stock buybacks, we are directly incentivizing this perverse behaviour.

brockwhittaker 7y ago

Sure — what are your other options if you have lots of cash? 1. Keep it in cash and get sub-inflationary levels on it, and perform poorly due to your lack of leverage. 2. Invest it in other market securities, effectively running some hedge fund. Not a great idea, distracting from your core biz, and shareholders may not appreciate the exposure to outside risk. 3. Buy back your own stock, which gives back to shareholders. I'm not saying it was the best thing companies could have done with their money, but there aren't a ton of amazing ways to deploy billions of dollars in cash unless you're expanding operations outside your area of core competency. I think that lots of people here are creating a lot of revisionist history right now. Almost nobody had any problem with share buybacks for the past five to ten years. The biggest note was that it would increase stock price over time due to the lower availability of shares and higher earnings per share, but hardly the critique most people have these days.

markharper 7y ago
There's also option 4: - Increase worker pay and benefits
- ff317 7y ago
  And Option 5 - Invest in research and development: better engines? Lighter materials? Better interior arrangements so that flyers can feel comfortable while you still turn a profit? I get that airlines don't directly create these things, but they could throw their excess cash into R&D contracts for manufacturers...
- kube-system 7y ago
  You can really only increase base compensation when you have the cash and you expect to have that cash down the road as well. Employees are not happy with incomes that are as cyclical as business income is. A bonus could be a good option.
ceejayoz 7y ago
"Keep it in cash" isn't looking like such a bad idea right now.
- seiferteric 7y ago
  Having just finished "Black Swan" I am convinced companies need to start thinking that these "once in a lifetime" events are actually pretty common. Having cash on hand to weather a storm should be mandated by shareholders.
  - ff317 7y ago
    Not to mention the airline industry in particular routinely has adverse events that affect it. Just to run down a list of random things airline execs should be considering as "normal" risks they need to plan some buffer for, all of which have caused significantly impactful events on a regular basis for the industry, even to the point of causing some airlines to go bankrupt and/or be bought out by competitors over time: * Government regulation impacts * Union strikes * Aircraft groundings due to faulty (or less-long-lived than anticipated) parts * Ticket search companies undercutting their profits * Oil (and thus fuel, one of their main costs) price surges * Wars and conflicts that decrease travel demand or cause large unsafe-to-fly zones over the world. * Volcano eruptions that fill regions of the globe's sky with engine-killing volcanic dust. * Terrorism (the reduction in passenger demand in the wake, groundings while implementing new safeguards, related lawsuits in the aftermath, etc) * Now-obviously: Pandemics (but even smaller epidemics have shown effects several times in the past couple of decades!)

johnbrodie 7y ago

The most convincing argument I've heard is centered around just how much cash flow and expenses goes through the airlines on a daily basis, meaning they'd need some extraordinary amount of cash in the bank to weather something unprecedented like this. If they _did_ have that much cash, it'd be bad for the economy since that capital is effectively "locked up". Instead, give the proceeds back to the shareholders that will likely do something else with it - invest in new businesses, buy more goods and services, etc. I don't have any links handy, but Ross Perot railed against companies hoarding cash for decades.

blackguardx 7y ago
Cash in a bank isn't "locked up." The bank uses it to make loans. In a sense, it expands the supply of money because a bank isn't required to have 100% cash reserves. So $50 billion in bank accounts generates more than $50 billion in loans.
dlp211 7y ago
Holding cash does not lock it up. Banks make deposited funds available as capital for investment. This can lead to a liquidity problem during a crunch, but that's literally why we have a central bank. There are plenty of companies that have large cash reserves. Stock buybacks should be made illegal again except as market operations to provide compensation. You can return to shareholders through dividends.

dustingetz 7y ago

interest rates have been so low that biggest players have infinity money and nowhere to invest it ... which also explains venture capital activity of the last decade

kcorbitt 7y ago

The reason most people invest money in public companies is because they expect to get money back at some point. Otherwise, why invest at all? There are two primary ways that companies can return money to shareholders: dividends and stock buybacks. Financially, the two are exactly equivalent. Tax-wise, they're mostly equivalent (there are a few exceptions around the edges). When a company issues a dividend, all the stockholders end up with a bit less equity and a bit more cash. Many stockholders would rather decide whether they value the cash or the equity more, which is why buybacks are attractive. In a buyback, you get to decide whether you value equity, in which case you keep your stock, or cash, in which case you can sell it back.

ghaff 7y ago
I mostly agree. Although dividends arguably are a bit more reliable than stock appreciation because of buy backs. However, the basic point is entirely correct. If you think stock buy backs are evil then you must logically agree that dividends are also evil. Which doesn't really make any sense given that, under classic finance theory, the share price is the discounted present value of dividends.

liquidise 7y ago

At a meta level i am shocked this is getting downvotes. It is a legitimate question that pokes around what could be considered generally accepted wisdom. It concerns me that HN is starting to frown upon this sort of thing.

rhino369 7y ago

It's how companies give profits back to their shareholders. It's just tax advantaged compared to dividends.

sudosteph 7y ago

Sure. When you combine hyper-competitive capitalism with a market that lacks regulation - taking steps that ensure you are privatizing profits and socializing losses is just good for business. Arguably, some of these corporations believe it is also necessary to stay in business. Airlines exist in a space with ample competition, limited differentiation, and high price-sensitivity for customers. When that happens, they live or die on number of passengers and valuation compared to competitors. It's hard to increase demand for flights past what is already available. So they pump their numbers for the short term because that's what everyone else is doing, and because the cost of saving money for a rainy day means spooking investors or ceding more passengers to a competitor.

bb2018 7y ago

Buybacks serve the same role as dividends. A company takes money they have no need for and instead of giving it to investors in the form of dividends (which is taxed) they buyback stock. As a shareholder you don't end up with cash but the value of the stock increases by the same amount but there is no tax. I own Google stock. They don't have a dividend at all and buyback massive amounts of stock. It is just efficient. If the government taxed buybacks then they would likely start giving a dividend, as people would prefer deciding what to do with the money. One additional issue is that company's have chosen often times to do stock buybacks even when taking on debt. This is because they can borrow money cheaply and believe the buybacks are good for the value of the shareholders overall. This isn't necessarily a bad thing for anyone - but in times like this it puts a real stress on them that may even bankrupt them. I think it is a bit of question of risk. In theory I'd like the company's I own to be prepared for an emergency, but I' also be annoyed if I invested in a company and they just let the money sit in a bank account for years instead of finding a way to return profits to the shareholders immediately.

cactus2093 7y ago

They have nothing better to do with that money.

maverick2007 7y ago

Correct me if I'm wrong but isn't it also a bet on the future in the sense of "I think our stock is undervalued right now and that it will go up in the future, so I should buy it cheap right now and then I can reissue the stock and raise a significantly more amount of money"? At least that's how I've thought about it

amylene 7y ago

Matt Levine has a good take from a few weeks ago. Basically he argues the buybacks were the only sensible play, if you were the airlines.

tathougies 7y ago

It's the exact same thing as dividends, with slightly better tax implications (you can choose when to receive them, rather than be taxed whenever you do receive them).

btilly 7y ago

Investors invest in companies because they expect to receive money back in the future. Therefore investment won't happen unless companies have ways to pay back investors. When a company has extra money, their options are to keep a rainy day fund, invest in growth, pay dividends or do a stock buyback. Rainy day funds are generally not big enough for extreme events. Investment opportunities only sometimes exist. Dividends are received as ordinary income by all investors, whether they wanted it or not. Stock buybacks as capital gains only by the investors who wanted it. Incidentally, contrary to most reporting on the topic, a stock buyback should not appreciably change the price of the company. Here is why not. Suppose that a company is worth $50 billion today, has $10 billion in cash reserves, and has a billion shares outstanding. It's stock price is $50/share. Now we do a $5 billion stock buyback. The company loses $5 billion in value (the amount of the buyback) and so is now worth $45 billion. For that $5 billion it purchases 100 million shares and destroys them. You now have a $45 billion dollar company with 900 million outstanding shares, and the stock price should still be $45 billion. You can enter different numbers, but the same result holds. Performing the stock buyback reduces the value of the company, and destroys shares in an equal proportion. Therefore the company price should be approximately the same. The theory here ignores higher order complications. For example dividends require more paperwork. But stock buybacks increase the volatility of the stock price, which increases the value of options. (Particularly long-term calls that are mostly held by people in the company.) The increased value of options comes out of the stock price. But still it mostly comes down to a choice of how to receive money.

asdfadsfgfdda 7y ago

It doesn't seem significantly different from issuing a dividend, both return money to investors. But a buyback allows investors to defer taxes.

jldugger 7y ago

Stock buybacks are touted as a tax efficient means of providing returns to shareholders as capital gains. The other option being a dividend. If you don't think dividends are evil then you shouldn't have too much problem with buybacks. The argument against buybacks are that they aren't very efficient -- CFOs tend to buy back when the stock price is high, and that it rewards people for not holding shares.