
GM’s Stock Buyback Is Bad for America and the Company - randomname2
https://hbr.org/2015/03/gms-stock-buyback-is-bad-for-america-and-the-company
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eru
> Taxpayers and workers brought GM out of bankruptcy, yet it is the hedge
> funds that will reap the biggest rewards. Taxpayers and workers should
> demand that open-market repurchases by all companies be banned. Stock
> buybacks manipulate the stock market and leave most Americans worse off. In
> this case, it is clear that what is good for the hedge funds is bad for the
> United States.

Stock repurchases are just a different way of paying dividends. Nothing scary
about them.

~~~
waltertan12
Stock repurchases are a different way of paying dividends IF the stock is
undervalued. Is GM undervalued?

~~~
adventured
It doesn't matter if the stock is undervalued (which is a strictly subjective
premise anyway - undervalued by what measure?). If it's overvalued that just
reduces the value proposition of the buyback. The value proposition is always
positive no matter what price is paid (that however says nothing about the
specific value proposition, merely that it's a positive number).

I'd argue that GM is closer to undervalued than anything else. It's capable of
yielding at least $6 billion in net income over the next four quarters, giving
it in the neighborhood of a 10 multiple. The economy looks to remain
strong'ish over 12 months, the consumer is spending and able to borrow at low
rates, which will continue to float GM's sales.

It's also worth noting it's not enough to only take the over / under valuation
of the stock into account when doing a buyback. You have to account for use of
cash - that is, what's the best use of your cash holdings. If there are no
great alternatives - for any number of reasons - there is nothing wrong with
doing stock buybacks when the stock price is richly valued (especially if the
cash held is producing mediocre returns, as cash does today). Buying the stock
back may be a vastly superior choice to sitting on the cash when it comes to
producing returns for shareholders.

Chipotle is famous for doing this despite their very hefty valuation and
relatively rapid expansion. Has turned out very well for shareholders.

~~~
aczerepinski
"It doesn't matter if the stock is undervalued."

Warren Buffett has written the opposite of this numerous times. Paying $1 for
something that is worth 80 cents (even if it's your own stock) destroys
shareholder value. The math and logic behind this is so basic, I don't
understand how anyone could believe otherwise.

~~~
eru
It doesn't matter if the stock is undervalued for this narrow question of
dividends vs stock repurchases.

If an outside investor buys stock, of course, under/overvaluation matters.

~~~
aczerepinski
Sometimes it's easiest to illustrate the flaw in a theory by using extreme
examples, so please forgive me for the hyperbole.

Let's say you have a company with only $100M in discounted future earnings
(and no significant balance sheet assets), but it is trading on the market for
$1B. This 10x intrinsic value scenario isn't common in real life but we
definitely see examples like it during market bubbles.

The company wants to distribute $1M back to shareholders. If it pays a
dividend, shareholders receive the full million less taxes - so perhaps
$600-750k in their pockets.

If on the other hand the company buys back $1M in stock, they are buying 0.1%
of $100M in future earnings, or $100k.

If my post doesn't make sense, google "Buffett on buybacks." He's written
about the subject in a number of his annual letters.

------
PantaloonFlames
Share re-purchase actions take money held by the company and transfer it to
stockholders. It's a statement by management that "we don't have good ways to
_invest_ this money in building the business further, so we're gonna just
return it to shareholders."

That in itself is not a negative statement to make. There are market
conditions in which a company simply cannot effectively invest $1b
productively, or $5b, or $8b.

The author of the piece doesn't address this. What is his alternative plan for
where to put the money? He says "if the old GM had 'saved' money...." it would
have had more to withstand the eventual downturn in 2009. Well where exactly
would GM save its money today? In a bank? Investing in someone _else 's_
shares?

GM has been ramping up production (building factories) in China but that looks
like a huge risk given the proven willingness of the Chinese government to
seize foreign commercial investments.

Should GM be building more factories in the USA? EU? Should it be investing in
massive new electric vehicle research? All interesting possibilities.

but Mary Barra doesn't have a plan for the money, which is why an activist
investor asked for her to give it to the owners of the stock. If she had said
- "look, I understand you want the $5b, but it's better for the company long-
term if we invest it in developing XXX" \- then the shareholders might have
sided with management.

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rwallace
The author makes some valid points, but instead of banning stock buybacks for
all companies, I think there would be a stronger case for banning stock
buybacks for companies that have been beneficiaries of bailouts with public
money.

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spitfire
That's a new leaf for HBR arguing for the general public over the hedge fund.

