That doesn't make any sense. The market is the most efficient capital allocator because shareholders are the market, not companies.
Companies are giving their cash back to shareholders because each individual company thinks their shareholders can better allocate the cash, rather than the companies themselves. This is equally true for both buybacks and dividends.
This is because most companies have no wish to operate like broad VC firms or investment firms. While plenty of shareholders do.
The government has all the infinite "dibs" it wants, they're called taxes. If the government wants to tax buybacks further it doesn't need any particular logic of "dibs" to do so. And right now buybacks are taxed in exactly the same way as capital gains, which is the same way qualified dividends are taxed too. And corporate profits are already taxed too.
Buying back stock only creates value for shareholders if the stock is trading for less than its intrinsic value. Above that price buybacks destroy shareholder value.
Executives are doing this to meet performance targets and get bonuses. Not to allocate capital efficiently.
I don't think I can follow your argument. What's intrinsic value? The market is supposed to arrive at a fair value for a stock (and there's no reason to assume it doesn't because that would create arbitrage opportunities). If you buyback at the fair value no shareholder value is created or destroyed, the only change is in the ownership of the assets and future dividends.
Don't stock buybacks basically transfer wealth from the company to the shareholders? The major advantage this has over other means of transferring wealth is that shareholders get to realize their gains with only capital gains tax applied, rather then the much higher dividend tax rate.
No tax rates are now the same(don't nerdify this, it's correct enough for the point). The reason is that dividends are sticky. You lower the dividend, and stock holders will notice(and sell). You buy back stock, and then later stop, few will notice. Buybacks support stock prices really well for executive stock based compensation, they can sell into the buying which they know exactly when it will happen.
While the tax rates are the same the result is different since a shareholder can chose when to realize the gain. If you model dividend reinvestment vs share buy backs this taxation deferral is quite significant for the shareholder due to compounding effects. A simplistic illustration:
Tax rate on cap gains and dividends is 20%.
Inflation is zero.
Company earns 10% of its market cap yearly in profits.
Company's market cap is static over time.
Scenario A: returns profits as share buy backs.
Scenario B: returns profits as dividends on which the shareholder pays tax and reinvests the rest in company stock.
At the end of the scenario, sell all stock paying capital gains tax due (nothing to pay on scenario B since stock price has not changed.)
Even though dividends and capital gains are taxed at the same rate, scenario A beats scenario B by 10% over 10 years and 45% over 30 years.
> Don't stock buybacks basically transfer wealth from the company to the shareholders?
There's some confusion in your comment. The company is already property of the shareholder. The shareholder holds shares of the company. Thus, the assertion that stock buybacks transfer wealth from the company to the shareholder is a tautology because the wealth from the company is already the wealth of the shareholder.
In the individual case, some number of shares in the company is property of the shareholder.
Perhaps more accurate would be to say they liquidate part of a company's wealth (the broader value of all assets owned by the company) into stock price (the value at which a share can be sold on the open market).
From this perspective it seems fair to say that they transfer wealth from company control to shareholder control.
I think it is best to characterize it as being an opportunity for shareholders to part ways with the company, taking their share of ownership as cash and moving on.
Of course, all of these characterizations are the same and describe the same event, but I find this one the least inflammatory. It makes it clear that no transfer of wealth is happening, that buybacks don't meaningfully effect share price, etc.
No the shareholders own the company so they “own” the cash either way. Buybacks and dividends return control of the cash back to shareholders so they can allocate it elsewhere.
Theoretically an x billion dollar dividend results in the exact same outcome for a shareholder as an x billion dollar stock buy back. Not sure the time value of money factors in.
No it is merely a act of divestiture of capital / wealth that shareholders already own.
What is peculiar is that this act has nothing to do with running a company well in the long term, yet is the most immediate way executives can improve their "performance based compensation". Execs seem to have found a hack around stock based compensation that biases companies towards divestiture over investment, and the short-term minded shareholders are onboard with this scheme at the expense of long-term minded shareholders.
This looks largely like a bug in the executive compensation system...I'm curious what kinds of fixes are going to come out of the world of MBA academia.
Another advantage for many different kinds of shareholders (foreign, non-profit, tax-loss-holders, long-term-holders etc) could be that the taxation rules for buybacks are specific to the shareholder.
Dividend and company taxes can really screw certain types of shareholders.
It also depends on what kind of account the holdings are in. In retirement accounts, it’s all the same.
In our « tax-free savings accounts », we still get hit by IRS withholding taxes that we can’t write off against any corresponding taxes (because there aren’t any).
In a cash account, US dividends are taxed as if they were bond interest.
Capital gains also let stockholders pick and choose which year to crystallize their gains.
I don’t plan on selling some funds until I have a low tax year.
Don't stock buybacks basically transfer wealth from the company to the shareholders?
No. It drives up the share price. That's nice for people who want to sell, but does little for the long term. A company that has dividends might be able to increase them if the number of shares is reduced, but buybacks are often done by companies that dont have dividends. There are companies doing both and I'm not sure what to make of that.
> Don't stock buybacks basically transfer wealth from the company to the shareholders? The major advantage this has over other means
No, because the shareholders already have the wealth that is in the company, since stock is a form of wealth. It makes some part of the wealth shareholders already have liquid, though.
Most securities have a real intrinsic value that can be calculated the future cash flows to owners from that security. For bonds, the number of variables in this calculation makes this easier to understand: If you have a bond that will pay you $100 one time in one year, then the intrinsic value of that bond is slightly less than $100 (because there is risk you won't be repaid, there is inflation, and there is a cost to waiting to get your $100). If you pay $50 for it, you are getting a very good deal relative to intrinsic value, and if you pay $150, you are getting a bad deal.
This same calculation can be made for stocks based on their dividends and any terminal value from an eventual acquisition. These calculations fluctuate more because dividends are variable.
The parent's comment is right though, its something buffet often observes: If a company buys back stock far about its intrinsic value, it is transferring wealth from current shareholders to now ex-shareholders. If it buys it back below intrinsic value, then it is transferring it from now ex-shareholders to shareholders.
There is actually a wonderful story that illustrates this. Try searching for "buffet pritzker Rockwood & Co arbitrage".
The short version is that Rockwood & Co was sitting on a massive supply of very valuable chocolate, and its stock price didn't reflect the value of that chocolate. Pritzker controlled the company, and announced it would redeem shares for chocolate (a buy-back in chocolate). Arbitrage traders then bought up shares at the low price, redeemed them for more valuable chocolate, and pocketed the difference.
BUT, what they didn't calculate was that the amount of chocolate that remained inside the company was far larger than the amount that was going out to the departing shareholders. Essentially, the chocolate 'payments' for stocks were far below the intrinsic value of the company. So, every time an arbitrage trader traded in shares for chocolate (at a profit to them) Pritzker was actually getting far richer by retaining his remaining shares. Everyone was winning, but Pritzker was winning far more. In the end, Pritzker retained a much higher ownership percentage of an only slightly smaller stockpile of very valuable chocolate, and made a lot doing it.
I think I saw the full version of this story in the biography of Buffet, but I am not sure. It is super fun. It illustrates why a management team that is buying back shares below intrinsic value is helping the remaining owners increase their wealth, and vice versa.
Why didn't Rockwood & Co just sell the chocolate in bulk to someone else? I have to imagine the arbitrage traders were taking it at a discount because they're probably bad at selling chocolate, and they're probably reselling them too. Why didn't Rockwood & Co just do that instead?
The market is frequently irrational. Short squeezes, news cycles, macro economic events, etc can cause a stock to diverge from a reasonable calculation of its discounted future earnings. In short, the efficient market hypothesis is incorrect. It's why value investors like Warren Buffett have been able to get rich buying underpriced stocks. It isn't all that unusual for stocks to double or halve during the course of a year. Acknowledging this is why Berkshire is authorized to buy back stock only up to a certain multiple of book value. More companies should follow suit.
If price=value by definition then that means there is no such thing as market manipulation, buy definition. And that the value of exchange traded tulips was in actual fact enormous at one point.
The fact that arbitration actually exists is because there is a disconnect between price and wealth generated solely by information differential.
And beyond an exchange, that, merely because their parent's opportunity cost differs greatly, raising one infant is in fact vastly more valuable than another essentially identical infant.
I would suggest that price is not identical to value, it's just that the market is usually the best way to determine a value.
Not really. Arbitrage opportunities typically occur when the risk and opportunity can be defined such as spread and liquidity across exchanges or contracts, euro denominated vs USD denominated assets, etc. intrinsic value is much more subjective. Yet, there are times where stocks might drift above or below their intrinsic value significantly. For instance, many CPG companies have become bond proxies due to rates, where the price only makes sense with a 3-4% discount rate.
Companies have non public information and therefore can more accurately price the value of their stocks relative to the market than investors can. This may not apply in the long term, but insider trading is illegal due to this information asymmetry.
In the extreme case of a disclosure that will tank the stock price their current investors would be better if the company sold new shares ahead of that announcement. This would then dilute the loss across more investors. Though the ethical issues should be obvious.
Buybacks are simply the opposite of issuing new stock which happens to have tax advantages.
Out of curiosity... are stock buybacks subject to any kind of insider trading rules? I'd imagine that they'd be needed if the executives own stock in the company (or whose compensation is otherwise tied to the performance of the stock).
There are separate rules, but they operate in the opposite direction. The SEC rules give a safe harbor, a type of immunity for enforcement actions for share price manipulation, to firms whose insiders sell when a buyback is announced.
> Buying back stock only creates value for shareholders if the stock is trading for less than its intrinsic value. Above that price buybacks destroy shareholder value.
That's assuming the value of the cash is the same in the hands of the corporation as the shareholders. But if the corporation has nothing it needs the money for internally then the cash is nothing but a liability that it has to waste resources trying to figure out how to externally invest, or have it get infected with principal-agent problems and empire building. The shareholders as more directly self-interested parties may be better equipped to find investments with a better risk-adjusted return.
Moreover, if the company is successful then needlessly holding the cash causes the stock to trade for less than its intrinsic value, because holding cash lowers the company's overall ROI from the above-market returns its actual business is generating to the average of that and the presumably market-average rate of return it collects on the cash. Returning the cash causes the company's share price to adjust (i.e. rise) to reflect the higher returns from its actual business once they're no longer being diluted.
Investors then try to model what the future dividends of the company will look like once it establishes a dividend, or what price it is likely to eventually get acquired for as a lump-sum payment.
Buybacks don't create value. They return the value created by the company to stockholders. They are form of dividends you're just automatically reinvesting it into the company stock instead of getting cash.
Yeah, wanted to respond this way. Buybacks are basically a one off dividend. Companies want to return money to shareholders, but don't want to commit to returning a certain amount regularly, so they do buybacks.
Whether the stock is over or undervalued is a bit besides the point, actually. It's a direct flow of cash to investors, that any investor can take advantage if they think the current price is too high (or not, if the price is too low)
Buybacks are not about creating value, they are about transferring value which already exists back to the legal owners.
Banning buybacks would leave money in the hands of the managers/administrators. Only suggest this if you feel CEOs are under paid and control too weak.
But "buying back stock" only temporarily creates value for the shareholder. If they don't immediately sell the stock, the price will return to what it was before they buyback, because no underling value in the company has increased (especially when dividends are never payed out, like most high tech companies that are always in the "growing" phase : looking at you FB, Goog etc).
The point is both the companies in question and the ultra-wealthy that are the beneficiaries of the vast majority of these buybacks AREN'T paying taxes, so it's another way for the government to at least attempt to capture the $$ that should already be going into the treasury instead of offshore accounts/subsidiaries/whatever double dutch triple lux tax evasion scheme of the month they're using.
How are they not paying taxes? The people selling their stock to the company in the buyback have to pay taxes on any gains and the people holding onto the stock long term will eventually have to pay taxes on any gains when they finally do sell (they're not going to hold onto a stock until the heat death of the universe so they are going to realize their gains and pay taxes on them at some point).
The companies are in many cases doing things like this:
1) their revenue they classify is centered in a different country like Ireland
2) they setup a massive line of credit with an international bank
3) they take out massive loans against the money they have “overseas” that is not taxed
4) they then pay the buybacks and other things to their investors with that loaned money in US
5) they then pay back the bank at their international site
6) the bank then borrows more money from federal reserve at nearly zero interest rate
Rinse and repeat.. tons of companies have done this. So sure some investors will eventually cash out but companies should also be taxed if they derive some benefit from the country they are from or selling products. I would argue those taxes should be low but allowing companies to totally dodge them seems like a bad setup long term.
What I don't understand about this is... Why can't I partake? If my employer is based out of these havens for tax purposes, why can't they pay "me" by paying into the bank account of the foreign on-paper-only company I own, whose line of credit with a foreign bank I then use for my own expenses?
I feel like this must be against the law somehow, but I don't quite understand where the line is.
> What I don't understand about this is... Why can't I partake?
Honestly: because you're not rich and connected enough to have the rules written for to your benefit your naked self-interest. If it was legal and economical for ordinary people to evade taxes, too many people would do it and the country would collapse.
It's not against the law at all. It's just expensive because you forgo labor protections, social security contributions, medicare contributions, paying for accountant's time to file for international income, etc.
Wages are taxed differently than a company's income. If you were to distribute the income to yourself every 2 weeks, you'd end up paying all the same taxes as wages.
It's pretty straightforward to determine where someone works. You are physically in the USA when you do the work so you're on the hook for income tax. What the companies do is set up a bunch of companies in different locations. Then they manipulate their books so that the low tax companies show profit while the high tax locations don't.
But you're not getting paid. Your company is getting paid, and then you're using credit against your company's assets to pay your expenses. You, for all intents and purposes, are volunteering.
Maybe your company has to sell something to be legit? Okay, you sell the people who are paying your company toothpicks. They pay your company for the toothpicks, the labor is just incidental.
Because the Department of Labor has actual real teeth and staff, whereas the IRS is drastically understaffed.
Also the situation you describe would make your life incredibly complicated. The logistical hoops necessary to pay your rent make it extremely unappealing, IMO.
Wouldn't it be hilarious if the bank prior to the buyback bought a bunch of the stock (I don't know if this is true, but seems plausible). Then in that case the company would literally be taking out a loan from the bank in order to buy the stock from the bank. So then the question is if its possible for the bank to claim some sort of thing where when they sell the stock to the actual company that it is some special type of transaction and maybe gets favorable tax treatment? Wow I want to look into that.. sounds interesting / shady if thats possible to do..
I believe your comment is referencing normal people paying taxes, where the comment you are replying too is referencing the ultra-wealthy and corporations paying taxes.
The ultra-wealthy and big corporations take advantage of schemes to lower their taxes.
Corporations are paying taxes. US corporate tax receipts as a percentage of GDP are a tick higher than the OECD average. Also, it’s not the “ultra wealthy” primarily benefitting from these buybacks. Most corporate equity is owned by the bottom 99% and pension funds.[1] (Someone with a $5 million retirement account may be very comfortable, but they’re not hiding their money in offshore accounts.)
[1] Most corporate equities are held by retirement plans or foreigners. Just 25% are held in taxable account. Of those, the bulk is owned by people outside the top 0.1%.
Considering the US’s keystone position in global economics, providing safe passage for trade (and relatively stable oil/NG prices, but never mind that) at the cost of a large standing navy, I think a single tick over other OECD countries is a joke. The multinationals owe the US better infrastructure.
Good it's called capitalism. We need creative destruction to move forward.
>> Retirees and the public were left holding the bag.
This!
Largely because the finance industry(or perhaps the world) is run by sales people.
Don't be a sucker, if you don't understand your financial assets in detail(e.g. if you are buying an index fund, understand why, not just based on past performance, go deep, what's the weighting?(currently float weighted which makes it easiest to sell to you, but the worst possible weighting makes it buy high and sell low).
Fuck that's a shit fuck ton of work for just a surface level analysis. But you should do much more research into your mutual funds/stocks than you do your next car purchase.
So yeah, it's not that they were left holding the bag, it's that they were sold free money that turned out to be not so free. Imagine that.
> the ultra-wealthy that are the beneficiaries of the vast majority of these buybacks
The S&P 500 is > 80% owned by institutions. That is mutual funds, pension funds and insurance companies. The main beneficiaries arent fat cats, but rather anyone with a 401k.
Are you claiming that a mutual funds' performance evenly benefits anyone with a 401k?
In the last 40 years 0.00025% of Americans have tripled their share of the wealth. Of course everyone with a 401k has benefited but they are nowhere close to the main beneficiaries of capital gains.
No. The share of wealth of the top 0.00025% has tripled.
The pool of people people in that quantile is dynamic.
In 1980, that was about 600 people. In 1980 the richest person in the United States was J. Paul Getty. I imagine most of those people are no longer alive.
In 1980, Jeff Bezos was 15, Bill Gates was 24, Larry and Sergey were 6, and Sergey had been living in the United States for 1 year. It's likely that the effect you're seeing is an artifact of the role technology plays in the economy rather than exploitation or rent seeking.
Your data does not say what you are claiming it says. It is possible (or even probable) for the ultra-wealthy to have retirement accounts. Once we admit that, then the obvious question becomes: Who do you think owns most of the money in those retirement accounts, the rich or the poor?
Retirement accounts are limited by the amount one might deposit annually. The most perhaps one can make is 19k in 401k and perhaps somehow max out SEP IRA - $56k (which I find quite tough to max out). Regular IRAs are out of questions, since at the income level dealing with 401k and SEP IRA, one does not get any benefits of funding regular IRA afaik.
So... The best-case scenario is $75k per year someone might be able to stash away in a retirement account. Let's say someone is able to do it for 50 years - it leads to $3.75m. It is a decent amount for retirement in my opinion, but 1) it is unlikely to optimize it fully to get there, and 2) doesn't really look stratospheric to make a difference in retirement funds ownership categorizations (i.e. 0.1% owns large part of retirement investments).
There are lots of IRA accounts with far more money in them. We have the data (from 2011) which shows it.
==As of 2011, 314 multi-millionaires had more than $25 million saved in their IRA, with average holdings of $258 million, the GAO reported. About 9,000 taxpayers had at least $5 million in their IRA, with average holdings of $16 million.==
==All told, 630,000 millionaires — about 1% of all IRA savers — cumulatively had more than $1 trillion in IRA accounts, accounting for 22% of all IRA assets.
Meanwhile, the other 99% — the 42 million taxpayers whose IRAs held less than $1 million — had average savings of just under $100,000.==
Thank you for sharing this link. Not sure what to think about it tho...
"In essence, Bain would value the special, riskier shares at pennies on the dollar. In one deal, employees invested about $23,000 in their IRAs. When the takeover target went public, those shares were worth about $14 million, and were worth about $23 million they finally sold the shares. That’s a 100,000% return."
Meaning, someone was risking their $23k in IRA. And looks like that investment opportunity was given to regular employees as well, meaning it wasn't a rigged up illegal trade based on some kind of insider information?
One legal (AFAIK) method:
The company had low/no valuation, and it was private. Those shares were sold to the employees (likely of the vehicle containing the company) at the stated valuation. Once they went public, there was a valuation event. Roughly, they snuck through the 409a before it had to be reported.
So if shares had a low valuation, employees buying these risked that they will worth nothing in the future. I.e. not really different from buying AMZN shares in IRA.
Unless, shares were valued low on purpose, and were offered to buy at that price as another form of compensation (so compensation was difference between "as valued" and "real value"). In that scenario, it appears that these employees had ordinary income, which was not declared as such... And of course, that smells "fraud"...
So the question is - was the original investment truly at risk?
$75k per year is a pretty insane amount of disposable income for most Americans, where median household income is 63k[1], per capita disposable income is 45k[2], and 78% of people report living paycheck-to-paycheck[3]. Anecdotally the only people I know who are funding their retirement well in there 20’s are generationally wealthy and got a house from mom and dad. Many, even those with some disposable income, live paycheck to paycheck.
Also, as my sister comment points out, rich people can still have ridiculous retirement accounts. Saying that “everyone gets a piece in retirement” ignores a large portion of our society.
That's the wrong type of investment for a retirement account with a 50-year horizon. An account like that is (should) be invested in a diversified portfolio of stocks and bonds, such as one composed of low-cost index funds.
By definition not the rich, since retirement accounts are capped by law to relatively low yearly contributions.
Sure the ultra-wealthy can have their retirement accounts too (if they even bother), but they can't be any larger than anyone else's. Just a tiny tiny tiny sliver for them, really.
Since the ultra-wealthy are by definition a small portion of the population, and retirement contributions are capped at a low annual rate, it does in fact make the point that the parent commenter is trying to.
==All told, 630,000 millionaires — about 1% of all IRA savers — cumulatively had more than $1 trillion in IRA accounts, accounting for 22% of all IRA assets.==
1 million dollars in a 401k is not the same as a 1 million dollars in a house. When the median american makes 65k per year and has 45k in disposable income it takes a lot of luck to put a million dollars into a 401K. There are 300 million+ americans, of which only 650k have a million or more in the 401k. How can we call the top 650K middle class?
We can assume that the 650k people with $1 million in just their IRAs also have significant other assets. I’m not really sure what you are arguing here.
Why would a retirement fund want a buyback? They would prefer a healthier company in ten years rather than a lump sum they need to pay someone to reinvest.
1) Because buybacks and dividends are what produce the entire value of stock at the end of the day. 2) Buybacks don't need to be reinvested, they already are by definition. 3) Rebalancing your portfolio due to buybacks is done automatically by your fund that you already pay a small maintenance fee for.
There's nothing unhealthy about buybacks, that's a total misconception that needs to die. They're just treated differently from unqualified dividends for tax purposes.
1)The value of the stock is based on the value of the company, a better performing company produces more value than a buyback. 2) I'll admit I'm not too knowledgeable about every kind of buyback, but surely some involve buying back stocks. For some kinds, you're probably right. 3) I would be surprised if many funds existed where there weren't transaction fees or a percentage based fee, giving them reasons to prefer buybacks even if it doesn't help the actual owner.
>They're just treated differently from unqualified dividends for tax purposes
At the end of the day it's not much of a tax loophole. The same total amount of money ends up getting taxed, it's just that shareholders can decide whether they want to opt-in to realizing their capital gains. Some choose to sell back fewer shares (frequently none) and some choose to sell back more shares (especially stock-receiving employees, who may feel a need to diversify). Hardly something to get upset about.
A retirement fund may not want the tax event of a dividend.
A retirement fund needs $x/month: things may work out such that they receive too much cash from dividends in any given month/quarter. So they're receiving, and being taxed on, cash that is not needed.
With buybacks a retirement fund can determine how much money they need and can cash out only what is required, and only take the tax hit on that.
Retirees are also going to be selling down their portfolio as they age for living expenses. The ultra-wealthy are probably not systemically selling out of the equity market.
The beneficiaries of these buybacks are the general public, these are public companies. They are your pension funds, your rainy day funds, they are government healthcare programs, Norway's Oil fund... They are everyone. The reason they aren't paying taxes on buybacks is because they haven't actually made any money until someone sells stock.
To add to this, the ultra-wealthy, university funds, funds-of-funds, etc. are interested in capital preservation, according to the article. This means they likely will not reinvest their profits into companies that will grow; they're more likely to reinvest into other companies that will do buybacks.
> Companies are giving their cash back to shareholders because each individual company thinks their shareholders can better allocate the cash, rather than the companies themselves.
I thought the reason for a stock buyback was that the board believes the stock is undervalued.
I can't imagine investing in a company that borrows loads of money from the government just to hand it back to shareholders. That sounds like a total scam to me and a terrible investment. I wouldn't accept stock in a company like that even for free. But what do I know. I'm not a CEO.
> Companies are giving their cash back to shareholders because each individual company thinks their shareholders can better allocate the cash, rather than the companies themselves.
This is very strange explaination. As stated it sounds like stock buybacks are some sort of altruistic endeavor resulting from some kind of collective shrug.
This couldn’t be further from truth. Buybacks are the result of executive incentives to hit a certain stock valuation. You can either do this the intended way by growing the company’s value by making competing in the marketplace, or you can do it the lazy underhanded way by manipulating the stock market by creating an artificial scarcity.
You don’t get chalk this up to a faceless emergent phenomena when there are a very short list of people on FTC documents who made the decision at each and every one of the these companies.
>This couldn’t be further from truth. Buybacks are the result of executive incentives to hit a certain stock valuation.
Why do you ignore the people who choose to sell their shares to the company?
Stock buybacks move cash from the company's coffers into the hands of selling shareholders, period. Whether it's good or bad to do so at any specific time is certainly debatable, but the idea that it "manipulates" the share price is wrong, both in theory and practice.
As a shareholder I want my money to be managed in a way that maximizes my investment. When executives incentives are paid by the value of the stock at a particular frozen moment in time, I get cheated. I get cheated because a buy back at the moment that the CEO and the board grade themselves is not in best long term interest of my wealth. I don't have time to be buying a selling stock everyday, they're fucking me by playing games. Money should be spent on research and development. That way GM and IBM dont become kodak, Walmart doesnt become Sears, and the great GE doesn't become...well GE is already there. Established american companies will grow from buy backs and mergers until they get disrupted because they didn't invest.
I highly doubt that compensation for executives is based on the value of a single share, not taking into account outstanding shares. That’s a blindly obvious loophole.
Their compensation would be based on market cap, which you can’t increase by doing a buyback.
That "blindingly obvious loophole" is basically the standard.
These compensation deals are very often based on earnings per share or value per share. And you can increase it.
The link below is from the Conference Board, which is about as rock-ribbed big business friendly capital establishment types as they come. Even they caution about executive trickery here.
In this case, companies are exploiting a short term feedback loop around taxation and share price, to funnel money into the executives and primary share owners.
In the long term -- the next crash will be a doozy.
Shareholders and companies are equally inefficient at allocating capital.
If not for buybacks, the company would probably have wasted the money on creating more useless jobs which would add no value to the company.
Instead, the company prefers to give the money back to shareholders in the form of capital appreciation so that they will either hold it or sell some of it and use the proceeds to buy shares of another equally wasteful corporation.
Eventually these corporate stock buybacks will lead to grotesque wealth inequality and if we're lucky, complete collapse of the international fiat monetary system which facilitates such atrocities.
> Companies are giving their cash back to shareholders because each individual company thinks their shareholders can better allocate the cash, rather than the companies themselves.
_This_ doesn't make any sense. Companies don't think. They're legal entities that are controlled by a small group of people. This group of people can decide that they would prefer to do share buybacks to meet their own performance targets.
Fact 1. Companies’ brains (for this level of executive decision-making) are their boards of directors.
Fact 2. Boards of directors are made up of people elected by shareholders.
Fact 3. “Making the shareholders money” (either through dividends or equity) is the most obvious “platform” on which to get elected to this position; and “not making the shareholders money” is usually a quick way to get replaced.
Fact 4. Unlike government elections in America—but like elections in Commonwealth nations—corporate “snap elections” can be triggered at any time from a shareholder vote. This means that a board-member can be removed pretty much instantly if they start to look like they’re not serving the shareholders’ interests.
Fact 5. Members of the board usually want to stay on the board, because it confers advantages. Even if there are no explicit advantages to being on the board, they get the ability to vote in ways that work toward their own personal interests, perhaps even getting themselves sweetheart deals. Even if they don’t go for these, there might be “lobbyists” (internal to the company, from industry-organizational bodies, etc.) that are willing to bribe them to vote certain ways.
And now, the assumption, that tends to hold in cases of publicly-traded companies: shareholders in the company are, by majority, pure investors that want their share value to increase, with some making short-term plays and others going long, but neither all that interested in the company outside of its portfolio value.
Putting the facts and the assumption together, you can derive that the board is structured in such a way, and members of the board are incentivized in such a way, that their behaviour is extremely predictable, operating almost according to an algorithm, rather than acting like a “group of people” with human whims.
This emergent behavior of the group, and the clear algorithmic model that can be used to predict it, are what people mean when they talk about “what corporations want.”
It’s very similar to how a person can want things that are at odds with the “wants” of the cells that compose them (such as doing things like drinking that damage those cells, despite each cell embodying an algorithm that steers toward that cell’s own survival.)
Fact 4 is largely incorrect. Boards with adversarial relationships with large blocs of shareholders generally adopt provisions like staggered board terms (like the US Senate).
Fact 3 is also a fairly fanciful interpretation. Large public corporate board membership can be lucrative, but is in practice not competed for by a talent pool the way that say, a CTO or VP of Sales or CFO role would be. New board members are almost always vetted and nominated by the existing board. Hence new board members are nearly always either 1. in-group members (a cynic would say "cronies") with satisficing business acumen from the same social/business milieu as the incumbents, or in the exceptional case, 2. high visibility outsiders (a cynic would say "window-dressing") from other endeavors, such as former politicians, admirals and generals, etc. A new movement adds a third possible vector in, namely being a highly qualified business person with a politically / optically desirable diversity characteristic. But once that candidate comes in, they quickly will learn that the means to stay in the Inner Ring and gain lucrative additional such opportunities is to toe the line...
I'm sympathetic to your idea of emergent behaviors of the group arising from knowable axioms about the individuals and their motivation but I think you've got some incorrect axioms about the selection and incentives of those individuals.
These are obviously not "facts" and companies obviously do not operate in that way.
Really obviously. Just observe any company.
I appreciate you might have a real hard-on for capitalism, but making up stuff like you just did doesn't help.
Companies are cess-pools of politics, incomplete information, petty rivalries, and disparate power. Most shareholders are clueless, poorly informed or spreadbetting.
Given this is all true, your "facts" are all objectively false.
Employees at a company might be engaging in petty rivalries in a "cesspool"... but the board of directors is composed of extremely professional, educated and informed investors.
Also, the board primarily represents not the small independent investor, but the majority of shares which are owned by professional institutional investors, which have quite the clue and are extremely well-informed -- they have entire teams of research analysts.
The comment you responded to does accurately represent how corporate boards work, if you actually bothered to "observe any company" in reality -- specifically publicly traded ones.
That's not a valid counter to the parent's well-formed post. Speaking for myself, I have observed countless companies and those facts continue to hold true.
I appreciate you might have a real hard-on for anti-capitalism, but making up stuff like you just did doesn't help.
Fact 2 is true-ish, sort-of, but largely irrelevant. Except in extreme cases that tend to make headlines, shareholders vote for the people management selects.
If the purpose of equity buyback is to more efficiently allocate capital, then individual companies executing equity buyback are doing so because can no longer make efficient use of capital by using it to fuel additional growth and higher returns.
If that's the case, then equity buyback is tantamount to admitting that the company has no future potential for growth. As a company's stock price reflects expected value from future growth, a buyback should therefore trigger a drop in the stock price.
But it usually doesn't, usually buybacks trigger increases in the stock price as fewer shares remain in circulation in the public market and the company improves executive flexibility by consolidating control, and as investors expect to be paid a premium over market price through the buyback program.
Why? Because private players don't care about macro performance metrics. Buybacks have nothing to do with what may or may not be the best allocation of capital in the market.
The stock price doesn't reflect growth at least not directly. The price reflects expectation of future earnings. If the company is never going to grow but makes stable 1M per year in profit then that company is worth something. Let's say it's worth around 16M as that's around the break even point at which people prefer to have cash over company stock. If now that company uses 1M in yearly profit to buy back shares it's still worth 16M but every individual outstanding share is worth more as it now represents bigger part of the same pie. Therefore after the buyback the share price should increase. We can also say by exactly how much (barring any other new information).
This is finance 101 really. Buybacks are just more tax efficient because they are not taxed at the time of the buyback but at the time the stock holders sell.
The company (therefore remaining shareholders) no longer has that $1M that they spent on the buyback, meaning the total pie is actually smaller as well as having fewer shares/slices outstanding.
Yes, what dividends have to do with it? The company has value no matter if it pays the dividends or not. Controlling it has value for example as it may be worth something when bought by another company. You can also always dissolve it and pay the cash back to shareholders or you can buy back the stock which is a form of dividend (one when you're automatically reinvesting into the company stock).
Companies are giving their cash back to shareholders because each individual company thinks their shareholders can better allocate the cash, rather than the companies themselves. This is equally true for both buybacks and dividends.
This is because most companies have no wish to operate like broad VC firms or investment firms. While plenty of shareholders do.
The government has all the infinite "dibs" it wants, they're called taxes. If the government wants to tax buybacks further it doesn't need any particular logic of "dibs" to do so. And right now buybacks are taxed in exactly the same way as capital gains, which is the same way qualified dividends are taxed too. And corporate profits are already taxed too.