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Personally, I've never really been comfortable with the concept of stock buy backs. We already have dividends and obviously the redirection to R&D for increasin

Personally, I've never really been comfortable with the concept of stock buy backs. We already have dividends and obviously the redirection to R&D for increasing shareholder value. It doesn't seem like something that's healthy for the market as it's as close as you can get to legal price manipulation and obfuscates the "true" price. Does anyone have a market theory justification that makes them comfortable with the idea?

idontknowtech 3y ago
The argument is that a company like Apple, instead of investing its cash pile itself, should return that money to its shareholders who will, collectively, better allocate their capital than Apple will. This is almost certainly true. The company then has essentially two choices on how to return that money. It can pay dividends, which are taxed, or it can do stock buybacks, which are not taxed until investors choose to transact their holdings. Financially, for most investors, buybacks are better. I'll also point out that buybacks don't obfuscate prices, but instead permanently change them. By reducing the equity outstanding, the equity remaining gets more valuable.
- tzs 3y ago
  There was a company a long time ago that had a clever idea. Instead of doing a dividend they would do a stock split followed by a stock buyback. For example a 1.03 to 1 stock split followed by a buyback of 3/103 of the stock. So if someone had 500 shares the split took then to 515. Then the buyback bought 15 of those shares. Net result: the person had 500 shares, just like before, plus some money from the company. The idea was that this would be capital gains income to the shareholders rather than ordinary income. The IRS was not amused. I don't remember the name of the company of if they got away with it, but the result was an addition to the tax code to make sure it would not work in the future. Then some buybacks that clearly were legitimate got classified as dividends under the new rules, so the rules were modified again so that those would be OK. I think there may have been another round or two of tweaks for more edge cases.
- woopsn 3y ago
  Apple is unconcerned with the efficient allocation of capital. Hence their shell companies in Ireland. Money spent on innovation is returned to the market efficiently, and ratchets science and technology forward across the marketplace.
freitzkriesler2 3y ago
The problem is from a tax perspective. Dividends are taxed twice. Once at the corporate level and another at the personal level. So companies in America prefer share buy packs as a work around. Other countries have fixed this by allowing dividends to be tax free. I would much prefer having reliable dividend pay outs that stock buy backs.
- danaris 3y ago
  ...Or, y'know, rather than tilting the tax code even more in favor of those who make money by owning, and not by working, we could even things out by taxing stock buybacks (more).
  - nickpp 3y ago
    Anybody can make money by owning - and we do. It's called investing and it's also how pension funds work. Tilting the tax code against us is tilting it against the people and for politicians, unchecked bureaucrats with their uncontrollable spending thirst.
    - danaris 3y ago
      Anybody with significant disposable income. That leaves out, based on figures I've seen, roughly half of America's population. Get out of your bubble.
      - freitzkriesler2 3y ago
        I have a UK pension with UK stocks that regularly trade sideways for roughly 5-10 GBP per share. Those stocks reliably pay out a dividend every month and is very much in he reach of the working poor. I make more monthly income out of my UK pension than I do from stock buy backs. This is how the stock market used to work in America before the 80s.
      - nickpp 3y ago
        > significant disposable income B.S. Last time I checked, accounts at most online brokers were free. And they even allowed purchase of fractional share - so you could start investing with 100 bucks. As long as you do save that $100 and not throw it all away on crap, of course.
jcranmer 3y ago
> Does anyone have a market theory justification that makes them comfortable with the idea? A large component of senior employees' salary at tech companies tends to be stock awards, which requires somebody to buy up the "free" stock to be usable as cash. If the company itself is doing this, then it amounts to a really roundabout way of paying employees. I'm still not comfortable with this idea, but it did change my attitude from "this is an outrageous practice" to "our tax laws are fucking broken."
- delecti 3y ago
  On the other hand, it seems like companies award stock as a form of golden handcuffs (you might be "awarded" that stock, but you don't actually get it for a while). If they just paid us with plain old money, instead of adding those hoops, there would be no problem to solve.
  - woopsn 3y ago
    Employees benefit incidentally, buybacks are a manifestation of corporate and capital interests alone. What's "fucking broken" is innovation in the monopolized market.
bitshiftfaced 3y ago
Some are saying that this allows people to postpone taxes, but not really. Not in aggregate. Someone has to sell their shares for companies to buy back stocks. For those who sell during the buyback, that profit is subject to taxes. Moreover, the market cap stays the same. Technically the shareholders already owned that cash they used for the buyback. All it does is move places on a report. If it were better used in R&D, that is a complaint they would be motivated to take up with management, since otherwise the buyback would be losing them money.
- orev 3y ago
  Wouldn’t the people selling those shares already be selling them (and paying taxes) regardless of whether they’re selling to someone else or to Apple? Unless they sold with the specific knowledge the shares were going to Apple, which doesn’t really make sense. Those sellers are already going to be paying taxes no matter who they sold to, and then they’re out of the market. So if the stock price goes up, only the people who held would gain any value from it.
  - bitshiftfaced 3y ago
    When you have a buy back, you have more buyers in the market, which puts upward pressure on price, which increases the likeliness that someone sells (and then the increased selling puts downward pressure on the price). And I would argue that those who hold didn't actually gain any value from it, unless the stock price was lower than it should've been at the time of the buy back.
Mountain_Skies 3y ago
The standard answer I get from finance types about any of this stuff is that it increases liquidity in the market so when you the little guy decides to sell, you can do so quickly instead of waiting until there's someone who wants to buy the stock because they're interested in investing in the company's future.
qsi 3y ago
Blame the tax code. Buybacks are a more tax efficient way of returning capital than dividends, which get taxed twice (earnings at corporate and then income at shareholders).

idontknowtech 3y ago

The argument is that a company like Apple, instead of investing its cash pile itself, should return that money to its shareholders who will, collectively, better allocate their capital than Apple will. This is almost certainly true. The company then has essentially two choices on how to return that money. It can pay dividends, which are taxed, or it can do stock buybacks, which are not taxed until investors choose to transact their holdings. Financially, for most investors, buybacks are better. I'll also point out that buybacks don't obfuscate prices, but instead permanently change them. By reducing the equity outstanding, the equity remaining gets more valuable.

tzs 3y ago
There was a company a long time ago that had a clever idea. Instead of doing a dividend they would do a stock split followed by a stock buyback. For example a 1.03 to 1 stock split followed by a buyback of 3/103 of the stock. So if someone had 500 shares the split took then to 515. Then the buyback bought 15 of those shares. Net result: the person had 500 shares, just like before, plus some money from the company. The idea was that this would be capital gains income to the shareholders rather than ordinary income. The IRS was not amused. I don't remember the name of the company of if they got away with it, but the result was an addition to the tax code to make sure it would not work in the future. Then some buybacks that clearly were legitimate got classified as dividends under the new rules, so the rules were modified again so that those would be OK. I think there may have been another round or two of tweaks for more edge cases.
woopsn 3y ago
Apple is unconcerned with the efficient allocation of capital. Hence their shell companies in Ireland. Money spent on innovation is returned to the market efficiently, and ratchets science and technology forward across the marketplace.

freitzkriesler2 3y ago

The problem is from a tax perspective. Dividends are taxed twice. Once at the corporate level and another at the personal level. So companies in America prefer share buy packs as a work around. Other countries have fixed this by allowing dividends to be tax free. I would much prefer having reliable dividend pay outs that stock buy backs.

danaris 3y ago
...Or, y'know, rather than tilting the tax code even more in favor of those who make money by owning, and not by working, we could even things out by taxing stock buybacks (more).
- nickpp 3y ago
  Anybody can make money by owning - and we do. It's called investing and it's also how pension funds work. Tilting the tax code against us is tilting it against the people and for politicians, unchecked bureaucrats with their uncontrollable spending thirst.
  - danaris 3y ago
    Anybody with significant disposable income. That leaves out, based on figures I've seen, roughly half of America's population. Get out of your bubble.
    - freitzkriesler2 3y ago
      I have a UK pension with UK stocks that regularly trade sideways for roughly 5-10 GBP per share. Those stocks reliably pay out a dividend every month and is very much in he reach of the working poor. I make more monthly income out of my UK pension than I do from stock buy backs. This is how the stock market used to work in America before the 80s.
    - nickpp 3y ago
      > significant disposable income B.S. Last time I checked, accounts at most online brokers were free. And they even allowed purchase of fractional share - so you could start investing with 100 bucks. As long as you do save that $100 and not throw it all away on crap, of course.

jcranmer 3y ago

> Does anyone have a market theory justification that makes them comfortable with the idea? A large component of senior employees' salary at tech companies tends to be stock awards, which requires somebody to buy up the "free" stock to be usable as cash. If the company itself is doing this, then it amounts to a really roundabout way of paying employees. I'm still not comfortable with this idea, but it did change my attitude from "this is an outrageous practice" to "our tax laws are fucking broken."

delecti 3y ago
On the other hand, it seems like companies award stock as a form of golden handcuffs (you might be "awarded" that stock, but you don't actually get it for a while). If they just paid us with plain old money, instead of adding those hoops, there would be no problem to solve.
- woopsn 3y ago
  Employees benefit incidentally, buybacks are a manifestation of corporate and capital interests alone. What's "fucking broken" is innovation in the monopolized market.

bitshiftfaced 3y ago

Some are saying that this allows people to postpone taxes, but not really. Not in aggregate. Someone has to sell their shares for companies to buy back stocks. For those who sell during the buyback, that profit is subject to taxes. Moreover, the market cap stays the same. Technically the shareholders already owned that cash they used for the buyback. All it does is move places on a report. If it were better used in R&D, that is a complaint they would be motivated to take up with management, since otherwise the buyback would be losing them money.

orev 3y ago
Wouldn’t the people selling those shares already be selling them (and paying taxes) regardless of whether they’re selling to someone else or to Apple? Unless they sold with the specific knowledge the shares were going to Apple, which doesn’t really make sense. Those sellers are already going to be paying taxes no matter who they sold to, and then they’re out of the market. So if the stock price goes up, only the people who held would gain any value from it.
- bitshiftfaced 3y ago
  When you have a buy back, you have more buyers in the market, which puts upward pressure on price, which increases the likeliness that someone sells (and then the increased selling puts downward pressure on the price). And I would argue that those who hold didn't actually gain any value from it, unless the stock price was lower than it should've been at the time of the buy back.

Mountain_Skies 3y ago

The standard answer I get from finance types about any of this stuff is that it increases liquidity in the market so when you the little guy decides to sell, you can do so quickly instead of waiting until there's someone who wants to buy the stock because they're interested in investing in the company's future.

qsi 3y ago

Blame the tax code. Buybacks are a more tax efficient way of returning capital than dividends, which get taxed twice (earnings at corporate and then income at shareholders).