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They're a means of "returning money", but they also pump up the stock price, to which managers' TCs are linked. Hence they are a form of manipulation. Unlike d

They're a means of "returning money", but they also pump up the stock price, to which managers' TCs are linked. Hence they are a form of manipulation. Unlike dividends, they don't return money to all shareholders, but to those who sell shares, which are the wealthiest, unnecessarily increasing inequality. Excessive buybacks and underinvestment are a big reason why Intel failed. Gelsinger (CEO) talked about this publicly. It's not just "returning money to shareholders", because it leads to perverse incentives and underinvestment. Under Otellini, Intel returned 109% of its profits to shareholders.

robertlagrant 3y ago
> They're a means of "returning money", but they also pump up the stock price, to which managers' TCs are linked. Hence they are a form of manipulation. Why would you say they're pumping up the stock price, rather than just raising the price? Is it a temporary pumping effect, like an Elon Musk tweet from 2017, or is it actually increasing the value of the remaining shares?
- concinds 3y ago
  Probably only the latter. My point was that executives (share sellers) benefit and it creates potentially toxic incentives.
  - kjreact 3y ago
    Executives are always incentivized to increase share value; that’s their job. Note: it’s the board of directors that issues new shares not executives. Executives can sit on the board, but the two are not the same. Executives are actually appointed by the board. The reason stock buybacks are viewed somewhat negatively is because it’s a lazy way to increase share value. Preferably executives would use the money to come up with new products/services to increase revenues. But if we’re talking about huge mega corporations, who already spend a lot of money on R&D, capex and/or acquisitions, then using some additional cash flow on buybacks makes sense. In Intel’s case, the buyback merits some discussion because it is implied that government subsidies are being used to buyback shares which is not the intention of the subsidy. Edit: IMO, I don’t think Intel underinvested, I believe they invested in many failed ventures and under their past and current leadership they are not able to grow the company in any meaningful way.
  - robertlagrant 3y ago
    > My point was that executives (share sellers) benefit and it creates potentially toxic incentives. This seems like a good incentive. Executives of course don't have to have any shares, although they probably will, but that's not "toxic". I know that toxic is now the blandest word in the language due to overuse, but even given that this seems distortional.
- thehappypm 3y ago
  Let's say corp XYZ has 100 shares out, and they're owned by 50 people. At any point, there are people trading, buying and selling those 100 shares. Buyer 51 comes along and wants to buy a share. He can only buy a share if one of the 50 owners are selling. So, he has to offer a price that'll convince one of the 50 to sell. XYZ Corp decides to do a buyback. They buy 20 of those shares. In that moment, they will certainly create a spike in demand for the 20 shares. But later on, now there are only 80 shares out. When buyer 52 comes along to buy a share, there are fewer shares, and fewer sellers. He might have to offer more than Buyer 51 to actually get a share for that reason.
  - robertlagrant 3y ago
    That's not pumping stock, though, right? Pumping stock is artificially increasing the number of buyers, for a short period. You're describing reducing the number of sellers. Which may increase the price, or may not.
    - thehappypm 3y ago
      You could argue that the buyback itself, like the moment where the company actually buys the shares back, is a pump moment. they could have the demand far outstrip the typical demand in the moment. But long-term, the price should be higher as they have decreased supply.
  - tzs 3y ago
    > But later on, now there are only 80 shares out. When buyer 52 comes along to buy a share, there are fewer shares, and fewer sellers. He might have to offer more than Buyer 51 to actually get a share for that reason. By buying that one share buyer 52 gets ownership of 1.25% of the company. Buyer 51 only got 1.00% of the company when they bought their share. You need to take that into account when comparing share prices.
gruez 3y ago
>Under Otellini, Intel returned 109% of its profits to shareholders. Seems like everything is working as intended. What do you think that companies are supposed to do with their profits? Why do you think shareholders buy stocks in the first place?
- fancyfredbot 3y ago
  > What do you think that companies are supposed to do with their profits? With hindsight it's clear that it would have been better for shareholders if Otellini had reinvested more profit into R&D rather than returning it to shareholders. Intel has now lost their process node advantage to TSMC. Their CPUs are not competitive on power efficiency with AMD and Apple. This is leading to smaller profits and ultimately a worse outcome for shareholders.
  - concinds 3y ago
    Right, more R&D and more CAPEX. The question is not whether shareholders deserve any return on their investment (yes), the question is short term vs. long term focus. Same with Boeing (161% of Boeing profits given to shareholders 2013-2019, underinvestment in talent and safety).
prepend 3y ago
> Hence they are a form of manipulation. They are a form of manipulation we don’t normally care about. Definitely not illegal. By this definition, productivity is manipulation. Or tax optimization is manipulation. Or IPOs are manipulation. Typically this word is used to indicate unethical and illegal behavior. Not just typical organizational behavior.
nabla9 3y ago
>Unlike dividends, they don't return money to all shareholders, That's false reasoning in so many level. Take every of your arguments and do counterfactual and you see. > leads to perverse incentives and underinvestment Investing is not alternative to paying dividends in any well managed company. Companies invest if they see better ROI for the investment than elsewhere. They give money back to shareholders (either dividends or buybacks) when they can't do better than markets.
- yborg 3y ago
  The positive ROI may accrue primarily to the top executives who are in a position to directly make that decision. Especially in a field like semiconductor processing where risks are high on new investment, it is almost always a lower risk decision to buyback the stock. I don't know the specifics of Otellini's pay package, but I would assume that his tenure resulted in massive wealth for himself, so this is certainly rational economic behavior but severely damaged the company.
  - nabla9 3y ago
    >it is almost always a lower risk decision to buyback the stock. This is all about buyback versus dividend. How it is that people are thinking wrong counterfactual?
  - mamonster 3y ago
    Well the other part is that a big part of share buybacks are simply "sanitizing" the dilution from stock based comps(which are increasingly the way that most people get paid). Intel SBC was 3.2 billion in 2023, and there haven't been any buybacks I think the last 2-3 years? Quite a bit of dilution which doesn't really make long term investors happy.
throw0101b 3y ago
> They're a means of "returning money", but they also pump up the stock price […] Stock prices are also effected by dividends: > Dividends can affect the price of their underlying stock in a variety of ways. While the dividend history of a given stock plays a general role in its popularity, the declaration and payment of dividends also have a specific and predictable effect on market prices. After the ex-dividend date, the share price of a stock usually drops by the amount of the dividend. * https://www.investopedia.com/articles/investing/091015/how-dividends-affect-stock-prices.asp https://www.investopedia.com/articles/investing/091015/how-d... This has been know since (at least) 1955: * https://www.jstor.org/stable/2976771 https://www.jstor.org/stable/2976771
diogofranco 3y ago
Buybacks "pumping the stock price" is a common misconception, but not actually true (unless the buyback is executed at prices lower than fair value). There are less shares outstanding afterwards, but there is also less cash, so if executed at fair prices there is no reason for the stock price to move. Just think through an example of a simple company which is a pot of $1000, and can get 10% returns on it. There are 100 shares, so if investors want 10% returns, shares should trade at 10$ (P/B = 1). If the company repurchases half the shares, there will be only 50 shares but the company only has 500$ now, making each share still worth 10$ for 10% hurdle rates.
- positr0n 3y ago
  But companies are not pots of assets. What you are buying is assets - liabilities + predicted future cashflow * discount rate. So a more realistic example would be a company with 100 shares, $1000 of cash, and $1000/yr stable income. So before a buyback, 1 share grants you the benefits if whatever the company does with $10/yr of income. Whether it be dividends, reinvestment, etc. If the share price is $25 and they spend half their cash on hand to buy 20 shares back, now one share gets you $12.50/year of income. Thus the share is worth more than it was before. Disclaimer: Armchair finance / economics knowledge. Hope the above is correct.

robertlagrant 3y ago

> They're a means of "returning money", but they also pump up the stock price, to which managers' TCs are linked. Hence they are a form of manipulation. Why would you say they're pumping up the stock price, rather than just raising the price? Is it a temporary pumping effect, like an Elon Musk tweet from 2017, or is it actually increasing the value of the remaining shares?

concinds 3y ago
Probably only the latter. My point was that executives (share sellers) benefit and it creates potentially toxic incentives.
- kjreact 3y ago
  Executives are always incentivized to increase share value; that’s their job. Note: it’s the board of directors that issues new shares not executives. Executives can sit on the board, but the two are not the same. Executives are actually appointed by the board. The reason stock buybacks are viewed somewhat negatively is because it’s a lazy way to increase share value. Preferably executives would use the money to come up with new products/services to increase revenues. But if we’re talking about huge mega corporations, who already spend a lot of money on R&D, capex and/or acquisitions, then using some additional cash flow on buybacks makes sense. In Intel’s case, the buyback merits some discussion because it is implied that government subsidies are being used to buyback shares which is not the intention of the subsidy. Edit: IMO, I don’t think Intel underinvested, I believe they invested in many failed ventures and under their past and current leadership they are not able to grow the company in any meaningful way.
- robertlagrant 3y ago
  > My point was that executives (share sellers) benefit and it creates potentially toxic incentives. This seems like a good incentive. Executives of course don't have to have any shares, although they probably will, but that's not "toxic". I know that toxic is now the blandest word in the language due to overuse, but even given that this seems distortional.
thehappypm 3y ago
Let's say corp XYZ has 100 shares out, and they're owned by 50 people. At any point, there are people trading, buying and selling those 100 shares. Buyer 51 comes along and wants to buy a share. He can only buy a share if one of the 50 owners are selling. So, he has to offer a price that'll convince one of the 50 to sell. XYZ Corp decides to do a buyback. They buy 20 of those shares. In that moment, they will certainly create a spike in demand for the 20 shares. But later on, now there are only 80 shares out. When buyer 52 comes along to buy a share, there are fewer shares, and fewer sellers. He might have to offer more than Buyer 51 to actually get a share for that reason.
- robertlagrant 3y ago
  That's not pumping stock, though, right? Pumping stock is artificially increasing the number of buyers, for a short period. You're describing reducing the number of sellers. Which may increase the price, or may not.
  - thehappypm 3y ago
    You could argue that the buyback itself, like the moment where the company actually buys the shares back, is a pump moment. they could have the demand far outstrip the typical demand in the moment. But long-term, the price should be higher as they have decreased supply.
- tzs 3y ago
  > But later on, now there are only 80 shares out. When buyer 52 comes along to buy a share, there are fewer shares, and fewer sellers. He might have to offer more than Buyer 51 to actually get a share for that reason. By buying that one share buyer 52 gets ownership of 1.25% of the company. Buyer 51 only got 1.00% of the company when they bought their share. You need to take that into account when comparing share prices.

gruez 3y ago

>Under Otellini, Intel returned 109% of its profits to shareholders. Seems like everything is working as intended. What do you think that companies are supposed to do with their profits? Why do you think shareholders buy stocks in the first place?

fancyfredbot 3y ago
> What do you think that companies are supposed to do with their profits? With hindsight it's clear that it would have been better for shareholders if Otellini had reinvested more profit into R&D rather than returning it to shareholders. Intel has now lost their process node advantage to TSMC. Their CPUs are not competitive on power efficiency with AMD and Apple. This is leading to smaller profits and ultimately a worse outcome for shareholders.
- concinds 3y ago
  Right, more R&D and more CAPEX. The question is not whether shareholders deserve any return on their investment (yes), the question is short term vs. long term focus. Same with Boeing (161% of Boeing profits given to shareholders 2013-2019, underinvestment in talent and safety).

prepend 3y ago

> Hence they are a form of manipulation. They are a form of manipulation we don’t normally care about. Definitely not illegal. By this definition, productivity is manipulation. Or tax optimization is manipulation. Or IPOs are manipulation. Typically this word is used to indicate unethical and illegal behavior. Not just typical organizational behavior.

nabla9 3y ago

>Unlike dividends, they don't return money to all shareholders, That's false reasoning in so many level. Take every of your arguments and do counterfactual and you see. > leads to perverse incentives and underinvestment Investing is not alternative to paying dividends in any well managed company. Companies invest if they see better ROI for the investment than elsewhere. They give money back to shareholders (either dividends or buybacks) when they can't do better than markets.

yborg 3y ago
The positive ROI may accrue primarily to the top executives who are in a position to directly make that decision. Especially in a field like semiconductor processing where risks are high on new investment, it is almost always a lower risk decision to buyback the stock. I don't know the specifics of Otellini's pay package, but I would assume that his tenure resulted in massive wealth for himself, so this is certainly rational economic behavior but severely damaged the company.
- nabla9 3y ago
  >it is almost always a lower risk decision to buyback the stock. This is all about buyback versus dividend. How it is that people are thinking wrong counterfactual?
- mamonster 3y ago
  Well the other part is that a big part of share buybacks are simply "sanitizing" the dilution from stock based comps(which are increasingly the way that most people get paid). Intel SBC was 3.2 billion in 2023, and there haven't been any buybacks I think the last 2-3 years? Quite a bit of dilution which doesn't really make long term investors happy.

throw0101b 3y ago

> They're a means of "returning money", but they also pump up the stock price […] Stock prices are also effected by dividends: > Dividends can affect the price of their underlying stock in a variety of ways. While the dividend history of a given stock plays a general role in its popularity, the declaration and payment of dividends also have a specific and predictable effect on market prices. After the ex-dividend date, the share price of a stock usually drops by the amount of the dividend. * https://www.investopedia.com/articles/investing/091015/how-dividends-affect-stock-prices.asp https://www.investopedia.com/articles/investing/091015/how-d... This has been know since (at least) 1955: * https://www.jstor.org/stable/2976771 https://www.jstor.org/stable/2976771

diogofranco 3y ago

Buybacks "pumping the stock price" is a common misconception, but not actually true (unless the buyback is executed at prices lower than fair value). There are less shares outstanding afterwards, but there is also less cash, so if executed at fair prices there is no reason for the stock price to move. Just think through an example of a simple company which is a pot of $1000, and can get 10% returns on it. There are 100 shares, so if investors want 10% returns, shares should trade at 10$ (P/B = 1). If the company repurchases half the shares, there will be only 50 shares but the company only has 500$ now, making each share still worth 10$ for 10% hurdle rates.

positr0n 3y ago
But companies are not pots of assets. What you are buying is assets - liabilities + predicted future cashflow * discount rate. So a more realistic example would be a company with 100 shares, $1000 of cash, and $1000/yr stable income. So before a buyback, 1 share grants you the benefits if whatever the company does with $10/yr of income. Whether it be dividends, reinvestment, etc. If the share price is $25 and they spend half their cash on hand to buy 20 shares back, now one share gets you $12.50/year of income. Thus the share is worth more than it was before. Disclaimer: Armchair finance / economics knowledge. Hope the above is correct.