
Who gets the money spent on share buybacks? - william_stranix
https://medium.com/bull-market/who-gets-the-money-spent-on-share-buybacks-d61a55c00457
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pedrocr
The article makes no sense. Share buybacks are a way for companies to return
money to shareholders just like issuing a dividend. The difference between the
two is mostly how they are taxed (share buybacks are generally more
efficient). The author seems to be railing against employee stock compensation
which is completely unrelated to stock buybacks, you can do either without the
other.

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spikels
Keep in mind that buybacks and dividends are very different for holders of
stock options. Option holders benefit from buybacks but get nothing from
dividends - that money is just gone (unless they are very rare "dividend
protected" options). This much bigger than the difference than taxation.

Since management both holds lots of options and makes the decision to do
buybacks it is unlikely that they are completely unrelated. Empirically it has
been know since at least 1998 that management with lots of stock options are
more likely to buyback shares[1].

[1]
[http://www.nber.org/digest/nov98/w6467.html](http://www.nber.org/digest/nov98/w6467.html)

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pedrocr
Very interesting. Of course you could replicate it with dividends as well by
saying "I'll be paying X$ per outstanding share as well as offering to swap
any option by another with a strike price that's X$ lower". The fact that the
buyback does the same thing in a mostly unnoticed way is a very nice hack.

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ISL
Stock compensation and buybacks seem like separate considerations. Stock-
compensation plans are clearly stated in annual reports and in SEC filings, so
they ought to be priced into the stock already.

Whether a buyback decrements the number of shares or reduces the number of
contractually-obligated shares issued is irrelevant to me as an investor; the
number of shares at the end of the buyback process will be smaller than if it
hadn't happened.

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boucher
It seems pretty unreasonable to tie together stock buybacks and employee stock
compensation. The reality is that companies using stock for employee
incentives will necessarily have to create new shares fairly regularly. Buying
back shares also has the fairly obvious correlation to increasing the per-
share price. That both things happen at the same time in many companies is not
surprising, but it's also necessary.

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jerf
"The reality is that companies using stock for employee incentives will
necessarily have to create new shares fairly regularly."

How does that work, exactly? Tone: Honest question. I don't understand how a
company could create new stock for itself, since it seems like that would
therefore dilute all current shares and thus being almost by definition
against the interest of all current stock holders and therefore something they
would not permit. (I say this not to argue it is therefore impossible, but to
highlight what misperceptions I may have that need correction.)

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pedrocr
Companies issue stock all the time when they want to raise capital. The
transaction is neutral to the shareholders. Say a company is worth Y. In
exchange for issuing X$ of stock the company receives X$ of cash and is now
worth Y+X. Now the new shareholders own X$ in stock and the old shareholders
Y$ in stock which is what the company was previously worth. Of course you only
do this transaction if you believe the X$ in cash will allow you to grow the
total value of the company so that Y grows more than it would had you not
taken the cash.

Now back to the stock incentives programs. Here you are issuing stock and
giving it to your employees. Assume you had to give then X$ in cash as
compensation, you could just do the same as before, raise that money in the
market and give the cash to them. You might as well do it in one step giving
them that value in stock and get the added benefit that those employees are
now financially invested in the outcome of the company.

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tacos
No. That's not how dilution works. Common sense: if issuing stock were neutral
to shareholders, then buybacks would also be neutral to shareholders. (Splits
are neutral to shareholders.)

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pedrocr
> Common sense: if issuing stock were neutral to shareholders, then buybacks
> would also be neutral to shareholders. (Splits are neutral to shareholders.)

Buybacks (and dividends) are indeed neutral to shareholders. You have a
company that's worth Y and you buyback X$ using company cash, the shareholders
now have in their hands a company that's worth Y-X and X$ in cash, for a total
of Y.

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tacos
No! OP is talking about shareholder dilution, not balance sheet shareholders'
equity. Also, dividends reduce shareholder equity so even by your perverse
definition they're certainly not "neutral."

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pedrocr
Dividends reduce shareholder equity and give shareholders the same amount of
cash so they are indeed neutral if you ignore taxes. The same is true for the
market value of a company. If a company has a market cap of Y and pays out X
in cash the market cap will tend to reduce by roughly X in any normally
functioning market.

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siberianbear
The author criticizes Warren Buffet's assertion that buybacks are good the
shareholders, writing "Warren Buffett should spend more time reading blogs
like Ultimi Barbarorum."

I've spent a lot of time reading Buffet, and he's pretty clear that he doesn't
believe in equity-based compensation for employees. He believes that if
employees want to own part of the company where they work, they should take
their salary and go buy stock on the open market.

So, at least Buffet is consistent in his own view of the world. He's no
hypocrite, and he's not guilty of what the author is accusing him of. The
author should go read more of Buffet's writings.

That being said, I disagree with Buffet and believe that the Silicon Valley
model of throwing equity compensation to rank-and-file employees is justified.
The author's point that share buybacks don't all go to the shareholders is
definitely true in general. But it is certainly less true or not true at all
with regards to Berkshire Hathaway (Buffet's company).

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programminggeek
A college professor explained to me in my senior capstone business strategy
class why share buybacks are a terrible idea. They signal to investors that
you have nothing better to do with the money than buy your own stock.

Instead of investing in R&D, buying assets, streams of income, creating new
products, renovating facilities, or even paying your own people, a stock
buyback says that all of those things are basically a worse ROI on the
business than just handing the money over to shareholders.

In general, I think my professor was right. I think there are good reasons to
potentially buy out investors and so on, but usually these programs are done
under the guise of making shareholders richer, but I just don't see that as
the case.

The best way to enrich shareholders is by simply giving them a dividend, or by
running a more profitable business (which will drive up the stock price).

Everything else is basically financial machinations that look good, but are
mostly meaningless.

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jdmichal
Everything your professor said also applies to dividends. Why are those
somehow magically OK when stock buybacks are not? As several others in this
thread have explained, both are a net wash.

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mrfusion
I never understood why buy backs aren't simply neutral for shareholders.

For a really simplified example. Let's say there's a company that simply holds
$100. No revenue or expenses. It's got 100 and that's it.

And say there are two shares total and two shareholders. Me and some other
guy. So each share is worth $50.

Say the company does a buy back and spends 50 to buy the other guys share. Now
I own the whole company but it's only worth $50. So I'm no better off than
before.

What am I missing?

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pedrocr
> What am I missing?

Nothing. Buybacks are a way to return cash to shareholders, just like
dividends, with different tax implications.

In your example the company has used the share buyback to return 50$ to
shareholders. If it wanted to do it evenly it could even do a stock split
first turning every 50$ share into two 25$ shares and then buy back one share
from each person. That would be functionally equivalent to doing a 25$
dividend per original share but have different tax implications (capital gains
are cheaper than income taxes in most places).

