5 ms·

"This improves the stock value for investors" Not really. A stock buyback is essentially the same thing as the company parking the money in the bank. It's almo

by jariel 7y ago

"This improves the stock value for investors" Not really. A stock buyback is essentially the same thing as the company parking the money in the bank. It's almost the same financial thing. Shareholders 'own' the $1 in the company's bank, or they 'own' it if it's paid back to shareholders. Stock buybacks or dividend payouts should basically have a null effect on the value of the company. They are kind of 'neutral' exercises. Edit: 'null value' obviously taking into consideration fewer shares, i.e. if the company buys shares from the market at market prices, it shouldn't directly affect the value of the other shares it's financially neutral.

kdamica 7y ago
A buyback has the added effect of reducing the number of shares, increasing their Earnings per Share (EPS). Since EPS is a widely-used metric for valuing a company, it's not quite the same as a dividend.
- jariel 7y ago
  In a 'perfect' buyback which was spread across all investors equally -> it's neutral. (Percentage ownership remains the same, cash was transferred to investors) That it won't ever exactly happen that way means some will win/lose depending on their individual situation, but it should be something approaching a wash on average. Again - stock buybacks are not 'windfalls' for investors it's just a normal part of financial operation. The question of how much cash on hand certain businesses should have to have ... is a separate issue. If the government wants to regulate this like they do banks, well, that's an idea, but I don't think it's the best one, but spurning businesses because they did a buyback last year and are otherwise operating normally is definitely not the right approach.
- smabie 7y ago
  EPS isn't used to value a company, it's used to value the price of a single share.
JaimeThompson 7y ago
If it was essentially the same as putting the money in the bank then they should be able to use that stock to keep themselves going instead of getting a bailout. But that will not work because their stocks are down so much.
throwawayjava 7y ago
Only if you assume perfect liquidity and either 1) a constant or monotonically increasing stock price or else 2) a huge cash reserve such that selling stock at basement prices or taking out highly leveraged loans is never necessary. If a company parks $1 in a treasury bond during good times, they have that $1 + approximately inflation in bad times. If a company buys back their stock at $N and then has to sell a large amount of stock at $M for M << N (or take a leveraged loan), then the company is only getting fractions on the dollar of that original $1. Unfortunately, the scenarios where huge companies really need cash now pretty well overlap with the scenarios where there are huge liquidity shocks and crashing equities prices. Such as a financial crisis or a pandemic.
- jariel 7y ago
  Of course - I'm not denying that 'stock buybacks' have a strategic impetus, of course they do. Every financial decision does. I'm saying that the popular notion of 'stock buybacks' as somehow a 'windfall' for investors is just not really true at all. The notions that some individual investors are literally selling their stock, but instead of to some other party but the company itself, is not a big deal. Stock buybacks are a rational and normal part of financial operations not some 'special win' for investors as some of the rhetoric implies.
  - iso947 7y ago
    Aren’t $1k of dividends taxed more than $1k or capital gains?
  - jessaustin 7y ago
    They aren't a "special win" in general. When they occur a month before a downturn that generates a bailout, they are.
    - jariel 7y ago
      Even a 'month before' some unforeseen event, it's not a 'special win'. It's barely a special win in any event.
clairity 7y ago
stock buybacks are rarely perfectly neutral for all shareholders. it's essentially a forced reinvestment in the same company, which is good for shareholders who believe the company is undervalued and already hold stock. dividends allow you to diversify right away, but have greater tax implications. the repurchased stock can also be held or destroyed on buyback, which affects the timing of the benefits. and lastly, buybacks are primarily useful to executives for their signaling value (e.g., luring less sophisticated investors into buying). the benefits are not uniform to every shareholder, especially through time.
- xyzzyz 7y ago
  it's essentially a forced reinvestment in the same company, which is good for shareholders who believe the company is undervalued and already hold stock. How is it a "forced reinvestment"? Buyback requires two parties to the transaction, the company is buying shares, but someone has to sell them. This can be you. It would be forced reinvestment if the company just kept cash and never returned it either through buyback or dividend, which incidentally is what most people grinding against airline stock buybacks seem to be suggesting. Really, stock buybacks and dividends are mostly equivalent, with the exception of the tax treatment, which is the whole reason why companies increasingly prefer the buyback route.
  - clairity 7y ago
    not every shareholder participates in the decision-making behind a buyback, and in some cases they can't all participate in the buyback itself (especially with majority privately-held entities).
    - xyzzyz 7y ago
      We are talking about publicly traded companies here. You can always participate in the buyback: just sell your shares, they're publicly traded, so there should be no difficulty. It doesn't matter much who's on the other side of your trade, as the arbitrageurs will ensure that the buyback is priced into the spot price.

by jariel 7y ago

kdamica 7y ago

A buyback has the added effect of reducing the number of shares, increasing their Earnings per Share (EPS). Since EPS is a widely-used metric for valuing a company, it's not quite the same as a dividend.

jariel 7y ago
In a 'perfect' buyback which was spread across all investors equally -> it's neutral. (Percentage ownership remains the same, cash was transferred to investors) That it won't ever exactly happen that way means some will win/lose depending on their individual situation, but it should be something approaching a wash on average. Again - stock buybacks are not 'windfalls' for investors it's just a normal part of financial operation. The question of how much cash on hand certain businesses should have to have ... is a separate issue. If the government wants to regulate this like they do banks, well, that's an idea, but I don't think it's the best one, but spurning businesses because they did a buyback last year and are otherwise operating normally is definitely not the right approach.
smabie 7y ago
EPS isn't used to value a company, it's used to value the price of a single share.

JaimeThompson 7y ago

If it was essentially the same as putting the money in the bank then they should be able to use that stock to keep themselves going instead of getting a bailout. But that will not work because their stocks are down so much.

throwawayjava 7y ago

Only if you assume perfect liquidity and either 1) a constant or monotonically increasing stock price or else 2) a huge cash reserve such that selling stock at basement prices or taking out highly leveraged loans is never necessary. If a company parks $1 in a treasury bond during good times, they have that $1 + approximately inflation in bad times. If a company buys back their stock at $N and then has to sell a large amount of stock at $M for M << N (or take a leveraged loan), then the company is only getting fractions on the dollar of that original $1. Unfortunately, the scenarios where huge companies really need cash now pretty well overlap with the scenarios where there are huge liquidity shocks and crashing equities prices. Such as a financial crisis or a pandemic.

jariel 7y ago
Of course - I'm not denying that 'stock buybacks' have a strategic impetus, of course they do. Every financial decision does. I'm saying that the popular notion of 'stock buybacks' as somehow a 'windfall' for investors is just not really true at all. The notions that some individual investors are literally selling their stock, but instead of to some other party but the company itself, is not a big deal. Stock buybacks are a rational and normal part of financial operations not some 'special win' for investors as some of the rhetoric implies.
- iso947 7y ago
  Aren’t $1k of dividends taxed more than $1k or capital gains?
- jessaustin 7y ago
  They aren't a "special win" in general. When they occur a month before a downturn that generates a bailout, they are.
  - jariel 7y ago
    Even a 'month before' some unforeseen event, it's not a 'special win'. It's barely a special win in any event.

clairity 7y ago

stock buybacks are rarely perfectly neutral for all shareholders. it's essentially a forced reinvestment in the same company, which is good for shareholders who believe the company is undervalued and already hold stock. dividends allow you to diversify right away, but have greater tax implications. the repurchased stock can also be held or destroyed on buyback, which affects the timing of the benefits. and lastly, buybacks are primarily useful to executives for their signaling value (e.g., luring less sophisticated investors into buying). the benefits are not uniform to every shareholder, especially through time.

xyzzyz 7y ago
it's essentially a forced reinvestment in the same company, which is good for shareholders who believe the company is undervalued and already hold stock. How is it a "forced reinvestment"? Buyback requires two parties to the transaction, the company is buying shares, but someone has to sell them. This can be you. It would be forced reinvestment if the company just kept cash and never returned it either through buyback or dividend, which incidentally is what most people grinding against airline stock buybacks seem to be suggesting. Really, stock buybacks and dividends are mostly equivalent, with the exception of the tax treatment, which is the whole reason why companies increasingly prefer the buyback route.
- clairity 7y ago
  not every shareholder participates in the decision-making behind a buyback, and in some cases they can't all participate in the buyback itself (especially with majority privately-held entities).
  - xyzzyz 7y ago
    We are talking about publicly traded companies here. You can always participate in the buyback: just sell your shares, they're publicly traded, so there should be no difficulty. It doesn't matter much who's on the other side of your trade, as the arbitrageurs will ensure that the buyback is priced into the spot price.