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Everything is valued based on growth - because capital gains tax is so much lower than income tax. Share buybacks make this a lesser issue for megacap stocks w

Everything is valued based on growth - because capital gains tax is so much lower than income tax. Share buybacks make this a lesser issue for megacap stocks with massive profits and margins. When you're talking about two companies with small profit margins and profits (or negative profits / losses) - if Company A is growing much faster than Company B - the valuation comparison might seem ridiculous. Here's a spreadsheet that makes it clear why the multiple on growth is so high when you consider tax and inflation: https://docs.google.com/spreadsheets/d/1Q00Y8PEyQaiahEvJN0Aq6XI1qlYkFFABBwIlz11i8n4/edit#gid=0 https://docs.google.com/spreadsheets/d/1Q00Y8PEyQaiahEvJN0Aq... It's obviously a flawed analysis, because stock prices are unpredictable (and, to a lesser extent, future revenues and margins). But it should make it clear why growth has such a high multiple.

colechristensen 4y ago
Dividends and increased share value through buybacks are taxable as capital gains (usually).
- onlyrealcuzzo 4y ago
  Most dividends are ordinary / ordinary income. > Dividends are the most common type of distribution from a corporation. They're paid out of the earnings and profits of the corporation. Dividends can be classified either as ordinary or qualified. Whereas ordinary dividends are taxable as ordinary income, qualified dividends that meet certain requirements are taxed at lower capital gain rates. https://www.irs.gov/taxtopics/tc404#:~:text=They're%20paid%20out%20of,at%20lower%20capital%20gain%20rates https://www.irs.gov/taxtopics/tc404#:~:text=They're%20paid%2.... When are dividends qualified (capital gains)? > For a dividend to be qualified, there are certain criteria that must be met, according to the IRS. For stocks, the criteria is: The stock must be held for at least 61 continuous days, unhedged, out of the 121-day period, beginning 60 days before the ex-dividend date. This covers most passively managed funds (most 401k funds these days), but still eliminates nearly all actively managed funds (the majority of capital invested). That's the whole point of share buybacks - it's a way to transfer value to shareholders that definitely isn't considered income.
  - formerkrogemp 4y ago
    > That's the whole point of share buybacks - it's a way to transfer value to shareholders that isn't considered income. If the presumption is that share buybacks increase stock prices more than simply in the short term, then, sure, that'll work out in practice. A pitfall to share buybacks is that many executive compensation packages are tied to stock price performance which can be juiced by billions in share buybacks. What we can observe is that short term stock buybacks are pushed in favor of financial resilience, maintenance, and necessary investments that ultimately leads to the company needing few-strings attached government bailouts. One of the most recent examples is the airline industry in the US. I do appreciate the discussion around qualified and unqualified dividends and their relative tax treatments. As a short term shareholder, I'd prefer stock buybacks. As a long-term shareholder, I'd prefer more investment and financial resilience.
    - onlyrealcuzzo 4y ago
      > A pitfall to share buybacks is that many executive compensation packages are tied to stock price performance which can be juiced by billions in share buybacks. You're assuming that shareholders don't want this, too. There's a reason executive pay is tied to stock price performance - that's all investors care about - because all they want is capital gains.
    - cercatrova 4y ago
      Friendly reminder that the US government turned a profit from the 2008 bailout. People often hear the word bailout and think it was free money when it actually was a loan.
  - adolph 4y ago
    > That's the whole point of share buybacks - it's a way to transfer value to shareholders that definitely isn't considered income. I thought the point of buybacks was "This company doesn't have growth ideas--invest elsewhere"
    - onlyrealcuzzo 4y ago
Lavery 4y ago
The capital gains / income tax rates have only a minor impact on the weight of growth in valuation models. One way to see this without getting to technical: there are a number of (very large) institutional investors that pay no tax at all (university endowments, charities, etc). If what you're saying is true, untaxed investors would have radically different allocations than similar taxed investors. That's not the case.
- onlyrealcuzzo 4y ago
  > If what you're saying is true, untaxed investors would have radically different allocations than similar taxed investors. That's not the case. Except it is the case for endowments and charities. They both have much lower risk tolerance than HNWI (~33% of capital). The bottom ~50% of capital is in R/E and is mostly about living, and less about taxes.

colechristensen 4y ago

Dividends and increased share value through buybacks are taxable as capital gains (usually).

onlyrealcuzzo 4y ago
Most dividends are ordinary / ordinary income. > Dividends are the most common type of distribution from a corporation. They're paid out of the earnings and profits of the corporation. Dividends can be classified either as ordinary or qualified. Whereas ordinary dividends are taxable as ordinary income, qualified dividends that meet certain requirements are taxed at lower capital gain rates. https://www.irs.gov/taxtopics/tc404#:~:text=They're%20paid%20out%20of,at%20lower%20capital%20gain%20rates https://www.irs.gov/taxtopics/tc404#:~:text=They're%20paid%2.... When are dividends qualified (capital gains)? > For a dividend to be qualified, there are certain criteria that must be met, according to the IRS. For stocks, the criteria is: The stock must be held for at least 61 continuous days, unhedged, out of the 121-day period, beginning 60 days before the ex-dividend date. This covers most passively managed funds (most 401k funds these days), but still eliminates nearly all actively managed funds (the majority of capital invested). That's the whole point of share buybacks - it's a way to transfer value to shareholders that definitely isn't considered income.
- formerkrogemp 4y ago
  > That's the whole point of share buybacks - it's a way to transfer value to shareholders that isn't considered income. If the presumption is that share buybacks increase stock prices more than simply in the short term, then, sure, that'll work out in practice. A pitfall to share buybacks is that many executive compensation packages are tied to stock price performance which can be juiced by billions in share buybacks. What we can observe is that short term stock buybacks are pushed in favor of financial resilience, maintenance, and necessary investments that ultimately leads to the company needing few-strings attached government bailouts. One of the most recent examples is the airline industry in the US. I do appreciate the discussion around qualified and unqualified dividends and their relative tax treatments. As a short term shareholder, I'd prefer stock buybacks. As a long-term shareholder, I'd prefer more investment and financial resilience.
  - onlyrealcuzzo 4y ago
    > A pitfall to share buybacks is that many executive compensation packages are tied to stock price performance which can be juiced by billions in share buybacks. You're assuming that shareholders don't want this, too. There's a reason executive pay is tied to stock price performance - that's all investors care about - because all they want is capital gains.
  - cercatrova 4y ago
    Friendly reminder that the US government turned a profit from the 2008 bailout. People often hear the word bailout and think it was free money when it actually was a loan.
- adolph 4y ago
  > That's the whole point of share buybacks - it's a way to transfer value to shareholders that definitely isn't considered income. I thought the point of buybacks was "This company doesn't have growth ideas--invest elsewhere"
  - onlyrealcuzzo 4y ago

Lavery 4y ago

The capital gains / income tax rates have only a minor impact on the weight of growth in valuation models. One way to see this without getting to technical: there are a number of (very large) institutional investors that pay no tax at all (university endowments, charities, etc). If what you're saying is true, untaxed investors would have radically different allocations than similar taxed investors. That's not the case.

onlyrealcuzzo 4y ago
> If what you're saying is true, untaxed investors would have radically different allocations than similar taxed investors. That's not the case. Except it is the case for endowments and charities. They both have much lower risk tolerance than HNWI (~33% of capital). The bottom ~50% of capital is in R/E and is mostly about living, and less about taxes.