4 ms·

Can't comment on Boeing specifically, but if a company has a bunch of cash on hand and doesn't have enough plausible projects to invest in that could return bet

Can't comment on Boeing specifically, but if a company has a bunch of cash on hand and doesn't have enough plausible projects to invest in that could return better than the benchmark rate, then I think it makes sense to return it to investors. Even in a well-run company (Apple?) it's reasonable to imagine that cash on hand could exceed the company's present capacity for new research projects. Scaling up an R&D department could take quite a bit of time, and it might not make sense to sit on that cash while they do it.

coldbrewed 3y ago
Apple is an edge case because of their incredibly strong market position, and their ability to maintain such high profit margins should be inviting a bit more antitrust investigation. But in this case, I'll accede the point for Apple's buybacks. But while there are some cases that are still able to do stock buybacks while plowing resources into R&D, there are companies that are lagging due to ineffective or underfunded R&D (Intel) or are cutting safety critical corners (Boeing) to maximize shareholder return. These are significant companies that provide critical goods and services that aren't exactly fungible, and it would build a lot more trust in them and market systems as a whole to see them take the initiative to improve their situations over plowing money into buybacks while begging for public funding or regulatory exceptions.
piva00 3y ago
> Can't comment on Boeing specifically, but if a company has a bunch of cash on hand and doesn't have enough plausible projects to invest in that could return better than the benchmark rate, then I think it makes sense to return it to investors. Isn't that what dividends are for though? Stock buybacks distort the valuation detached from what the market is pricing the company, it still does not make sense in my mind.
- anthuswilliams 3y ago
  From the company's perspective, dividends and buybacks are economically equivalent (i.e. they are giving a certain quantity of cash to shareholders) However, from the shareholder perspective, buybacks are more tax-efficient since those who sell their shares pay taxes on the gains, and those who hold end up with a larger share of the company and no tax. This is all according to theory. In practice, there does also seem to be a sort of received wisdom among managers that buybacks are better for companies because they can cut them in times of trouble, whereas investors will perceive cuts in dividend as somehow foretelling bankruptcy.
- lupire 3y ago
  Buybacks at market price don't distort the valuation. You could make the same wrong about claim about dividends distorting market price my making the stock temporarily more valuable shortly before the dividend pays out. A buyback is a more efficient dividend. It doesn't force a realized gain, and stockholders can choose the size of their cash out whenever they want, instead of the company forcing it.
  - piva00 3y ago
    > A buyback is a more efficient dividend. It doesn't force a realized gain, and stockholders can choose the size of their cash out whenever they want, instead of the company forcing it. That goes into financial accounting engineering, something I'm really not fond of, efficiency in dribbling taxes due is not something I consider an advantage, it's a bug of the system. > You could make the same wrong about claim about dividends distorting market price my making the stock temporarily more valuable shortly before the dividend pays out. Probably another inherent issue I see in the current system, dividends should be paid out in proportion to the time an investor held the shares, they took higher risk by holding them for longer and deserve the full reward, someone just speculating right before a dividend payout should not have much reward since they had no skin in the game while the company accrued their extra cash in hand to be paid out. The current incentives reward more speculative and short-term decision making rather than companies generating the most value to society in the longer term. I do not think that's the most efficient way to price companies: return of shareholder value, that should be a consequence of a good company, not an objective in itself (as it's been since the Jack Welch plague over MBAs). Again, I look at the case of Boeing, a company that gained a lot of value due to producing good products, with quality, and the downfall it's going through from maximising shareholder value with buyback programs, cutting corners, etc. The current incentives do not punish this kind of egregious behaviour enough.
    - lupire 3y ago
      You can argue that tax law isn't fair, but that's not an argument that the company is mistreating investors or employees or customers. Boeing returning money to shareholders is not what caused MAX to fail. Boeing making money cutting costs on QA and engineering caused MAX to fail.

coldbrewed 3y ago

Apple is an edge case because of their incredibly strong market position, and their ability to maintain such high profit margins should be inviting a bit more antitrust investigation. But in this case, I'll accede the point for Apple's buybacks. But while there are some cases that are still able to do stock buybacks while plowing resources into R&D, there are companies that are lagging due to ineffective or underfunded R&D (Intel) or are cutting safety critical corners (Boeing) to maximize shareholder return. These are significant companies that provide critical goods and services that aren't exactly fungible, and it would build a lot more trust in them and market systems as a whole to see them take the initiative to improve their situations over plowing money into buybacks while begging for public funding or regulatory exceptions.

piva00 3y ago

> Can't comment on Boeing specifically, but if a company has a bunch of cash on hand and doesn't have enough plausible projects to invest in that could return better than the benchmark rate, then I think it makes sense to return it to investors. Isn't that what dividends are for though? Stock buybacks distort the valuation detached from what the market is pricing the company, it still does not make sense in my mind.

anthuswilliams 3y ago
From the company's perspective, dividends and buybacks are economically equivalent (i.e. they are giving a certain quantity of cash to shareholders) However, from the shareholder perspective, buybacks are more tax-efficient since those who sell their shares pay taxes on the gains, and those who hold end up with a larger share of the company and no tax. This is all according to theory. In practice, there does also seem to be a sort of received wisdom among managers that buybacks are better for companies because they can cut them in times of trouble, whereas investors will perceive cuts in dividend as somehow foretelling bankruptcy.
lupire 3y ago
Buybacks at market price don't distort the valuation. You could make the same wrong about claim about dividends distorting market price my making the stock temporarily more valuable shortly before the dividend pays out. A buyback is a more efficient dividend. It doesn't force a realized gain, and stockholders can choose the size of their cash out whenever they want, instead of the company forcing it.
- piva00 3y ago
  > A buyback is a more efficient dividend. It doesn't force a realized gain, and stockholders can choose the size of their cash out whenever they want, instead of the company forcing it. That goes into financial accounting engineering, something I'm really not fond of, efficiency in dribbling taxes due is not something I consider an advantage, it's a bug of the system. > You could make the same wrong about claim about dividends distorting market price my making the stock temporarily more valuable shortly before the dividend pays out. Probably another inherent issue I see in the current system, dividends should be paid out in proportion to the time an investor held the shares, they took higher risk by holding them for longer and deserve the full reward, someone just speculating right before a dividend payout should not have much reward since they had no skin in the game while the company accrued their extra cash in hand to be paid out. The current incentives reward more speculative and short-term decision making rather than companies generating the most value to society in the longer term. I do not think that's the most efficient way to price companies: return of shareholder value, that should be a consequence of a good company, not an objective in itself (as it's been since the Jack Welch plague over MBAs). Again, I look at the case of Boeing, a company that gained a lot of value due to producing good products, with quality, and the downfall it's going through from maximising shareholder value with buyback programs, cutting corners, etc. The current incentives do not punish this kind of egregious behaviour enough.
  - lupire 3y ago
    You can argue that tax law isn't fair, but that's not an argument that the company is mistreating investors or employees or customers. Boeing returning money to shareholders is not what caused MAX to fail. Boeing making money cutting costs on QA and engineering caused MAX to fail.