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I agree with that wholeheartedly. I'd go further and say that I think companies are getting too big to the point where different divisions have no relation to e

I agree with that wholeheartedly. I'd go further and say that I think companies are getting too big to the point where different divisions have no relation to each other at all. Any major tech stock has this problem. The problem is I have no idea how it could be discouraged. It feels like whenever something is regulated it just results in something completely different than intended.

lazide 4y ago
Part of the problem is the tax code. Dividends (what a value company typically produces) are taxed at a much higher rate than long term capital gains (which a ‘growth’ company produces). Dividends usually at the same rate as income, from 10-37% at the federal level, and often the same if the state has an income tax. Long term capital gains are 0-20%, and many states don’t tax them at all even if they tax income. Everyone has a significant incentive to go ‘growth’ in that environment.
- kgwgk 4y ago
  Do you know what is a share repurchase or buyback? [I find it unlikely that you don't - but your comment doesn't make much sense if you do.]
  - lazide 4y ago
    A share buyback is a way to convert extra cash (or new debt) into almost a dividend. It’s gotten popular lately for exactly this tax efficiency reason. It is not a guaranteed way to do it however, as unlike a dividend, there is no way to directly tie the repurchase of shares to x amount of actual long term market value. It often works though, and when markers were going up, it helps.
    - kgwgk 4y ago
      > unlike a dividend, there is no way to directly tie the repurchase of shares to x amount of actual long term market value I don't understand what you mean. From the point of view of the company - and what you called its significant incentive to go ‘growth’ if I understood your comment - there is no difference between spending $1bn repurchasing shares or distributing dividends.
      - lazide 4y ago
        To the investors there is! If you spend $1bln buying back shares, that isn’t money in their pocket until they sell. And if they sell, they don’t get any future ‘growth’. And if the company/economy doesn’t do well next quarter, they’re losing it in the form of decreased stock value, or even implosion/complete loss. A dividend is direct cash in the bank. Much lower (zero) ongoing risk of losing that payment. But it gets taxed directly at a higher rate.
        kgwgk 4y ago
        > To the investors there is! I thought we agreed that the difference to investors is that selling shares back to the company is better from a tax perspective than receiving a dividend. > If you spend $1bln buying back shares, that isn’t money in their pocket until they sell. In aggregate, they just sold $1bn. Individually, they can sell the proportional part. (Ignoring the second-order effects due to the uncertainty about the timing of the buybacks.) > And if they sell, they don’t get any future ‘growth’. Just like when they get the dividend and they end up owning the same share of the same company. The difference is that they pay less taxes. > And if the company/economy doesn’t do well next quarter, they’re losing it in the form of decreased stock value, or even implosion/complete loss. This seems more of a reason to avoid companies that do not distribute money (either in the form of dividends or buybacks), doesn't it? > A dividend is direct cash in the bank. Much lower (zero) ongoing risk of losing that payment. But it gets taxed directly at a higher rate. Selling the stock to the company is also cash in the bank - and it doesn't get taxed at a higher rate. Whatever the relevance of "they don’t get any future ‘growth’" argument it's unrelated to the difference in rates between income taxes and capital gain taxes. For the sake of the argument, let's say that both tax rates are equal. If company A distributes $1bn and company B doesn't would you still say that investing in company A the investros "don’t get any future ‘growth’"? In that case your preference for 'growth' companies is not based on the fact that dividends are taxed at a much higher rate than long term capital gains.
        lazide 4y ago
        I think several things are getting confused here. I’m mentioning two factors: 1) tax efficiency 2) actual risk of losing money/extracting value from their holdings. If an investor wants reliable, regular income, stock buybacks aren’t helpful. Dividends are. Enough to be worth using less tax efficient structures. However if an investor wants a maximally large portfolio at a indefinite future point, they generally don’t care about dividends. In fact if they want maximum tax efficiency above cash flow (which such investor generally wants), and are comfortable with risk, they want to avoid dividends. Stock buybacks ARE more tax efficient than dividends, but also higher risk. In theory (and usually in practice even more so), buying back the $1bln increases the value of ongoing remaining stock holdings by $1bln. However, unlike a dividend, that doesn’t get converted into cash. It turns cash into increased scarcity for equity ownership in the company. Depending on expected future earnings multiples (cough inflated P/E) this can swing widely, but also provide ‘leverage’ for a company doing this. Which increases ongoing dependence on management of the company, market perception of the companies worth, etc. which increases actual risk to the investor going forward. It is far more tax efficient though. Which if ‘everything always goes up’ is not a big deal, and often desirable. If someone is making sure they have cash in a bank account every month so they don’t need to be eating cat food, less so. Does what I’m saying make more sense in that context? I suspect that the ‘market goes up’ + automation of trades has also made dividends look less necessary. It’s been awhile since we’ve had a good stock market crash.

lazide 4y ago

Part of the problem is the tax code. Dividends (what a value company typically produces) are taxed at a much higher rate than long term capital gains (which a ‘growth’ company produces). Dividends usually at the same rate as income, from 10-37% at the federal level, and often the same if the state has an income tax. Long term capital gains are 0-20%, and many states don’t tax them at all even if they tax income. Everyone has a significant incentive to go ‘growth’ in that environment.

kgwgk 4y ago
Do you know what is a share repurchase or buyback? [I find it unlikely that you don't - but your comment doesn't make much sense if you do.]
- lazide 4y ago
  A share buyback is a way to convert extra cash (or new debt) into almost a dividend. It’s gotten popular lately for exactly this tax efficiency reason. It is not a guaranteed way to do it however, as unlike a dividend, there is no way to directly tie the repurchase of shares to x amount of actual long term market value. It often works though, and when markers were going up, it helps.
  - kgwgk 4y ago
    > unlike a dividend, there is no way to directly tie the repurchase of shares to x amount of actual long term market value I don't understand what you mean. From the point of view of the company - and what you called its significant incentive to go ‘growth’ if I understood your comment - there is no difference between spending $1bn repurchasing shares or distributing dividends.
    - lazide 4y ago
      To the investors there is! If you spend $1bln buying back shares, that isn’t money in their pocket until they sell. And if they sell, they don’t get any future ‘growth’. And if the company/economy doesn’t do well next quarter, they’re losing it in the form of decreased stock value, or even implosion/complete loss. A dividend is direct cash in the bank. Much lower (zero) ongoing risk of losing that payment. But it gets taxed directly at a higher rate.
      - kgwgk 4y ago
        > To the investors there is! I thought we agreed that the difference to investors is that selling shares back to the company is better from a tax perspective than receiving a dividend. > If you spend $1bln buying back shares, that isn’t money in their pocket until they sell. In aggregate, they just sold $1bn. Individually, they can sell the proportional part. (Ignoring the second-order effects due to the uncertainty about the timing of the buybacks.) > And if they sell, they don’t get any future ‘growth’. Just like when they get the dividend and they end up owning the same share of the same company. The difference is that they pay less taxes. > And if the company/economy doesn’t do well next quarter, they’re losing it in the form of decreased stock value, or even implosion/complete loss. This seems more of a reason to avoid companies that do not distribute money (either in the form of dividends or buybacks), doesn't it? > A dividend is direct cash in the bank. Much lower (zero) ongoing risk of losing that payment. But it gets taxed directly at a higher rate. Selling the stock to the company is also cash in the bank - and it doesn't get taxed at a higher rate. Whatever the relevance of "they don’t get any future ‘growth’" argument it's unrelated to the difference in rates between income taxes and capital gain taxes. For the sake of the argument, let's say that both tax rates are equal. If company A distributes $1bn and company B doesn't would you still say that investing in company A the investros "don’t get any future ‘growth’"? In that case your preference for 'growth' companies is not based on the fact that dividends are taxed at a much higher rate than long term capital gains.
        lazide 4y ago
        I think several things are getting confused here. I’m mentioning two factors: 1) tax efficiency 2) actual risk of losing money/extracting value from their holdings. If an investor wants reliable, regular income, stock buybacks aren’t helpful. Dividends are. Enough to be worth using less tax efficient structures. However if an investor wants a maximally large portfolio at a indefinite future point, they generally don’t care about dividends. In fact if they want maximum tax efficiency above cash flow (which such investor generally wants), and are comfortable with risk, they want to avoid dividends. Stock buybacks ARE more tax efficient than dividends, but also higher risk. In theory (and usually in practice even more so), buying back the $1bln increases the value of ongoing remaining stock holdings by $1bln. However, unlike a dividend, that doesn’t get converted into cash. It turns cash into increased scarcity for equity ownership in the company. Depending on expected future earnings multiples (cough inflated P/E) this can swing widely, but also provide ‘leverage’ for a company doing this. Which increases ongoing dependence on management of the company, market perception of the companies worth, etc. which increases actual risk to the investor going forward. It is far more tax efficient though. Which if ‘everything always goes up’ is not a big deal, and often desirable. If someone is making sure they have cash in a bank account every month so they don’t need to be eating cat food, less so. Does what I’m saying make more sense in that context? I suspect that the ‘market goes up’ + automation of trades has also made dividends look less necessary. It’s been awhile since we’ve had a good stock market crash.