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Share buybacks increase the company share price because they decrease the pool of available shares. Corporate Executives often derive a significant percentage

Share buybacks increase the company share price because they decrease the pool of available shares. Corporate Executives often derive a significant percentage of their total bonus earnings when the share price goes up, so they have a huge incentive to spend the money they repatriated on share buybacks to line their own pockets via large bonuses.

roenxi 5y ago
Share buybacks also decrease the company share price because the company has less money after the buyback.
- chii 5y ago
  which is why share buy backs and dividend payments are the exact same thing (except for the tax implications).
- quickthrowman 5y ago
  > Share buybacks also decrease the company share price Share buybacks reduce shareholders’ equity and the book value of a company since cash is spent but no asset is gained to offset it. It also raises EPS, since the earnings don’t change but the number of shares (denominator) is lower. This doesn’t necessarily translate into a lower price per share, the supply of shares is reduced and the company generally buys their shares back on the open market, and the volume of their buying is substantial.
bitshiftfaced 5y ago
Isn't there a very simple fix for that? Just tie the bonus to market cap.
- adventured 5y ago
  Tie it to a combination of things, including sales and operating income growth, not just market cap (which can be artificially juiced by macro market circumstances floating the boat of mediocre companies).
- tata71 5y ago
  "Just get Congress to pass term limits!"
gruez 5y ago
>Corporate Executives often derive a significant percentage of their total bonus earnings when the share price goes up, so they have a huge incentive to Doesn't that apply to any sort of action that returns earnings to shareholders? eg. if they paid out dividends instead of doing buybacks, executives would also benefit because they're shareholders.
- deleted 5y ago
  [deleted]
- klipt 5y ago
  Depends how is structured? Options for example don't earn dividends, so if you have options, you benefit from buybacks but not from dividends.
seibelj 5y ago
This is exactly the same as a dividend, but the benefit is shareholders can choose when to recognize profits rather than being forced to when given the dividend. The double-taxation of corporate taxes and dividend income has made this the far better choice. One gives money to shareholders directly, the other indirectly by boosting the share price. There is nothing nefarious about this. If a company has free cash flow and can’t find a way to reinvest to grow faster than the standard rate of return, then it should be given back to shareholders to be reinvested in the economy more productively.
- deleted 5y ago
  [deleted]
csomar 5y ago
Another perspective: Share buyback moves the decision of paying taxes from the company to the investor (plus avoid double taxation). With dividends, the investor will always get taxed. With share buyback, the investor can decide if he wants to keep his shares and not get taxed; or sell (with a profitable appreciation) and pay capital gain taxes.
- Glyptodon 5y ago
  While it's true that share buybacks are a nice way to return value to shareholders compared to dividends from a tax perspective they also have little to do with a business's growth or improvements in profitability. On some level I'm surprised bonuses are tied to share price and not market cap.
  - throw0101a 5y ago
    > While it's true that share buybacks are a nice way to return value to shareholders compared to dividends from a tax perspective they also have little to do with a business's growth or improvements in profitability. Dividends also "also have little to do with a business's growth or improvements in profitability." At the end of the day, with either 'system', company management has decided that they cannot find internal uses for cash that give decent rates of return, and have decided to return the cash to shareholders. But it seems to me only one system is 'vilified'. There's a lot of magical thinking that goes on around dividends: * https://canadiancouchpotato.com/2011/01/18/debunking-dividend-myths-part-1/ https://canadiancouchpotato.com/2011/01/18/debunking-dividen...
  - webinvest 5y ago
    The purpose of public stock is pay out profit to shareholders. Buybacks are a method of achieving this. Infinite growth is a joke.
refurb 5y ago
Have you seen executive bonus structures? I'm going to assume the compensation committee isn't stupid and has more than one metric and a metric that can't be gamed quite so easily.

roenxi 5y ago

Share buybacks also decrease the company share price because the company has less money after the buyback.

chii 5y ago
which is why share buy backs and dividend payments are the exact same thing (except for the tax implications).
quickthrowman 5y ago
> Share buybacks also decrease the company share price Share buybacks reduce shareholders’ equity and the book value of a company since cash is spent but no asset is gained to offset it. It also raises EPS, since the earnings don’t change but the number of shares (denominator) is lower. This doesn’t necessarily translate into a lower price per share, the supply of shares is reduced and the company generally buys their shares back on the open market, and the volume of their buying is substantial.

bitshiftfaced 5y ago

Isn't there a very simple fix for that? Just tie the bonus to market cap.

adventured 5y ago
Tie it to a combination of things, including sales and operating income growth, not just market cap (which can be artificially juiced by macro market circumstances floating the boat of mediocre companies).
tata71 5y ago
"Just get Congress to pass term limits!"

gruez 5y ago

>Corporate Executives often derive a significant percentage of their total bonus earnings when the share price goes up, so they have a huge incentive to Doesn't that apply to any sort of action that returns earnings to shareholders? eg. if they paid out dividends instead of doing buybacks, executives would also benefit because they're shareholders.

deleted 5y ago
[deleted]
klipt 5y ago
Depends how is structured? Options for example don't earn dividends, so if you have options, you benefit from buybacks but not from dividends.

seibelj 5y ago

This is exactly the same as a dividend, but the benefit is shareholders can choose when to recognize profits rather than being forced to when given the dividend. The double-taxation of corporate taxes and dividend income has made this the far better choice. One gives money to shareholders directly, the other indirectly by boosting the share price. There is nothing nefarious about this. If a company has free cash flow and can’t find a way to reinvest to grow faster than the standard rate of return, then it should be given back to shareholders to be reinvested in the economy more productively.

deleted 5y ago
[deleted]

csomar 5y ago

Another perspective: Share buyback moves the decision of paying taxes from the company to the investor (plus avoid double taxation). With dividends, the investor will always get taxed. With share buyback, the investor can decide if he wants to keep his shares and not get taxed; or sell (with a profitable appreciation) and pay capital gain taxes.

Glyptodon 5y ago
While it's true that share buybacks are a nice way to return value to shareholders compared to dividends from a tax perspective they also have little to do with a business's growth or improvements in profitability. On some level I'm surprised bonuses are tied to share price and not market cap.
- throw0101a 5y ago
  > While it's true that share buybacks are a nice way to return value to shareholders compared to dividends from a tax perspective they also have little to do with a business's growth or improvements in profitability. Dividends also "also have little to do with a business's growth or improvements in profitability." At the end of the day, with either 'system', company management has decided that they cannot find internal uses for cash that give decent rates of return, and have decided to return the cash to shareholders. But it seems to me only one system is 'vilified'. There's a lot of magical thinking that goes on around dividends: * https://canadiancouchpotato.com/2011/01/18/debunking-dividend-myths-part-1/ https://canadiancouchpotato.com/2011/01/18/debunking-dividen...
- webinvest 5y ago
  The purpose of public stock is pay out profit to shareholders. Buybacks are a method of achieving this. Infinite growth is a joke.

refurb 5y ago

Have you seen executive bonus structures? I'm going to assume the compensation committee isn't stupid and has more than one metric and a metric that can't be gamed quite so easily.