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This is kind of funny because the SEC is basically saying Nvidia held their share price artificially high by doing this, but Nvidia also bought back billions of

This is kind of funny because the SEC is basically saying Nvidia held their share price artificially high by doing this, but Nvidia also bought back billions of their own shares, by this logic they were overpaying.

kgwgk 4y ago
Securities fraud squared!
spupe 4y ago
Stock buybacks also increase stock prices, and a lot of companies are doing it lately.
projektfu 4y ago
That is a separate issue. Stock buybacks can be done to reward insiders. A dividend would be distributed equally and has the effect of directly cutting the share price. A buyback distributes cash unequally and puts upward pressure on share prices. Only insiders know for sure if the action is being done to buy back shares on sale or to distribute profits.
- rileymat2 4y ago
  > and puts upward pressure on share prices I am curious if there is evidence for this. I don’t see how distributing capital that could be used for growth pressures share prices up. People not selling back the shares are trading the current profits for a bigger share of future profits, which may never exist. So I am not sure on a risk adjusted discounted cash flow model there is any justification for increased price pressure. I always presumed that the main benefit of buybacks v dividends was being able to time capital gains for tax purposes. But this is all speculation too, no evidence behind my post.
  - projektfu 4y ago
    There are two reasons in my mind why buybacks are different. The first is that buybacks are reported after the fact and do not directly alter the share price, rather they increase competition for the available shares and reduce dilution. Dividends immediately reduce the share price by the dividend although the price often moves up a little before the ex-dividend rate. The other reason is that there are very few stocks that are being valued by the market on any sort of model. That goes for cash flow models as well as other things like PE ratios, etc. We are in the tinkerbell regime, prices went up over the last 10 years because people are clapping louder. Obviously that is a controversial take but I am not predicting a reversal, just saying that the market overall is in a weird place.
    - kgwgk 4y ago
      > buybacks are reported after the fact and do not directly alter the share price But the fact itself adds demand for the shares on the market, affecting the share price.
      - cormacrelf 4y ago
        There's also an open market buyback. And multiple ways of doing it off the open market, often known as a tender offer for a popular method where you get shareholders to bid on the lowest price they would accept within a range of premium buyback prices. Off the market, an offer does become public immediately, that is a necessary component of doing it at all. The sales do not. Directly is the wrong word, there's no more direct way to affect price than a bid/ask/sale of a share. The key is that the information about how much of the stock will actually get bought at what price is delayed on its way to becoming a price signal in the market. Here's an old-ish but good paper about it, showing how this delay can be exploited by those with inside information. Not a loophole but rather another thing to watch out for. https://chicagounbound.uchicago.edu/cgi/viewcontent.cgi?article=5061&context=uclrev https://chicagounbound.uchicago.edu/cgi/viewcontent.cgi?arti...
  - JamesBarney 4y ago
    > I am curious if there is evidence for this. I don’t see how distributing capital that could be used for growth pressures share prices up. Say I have a company worth a $1,000,000 dollars that has a 1,000 shares each worth $1,000. Company comes into a giant one off windfall. They use that windfall to buyback half the shares. There are now there are only 500 shares that own a $1,000,000 dollar company so each share is worth $2,000. Or put another way .2% of future profits is worth more than .1% of future profits. > I always presumed that the main benefit of buybacks v dividends was being able to time capital gains for tax purposes. It's not about timing, it's simpler. Buybacks are taxed as capital gains, and dividends as income.
    - rileymat2 4y ago
      This is not true, qualified dividends are taxed at the capital gains rate. Most are qualified. Also, with the windfall the $1,000,000 company is no longer worth that much, it is worth $1,000,000 + the windfall, so you will be buying back at a much higher rate.
      - JamesBarney 4y ago
        After the company spends the windfall it's only worth a million afterwards. But you're right about qualified dividends. I had no idea qualified dividends were taxed at the same rate as capital gains. I'd always hear that was why companies do stock buybacks. Thanks for teaching me something new. You're right it's about allowing investors to time their taxable events.
        rileymat2 4y ago
        > After the company spends the windfall it's only worth a million afterwards. This is true. But look at a simple example, your example. Company Worth $1,000,000. 1,000 shares, each worth $1,000. Windfall Event: They get $1,000,000 of unexpected income. Now the company was whatever it was before + $1,000,000. Naturally, that means the company is worth $2,000,000. So the stock price is $2,000. Well, we buy back half the shares, but it is 500 shares at $2,000 a share. This costs $1,000,000. Now each share is worth $1,000 because the company has spent half its capital.
- Msw242 4y ago
  A buyback increases EPS and makes the shares worth more. Same pie, fewer slices. It is just a more tax efficient way to distribute earnings.
  - disgruntledphd2 4y ago
    Buybacks should be banned. It's bad for society to have companies spend money on their own shares, and dividends have the appealing property that they allow a holder to both continue to hold, and bank some gains for further investments.
    - JamesBarney 4y ago
      Most holders own enough stock that if they wanted to both bank some gain and hold they could sell some stock and hold on to some other stock. I think we should get rid of the tax advantage for capital gains though, the mechanism through which a company distributes capital shouldn't determine tax rate. Also I think dividends make it psychologically easier for people to live off the interest.
      - Msw242 4y ago
        The reason that cap gains are taxed differently is because of inflation. If you have 10000 in stock, and there's 20% inflation and the price of your stock goes up to 12000, you haven't made any real gains (no added purchasing power) but you have accrued 2000 in taxable gains. Instead of adjusting returns for inflation, we just reduced the marginal tax rate for capital gains.
- 99_00 4y ago
  Stock buy backs and dividends benefit or harm all shareholders in proportion to how much stock they own regardless of being an insider or not. Unless the insiders act illegally. If an insider wants to act illegally they can do so in any number of ways other than knowing that a buy back is coming.
Slartie 4y ago
The most successful fraudsters eventually start to fully believe their own fraudulent story. This of course entails to do things that make sense in the fraudulent narrative, but are actually disadvantageous when judging them from a viewpoint outside of the fraud.
Shadonototra 4y ago
You think wrong, if they commit, it's to push their agenda even further, they knew what they were doing, maybe they did in preparation for such charges
indemnity 4y ago
Buybacks increase prices, a large part of compensation is linked to share price, executives don’t care if the company is overpaying, they see more in their pocket.

kgwgk 4y ago

Securities fraud squared!

spupe 4y ago

Stock buybacks also increase stock prices, and a lot of companies are doing it lately.

projektfu 4y ago

That is a separate issue. Stock buybacks can be done to reward insiders. A dividend would be distributed equally and has the effect of directly cutting the share price. A buyback distributes cash unequally and puts upward pressure on share prices. Only insiders know for sure if the action is being done to buy back shares on sale or to distribute profits.

rileymat2 4y ago
> and puts upward pressure on share prices I am curious if there is evidence for this. I don’t see how distributing capital that could be used for growth pressures share prices up. People not selling back the shares are trading the current profits for a bigger share of future profits, which may never exist. So I am not sure on a risk adjusted discounted cash flow model there is any justification for increased price pressure. I always presumed that the main benefit of buybacks v dividends was being able to time capital gains for tax purposes. But this is all speculation too, no evidence behind my post.
- projektfu 4y ago
  There are two reasons in my mind why buybacks are different. The first is that buybacks are reported after the fact and do not directly alter the share price, rather they increase competition for the available shares and reduce dilution. Dividends immediately reduce the share price by the dividend although the price often moves up a little before the ex-dividend rate. The other reason is that there are very few stocks that are being valued by the market on any sort of model. That goes for cash flow models as well as other things like PE ratios, etc. We are in the tinkerbell regime, prices went up over the last 10 years because people are clapping louder. Obviously that is a controversial take but I am not predicting a reversal, just saying that the market overall is in a weird place.
  - kgwgk 4y ago
    > buybacks are reported after the fact and do not directly alter the share price But the fact itself adds demand for the shares on the market, affecting the share price.
    - cormacrelf 4y ago
      There's also an open market buyback. And multiple ways of doing it off the open market, often known as a tender offer for a popular method where you get shareholders to bid on the lowest price they would accept within a range of premium buyback prices. Off the market, an offer does become public immediately, that is a necessary component of doing it at all. The sales do not. Directly is the wrong word, there's no more direct way to affect price than a bid/ask/sale of a share. The key is that the information about how much of the stock will actually get bought at what price is delayed on its way to becoming a price signal in the market. Here's an old-ish but good paper about it, showing how this delay can be exploited by those with inside information. Not a loophole but rather another thing to watch out for. https://chicagounbound.uchicago.edu/cgi/viewcontent.cgi?article=5061&context=uclrev https://chicagounbound.uchicago.edu/cgi/viewcontent.cgi?arti...
- JamesBarney 4y ago
  > I am curious if there is evidence for this. I don’t see how distributing capital that could be used for growth pressures share prices up. Say I have a company worth a $1,000,000 dollars that has a 1,000 shares each worth $1,000. Company comes into a giant one off windfall. They use that windfall to buyback half the shares. There are now there are only 500 shares that own a $1,000,000 dollar company so each share is worth $2,000. Or put another way .2% of future profits is worth more than .1% of future profits. > I always presumed that the main benefit of buybacks v dividends was being able to time capital gains for tax purposes. It's not about timing, it's simpler. Buybacks are taxed as capital gains, and dividends as income.
  - rileymat2 4y ago
    This is not true, qualified dividends are taxed at the capital gains rate. Most are qualified. Also, with the windfall the $1,000,000 company is no longer worth that much, it is worth $1,000,000 + the windfall, so you will be buying back at a much higher rate.
    - JamesBarney 4y ago
      After the company spends the windfall it's only worth a million afterwards. But you're right about qualified dividends. I had no idea qualified dividends were taxed at the same rate as capital gains. I'd always hear that was why companies do stock buybacks. Thanks for teaching me something new. You're right it's about allowing investors to time their taxable events.
      - rileymat2 4y ago
        > After the company spends the windfall it's only worth a million afterwards. This is true. But look at a simple example, your example. Company Worth $1,000,000. 1,000 shares, each worth $1,000. Windfall Event: They get $1,000,000 of unexpected income. Now the company was whatever it was before + $1,000,000. Naturally, that means the company is worth $2,000,000. So the stock price is $2,000. Well, we buy back half the shares, but it is 500 shares at $2,000 a share. This costs $1,000,000. Now each share is worth $1,000 because the company has spent half its capital.
Msw242 4y ago
A buyback increases EPS and makes the shares worth more. Same pie, fewer slices. It is just a more tax efficient way to distribute earnings.
- disgruntledphd2 4y ago
  Buybacks should be banned. It's bad for society to have companies spend money on their own shares, and dividends have the appealing property that they allow a holder to both continue to hold, and bank some gains for further investments.
  - JamesBarney 4y ago
    Most holders own enough stock that if they wanted to both bank some gain and hold they could sell some stock and hold on to some other stock. I think we should get rid of the tax advantage for capital gains though, the mechanism through which a company distributes capital shouldn't determine tax rate. Also I think dividends make it psychologically easier for people to live off the interest.
    - Msw242 4y ago
      The reason that cap gains are taxed differently is because of inflation. If you have 10000 in stock, and there's 20% inflation and the price of your stock goes up to 12000, you haven't made any real gains (no added purchasing power) but you have accrued 2000 in taxable gains. Instead of adjusting returns for inflation, we just reduced the marginal tax rate for capital gains.
99_00 4y ago
Stock buy backs and dividends benefit or harm all shareholders in proportion to how much stock they own regardless of being an insider or not. Unless the insiders act illegally. If an insider wants to act illegally they can do so in any number of ways other than knowing that a buy back is coming.

Slartie 4y ago

The most successful fraudsters eventually start to fully believe their own fraudulent story. This of course entails to do things that make sense in the fraudulent narrative, but are actually disadvantageous when judging them from a viewpoint outside of the fraud.

Shadonototra 4y ago

You think wrong, if they commit, it's to push their agenda even further, they knew what they were doing, maybe they did in preparation for such charges

indemnity 4y ago

Buybacks increase prices, a large part of compensation is linked to share price, executives don’t care if the company is overpaying, they see more in their pocket.