
Buybacks at $46B a Month Dwarf Everything in U.S. Market (2015) - tosseraccount
http://www.bloomberg.com/news/articles/2015-03-04/buybacks-at-46-billion-a-month-dwarf-everything-in-u-s-market
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cperciva
Remember, in a perfectly liquid market without taxes, a company which executes
a share buyback will have no change in its stock price, since the shared
redeemed will be exactly balanced by a reduction in the value of the company;
and this is also exactly equivalent to distributing profits in the form of a
dividend.

On the other hand, when the rate of taxation on capital gains is lower than
the rate of taxation on corporate dividends, it's advantageous to pay out
surplus cash in the form of capital gains by executing a share buyback. This
also provides a tax-planning benefit to shareholders: Everybody is forced to
realize a dividend (and pay tax on it) but some shareholders will prefer to
realize more or less capital gains in a given year.

In Canada we have rules which sometimes reclassify capital gains as "deemed
dividends" to prevent this sort of maneuver. A far better solution would be to
simply fix the tax system so that economically equivalent actions get taxed
identically in the first place.

~~~
baus
I don't think this is accurate. When a company buys back shares, the shares
are retired increasing the ownership percentage of the remaining shareholders.

It is basically the opposite of issuing shares and diluting existing
shareholders.

~~~
cecilpl
Right. The remaining shareholders own a larger percentage of a company that
now owns less cash.

Say the only thing my company owns is a bank account with $100 in it. There
are 5 shares outstanding worth $20 each. The company buys back one share for
$20, so now there are 4 shares outstanding in a company that owns $80.

~~~
djrogers
People don't invest in companies that merely have cash. Growth and recurring
revenue are more important metrics to most

~~~
pzone
OK, but if the company held $50 in non-cash assets and $50 in cash, the same
logic would hold. The "growth and recurring revenue," stuff you're talking
about is just an asset pricing restriction, which requires that the $50 in
non-cash assets are not affected by moving some cash off the balance sheet.
This holds if the company does not face cash constraints. (Like Apple.)

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Animats
This is a consequence of tax law and greed. There are three ways a company can
pay for their capital - dividends, interest, and stock buybacks. The first is
taxable. Only the last makes options given to executives valuable.

The US should tax buybacks and interest as it does dividends. That would put a
stop to this.

~~~
AnthonyMouse
All of them are taxable. Interest is taxable income (to the lender), though
it's also a prime opportunity for tax arbitrage so the lenders have a strong
tendency to be incorporated in low tax jurisdictions.

And buybacks effectively get taxed as capital gains (because they result in
higher share prices), but not until the shareholders sell their shares, and of
course then it's at the capital gains rate.

So what you're really getting at is that dividends and capital gains should be
taxed at the same rate.

And if you really want to promote dividends, let reinvested dividends defer
taxes like buybacks do until the shares purchased with the dividends are sold,
even if they're reinvested in a different company. Then you'll see investors
demanding dividends because the tax advantage of buybacks would be gone and
dividends would have the advantage of allowing investors to choose what to
invest the new money in.

~~~
sokoloff
> So what you're really getting at is that dividends and capital gains should
> be taxed at the same rate.

In large part, they are:
[https://en.wikipedia.org/wiki/Qualified_dividend](https://en.wikipedia.org/wiki/Qualified_dividend)

~~~
roganp
Except that with a capital gain you can choose when realize that gain (and
when you pay that tax) whereas the company defines its dividend schedule. But
I did not know that was the law...it is always/everywhere repeated that
dividends are taxed at the personal income rates (e.g. many times in these
comments that is repeated), but that is not true.

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sna1l
Apple buys back a large amount of stock because that is the only way they can
really get any return out of their stock
([http://247wallst.com/technology-3/2016/03/01/why-apple-
may-s...](http://247wallst.com/technology-3/2016/03/01/why-apple-may-
spend-20-billion-in-stock-buybacks-in-2016-alone-or-more/)).

Unfortunately due to the law of large numbers, for them to grow at even a
15-20%, would require billions and billions of dollars in revenue increases.
Seems like the most prudent course of action for them and their investors.
Albeit you could also argue that using that cash to buy other companies might
be worthwhile.

~~~
joshdickson
That's not the law of large numbers.

~~~
rdl
There are at least two widely used "law of large numbers" \-- mean reversion
is more popular outside finance, and firm size vs market size is probably more
popular within finance.

~~~
joshdickson
It is used in both situations, but it very clearly only means the former and
the latter is incorrect. "Begs the question" is almost always used
incorrectly; that doesn't mean its definition has changed.

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xenadu02
So many companies with so much profit they literally can't find any way to
invest it to generate return. It might make you wonder why wages are stagnant
or what the argument for outsourcing to lower labor costs is really about, if
you were the sort of person to bother wondering about such things.

~~~
virmundi
I no longer wonder about such things. The simple fact of the matter is that
the system is designed to work against wage earners. It focuses on the benefit
of our corporate overlords.

For example, I use to work for a company as a wage earner. I left, moving my
401k into a self-directed IRA. Since the market has been bad lately, I
remained in cash. I want to put that money somewhere else: property.

I would love to buy a building downtown (which is theoretically possible). I
would convert the top floor, about 5k sq/ft, into a co-work office that
charges $10/day. The first floor I would rent out to someone, like a grocer.
Sadly, the system works against this dream.

First, I can't use the building directly if I purchased it with the IRA. I, as
the IRA holder, cannot utilize any properties within the account directly.
There goes the co-work. I can't put sweat equity in because that is an illegal
contribution. There goes fixing the building without loosing money on labor. I
can't directly take the checks and deposit them in the IRA. The law requires
that all checks go directly to IRA holding company (who will take a
percentage). Finally, I have to get a special IRA account that holds property.
Trick is that there is almost no one that does that since they don't make a
lot of money. The few that do, take a big chunk.

So I, as a lowly wage earner, can't tap my largest asset directly. I can only
use my money to feed the pockets of others via stocks and bonds.

As the Simpson's sung, "It's the American way!"

~~~
superuser2
I don't want to be rude, but this doesn't make much sense.

Preferential tax treatment for retirement savings accounts was created with
the the specific intention of encouraging people to save for retirement, in
order to minimize the extent of poverty among senior citizens. It is a
feature, not a bug, that these accounts make it difficult to speculate,
because the speculation decisions of amateurs and even most professionals are
provably, demonstrably worse in aggregate returns than buy-and-hold passive
investment in the overall economy.

If you want to speculate on real estate, you are free to do so. You just have
to pay taxes on the money used to do so, so that the government can afford to
rescue you from poverty if you fail.

> Since the market has been bad lately, I remained in cash.

For the record, buying at the top of the market and cashing out in downturns
is the maximally wrong investment strategy. A random number generator would in
general outperform this strategy, because at least some of the time it would
do _anything_ but that.

~~~
makomk
> It is a feature, not a bug, that these accounts make it difficult to
> speculate

Except that IRAs do let people invest their retirement savings in risky
speculative investments like buy-to-let properties - they just have to give
the IRA holding company a cut of they money in fees and pay someone else to
deal with the repairs and maintenance, both of which have the effect of making
their returns worse.

~~~
HappyTypist
The previous poster said it makes it difficult, not impossible. Forcing you to
pay fees would be a disincentive and discourage people from speculation

~~~
virmundi
The issue is that I'm forced to speculate in the stock or bond markets rather
than the property market. The companies providing investment IRAs are
practically non existent. I've tried to find them. All I actually find was
rumors if their existence.

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ChuckMcM
Does anyone know if you can use foreign funds in a buyback as a way to
repatriate funds? Wondering if you have cash sitting in a foreign bank, can
you use those funds to buy your own stock? Probably not since it would be a
giant loophole you could drive a bunch of cash through.

~~~
iofj
Yes you can. From [1]:

While U.S. tax law is currently making it unattractive for Apple to spend its
foreign earnings on buybacks, that pile of overseas capital (now above $200
billion) is effectively guaranteeing bonds that raise cheap capital Apple can
use to buyback its shares at an extreme discount.

Steps:

1\. Loan "US" cash, guaranteed by foreign cash (doesn't need profits
repatriated)

2\. Use loaned cash to buyback shares

Optimization:

1\. Loan "US" cash, guaranteed by foreign cash

2\. Buyback using loaned cash

3\. Have your foreign subsidiary buy the loan from whoever you loaned from

4\. Use the interest payments to transform US income into foreign (non-
taxable) income

(it's not quite unlimited, there's a number of problems with this)

[1] [http://appleinsider.com/articles/15/10/27/apple-inc-
snatches...](http://appleinsider.com/articles/15/10/27/apple-inc-snatches-
up-14-billion-of-its-own-shares-in-massive-q4-buyback-surge)

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walterbell
Are there public companies where projected buybacks would result in the
company being taken private, after N years?

~~~
dingaling
Yes, Michael Dell took his namesake company private again in 2013 after $25
billion of buy-backs.

~~~
kgwgk
He (they) also put $25bn on the table to buy the 85% he did not control
already.

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carsongross
Some day, please let it be soon, corporations will all be treated as big LLCs,
with profits/dividends passed through to shareholders proportionally to be
taxed at the individual income rates. Couple that with taxing cap-gains as
income, since it is, and all this nonsense goes away.

Owners (rather than todays "owners") get their share of profits, rich people
pay their share in taxes, good triumphs over evil, and so on.

~~~
sabalaba
Taxing capital gains at 39.6% (our current top income bracket as of 2016)
would be bad for business, job creation, and growth in the US economy.
California also taxes long term capital gains (LTCG) at a top rate of 13%. It
would mean that an investor in California would experience a LTCG rate of
52.6%, the highest in the entire OECD. Capital has legs and having a non-
competitive capital gains rate would incentivize investors to allocate their
capital elsewhere.

[1] [http://taxfoundation.org/article/2016-tax-
brackets](http://taxfoundation.org/article/2016-tax-brackets)

[2] [http://www.forbes.com/sites/robertwood/2015/03/25/u-s-
capita...](http://www.forbes.com/sites/robertwood/2015/03/25/u-s-capital-gain-
rate-among-worlds-highest-but-president-obama-wants-more/#10f23b8f20ce)

[3] [http://taxfoundation.org/blog/how-high-are-capital-gains-
tax...](http://taxfoundation.org/blog/how-high-are-capital-gains-tax-rates-
your-state)

~~~
downandout
_> California also taxes long term capital gains (LTCG) at a top rate of 13%_

I'm sure that Zuckerberg et al have brilliant tax accountants, but this is one
thing that has never made sense to me. Volunteering to pay an extra 13% simply
for the privilege of living in Northern California seems insane to me. Any of
these guys could move a few hours down the road to Tahoe or Reno and save
themselves billions of dollars in state taxes, even if they left the company
headquarters in CA.

I'd also like to see Pricenomics do a study measuring the market cap impact of
California's high corporate income tax rates on major publicly traded Silicon
Valley companies. I'm guessing investors would be sickened by the results.

~~~
lyncnshare
The tax only applies to realized gains. As long as they aren't selling their
shares they aren't being taxed. They can also sometimes contribute the shares
to tax advantaged vehicles (remember Romney having $101 million in his IRA
[1]) or set up other structures to minimize their tax burden. That being said,
Northern California is a wonderful place and housing and cost of living prices
indicate that many people are willing to pay to live there.

[1] [http://www.reuters.com/article/us-usa-campaign-romney-ira-
id...](http://www.reuters.com/article/us-usa-campaign-romney-ira-
idUSTRE80N04E20120124)

~~~
downandout
_> That being said, Northern California is a wonderful place and housing and
cost of living prices indicate that many people are willing to pay to live
there._

No place is wonderful enough to pay billions of dollars in extra taxes just to
live there. If you are a top engineer making $500K/yr, you're only paying
~$65K/yr in CA taxes, and you wouldn't make anywhere close to $500K in other
cities. So the decision to live in CA makes perfect financial sense in that
scenario. But in the case of a billionaire founder, it simply doesn't make any
sense to sell shares while living as a California resident. You're essentially
volunteering to pay a ~65% increase in total capital gains taxes over what
they would be in a tax-free state.

~~~
sokoloff
There's the fact that Facebook is headquartered in California, and having to
establish and maintain NV residency might be more of a burden than Mark is
willing to do. (Imagine that CA will scrutinize that claim carefully.)

If Mark has to stay 183 nights in NV (or stay in NV more nights than anywhere
else), that might be more of a personal burden and inconvenience than paying
CA tax. And if it harms his ability to lead his company, it might ultimately
be more expensive as well...

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seizethecheese
Apple bought back $30 Billion of itself in 2015[1]. It's market cap is around
$600 Billion. It's buying 1/20th of itself every year.

[1] [http://www.aboveavalon.com/notes/2015/11/2/apple-is-
buying-b...](http://www.aboveavalon.com/notes/2015/11/2/apple-is-buying-back-
shares-like-theres-no-tomorrow)

------
downandout
I wonder how much of this is related to the harsh corporate tax environment in
the US. Take Apple for example. They can't use their offshore cash to directly
fund buybacks or dividends without repatriating the money and paying high US
corporate taxes on it. Instead, they have borrowed against their offshore cash
to make buybacks, and then whatever cash is needed for debt service can either
be funded from operating income or by importing offshore cash in a relative
trickle, with a correspondingly low tax burden, while the money grows
virtually tax-free overseas.

So by doing share repurchases with borrowed money, shareholders and executives
can reap the benefits of offshore cash without subjecting it to the enormous
tax burden they would by directly repatriating the money. As long as corporate
profits are still piling up abroad, this trend of corporate buybacks will
likely continue.

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onion2k
A lot of C-level pay is to tied to the company's earnings-per-share. A buyback
makes that number go up without actually improving anything. It's a lazy way
of getting your bonus. Here in the UK it was illegal for a very long time.

~~~
Gustomaximus
If this is a lazy way for a CEO to meet goals, I'm as concerned how lazy the
board is in not putting scenario exceptions in the bonus to allow for stock
concentration via buyback. It would be a fairly simple line in a bonus plan.
Likewise they shouldn't be punished if share are diluted via raising money on
the markets if that is the best things to do at the time.

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david927
For everyone wondering why the large cash balances on company books, this is
why. But it also means that if companies are spending their 'rainy day' money
that it's truly raining. The theory that the tech cycle is hitting its 8-year
downturn cycle just got more substantiated.

~~~
taneq
Does it really count as "spending rainy-day money" if they're spending their
cash reserves on buybacks? It seems more to me like they just have literally
nowhere else to spend the money other than bringing all those dividends back
into the company.

~~~
joshdickson
This is right. Though it's not that there is nowhere to spend the money, it's
that the company believes there is nowhere that would generate a better return
than just buying back part of the company and the money earns nothing in the
bank due to low interest rates. Apple has spent a truly staggering amount of
money on buybacks, money which it could have, for instance, used to buy Tesla,
Spotify, etc. Even after investing in major new product areas (watch, cars),
they still have more cash than they will ever realistically need.

~~~
eru
If Apple's shareholders want to hold Tesla stock, they can just buy it via the
money Tesla gave to them via the buybacks. They don't need Apple sitting in
the middle.

~~~
joshdickson
That's not how an acquisition works. It's not about Apple shareholders wanting
to hold Tesla stock, it's about Apple potentially wanting to own the company,
and that results in Tesla shareholders receiving Apple stock at whatever the
agreed upon price is. Apple would not just become an equity investor and buy
some Tesla stock, it would assume control of the company.

~~~
eru
And how would that extra layer of management be good for shareholders?

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wlievens
Isn't there a (big) difference between just buying ack shares and keeping them
in a pool, or actually destroying them to reduce the number of outstanding
shares? Or are those two equivalent?

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irixusr
In conclusion the stock market is up because there's lots of easy money and
companies are buying back stock.

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ww520
Is this one way to use the cash from profit oversea instead of bringing them
back into the country and taxed?

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pfarnsworth
Buybacks are a terrible waste of shareholders' money and is akin to putting
lipstick on a pig. The only reason why IBM has had relatively decent numbers
is because of the financial engineering associated with buybacks.
Unfortunately, it all blew up with the current CEO who has to deal with the
fact that revenues are dropping like a rock and can't be out-engineered
anymore.

~~~
riggins
Warren Buffet is on the phone for you ... He says when the intrinsic value of
a company is greater then the price implied by the stock, buybacks benefit the
shareholders .. And when the intrinsic value is less than the price implied by
the market price of the stock buybacks are bad for shareholders.

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mrfusion
Guys what happens if a company buys back all its shares? I've always wondered
that.

~~~
slv77
The last outstanding share of a company is worth the value of the entire
company. Selling the last share is typically a liquidation event where all
assets are sold to a third party and the cash is distributed to the remaining
shareholder. At that point the comany has no value (all its assets having been
liquidated) and is shut down.

Lets assume that the last remaining shareholder of Apple made the choice to
sell his share to the company for $1 (not a very logical choice). The company
still needs shareholders to operate and so the board would need to issue new
shares. At that point the could simply grant them to themselves and take
control of the company.

~~~
mac01021
Why does the company need shareholders to operate? Does our legal framework
prevent a corporation from owning itself and appointing its own board and so
forth?

~~~
slv77
Laws vary based on where you incorporate but for the corporation to stay in
good standing requires regular shareholder meetings.

There are other corporate structures that don't require shareholders for
things like trusts, non-profits, member controlled companies and cooperatives.

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lstamour
The article is from March 2015, FYI...

~~~
dang
Good catch. We added that above.

