
Companies Use Borrowed Billions to Buy Back Stock, Not to Invest - JumpCrisscross
https://www.bloomberg.com/news/articles/2019-08-08/companies-use-borrowed-billions-to-buy-back-stock-not-to-invest
======
chiefalchemist
> "What’s all but vanished is the correlation between how much companies
> borrow and how much they invest."

I think the better question is: Under what condition(s) would not investing be
a wise and sustainable business decision.

The first answer that comes to mind is: a monopoly. If you dominate your
market you have little fear of competition over taking you. You don't need to
invest.

The second answer that comes to mind: being a member of a cartel; where
competition is feigned for appearances. Again, the need to invest is minimal
as normal market forces have been subverted.

~~~
IllogicalLogic
It seems C-level execs across industries believe buying back stock with
profit/debt to unlock performance bonuses is a win-win.

This kind of stupidity is why I'm bearish on Apple. Companies should never
prioritize financial engineering over R&D imo.

The company & shareholders will eat the disastrous consequences of this
asinine thinking when the market next adjusts 30-60% and everyone realizes
they were wasting money buying back stock at all time highs.

~~~
coralreef
\- Apple is spending more than ever on research and development.

\- R&D account for 7.9% for its revenue this part quarter.

\- Apple is now on pace to spend $16 billion in R&D in 2019 as it preps for
life after iPhone dominance.

[https://www.imore.com/apple-spending-record-amount-
research-...](https://www.imore.com/apple-spending-record-amount-research-and-
development-it-searches-next-thing)

~~~
Aeolun
It’s actually pretty impressive that they’re spending that much on R&D and
still manage to make the next product worse than the previous one.

~~~
cuban-frisbee
Most of it is likely going to unannounced products like the rumored Apple car
and and the rumored AR product.

~~~
secfirstmd
I really don't understand how Apple hasn't used it's cash pile to buy Tesla.
It seems like a pretty dam good fit.

~~~
steelframe
> I really don't understand how Apple hasn't used it's cash pile to buy Tesla.

All you need to understand is that they haven't. Assuming Apple is still a
sound and rational company pursuing a similar line of business, that should
speak volumes to you.

~~~
NotSammyHagar
Apple raising prices on their phones so 1k was probably an irrational choice.
It's amazing how they are repeating history of the first time jobs was ejected
from apple and they reduced innovation and were on the way to death until he
came back and saved them with nextstep.

------
Buraksr
Capital has been cheap for some time now, since the economic crash in 2008. It
has only been since ~2016 that the Federal Funds Rate has lifted above half a
percent [0]. And although the rates have recently been increased (Rate
recently fell 1/4 of a percent but is still just above 2%), we are still
seeing very low rates. Because capital has been relatively easy to acquire for
this time I wonder if this is a more a consequence of the obvious but high
cost investments already drying up.

Executives have always wanted to drive up metrics as it allows them to move
forward in their work, so I would find it doubtful that they wouldn't want to
build out their business further if they are able to (More sales is a sure way
to make more profits in most cases). If the capital is there, and we know it
is, then these business must not see enough demand to expand.

Many would say that buy-backs are a result of a company having excess capital
and no sure investments [1]. With the us inflation rate hovering between 1.5
and 3 percent [2], a loan at ~2.25 percent is close to free money.

I personally worry for the economy because of buy-backs. Not because I believe
there is anything wrong with the practice, but because I think it indicates
that business is general not going well enough to invest back into it.

-0, [https://tradingeconomics.com/united-states/interest-rate](https://tradingeconomics.com/united-states/interest-rate)

-1, [https://www.investopedia.com/ask/answers/040815/what-situati...](https://www.investopedia.com/ask/answers/040815/what-situations-does-it-benefit-company-buy-back-outstanding-shares.asp)

-2, [https://www.usinflationcalculator.com/inflation/current-infl...](https://www.usinflationcalculator.com/inflation/current-inflation-rates/)

~~~
JMTQp8lwXL
It sounds like a self-fulfilling prophecy. Businesses return value to
shareholders, because they see limited or no opportunity to expand demand.
However, 70% of GDP is consumer spending. The benefit of buybacks is largely
lost on the middle class, as the top 10% holds 80% of the total market
capitalization. [0]

Stock buybacks further reduce the economy's capacity for increasing consumer
spending, since the wealthy need roughly the same number of dress shirts and
food and washing machines as the rest of us. A marginal dollar isn't
meaningful to someone who's already wealthy; they'll save that dollar. But
give your average middle class American a dollar and it will lead to increased
consumption. Large companies are facing an ever-diminishing base of consumer
spending.

[0]
[https://www.washingtonpost.com/posteverything/wp/2017/03/02/...](https://www.washingtonpost.com/posteverything/wp/2017/03/02/perspective-
on-the-stock-market-rally-80-of-stock-value-held-by-top-10/)

~~~
zanny
Its not in any one businesses self interest to be philanthropic by paying
their workers more or slashing their prices to drive up the available
consumption of the working class.

It would be the governments responsibility to right the ship, but considering
whose lobbyists that have the pen of legislature and ear of congress good luck
with that. Too many seats are non-competitive, the propaganda and distraction
machines too effective, and the people too ignorant to collectivize.

Eventually the consequences of the constant shaving of productivity away from
the workers into the Wall Street black magic money hole will destabilize the
country. Not in a French Revolution kind of way, just the slow rotting death
that leads to the bottom falling out a la the Soviet Union's collapse.
Eventually the thread is drawn taught enough that bread stops showing up in
the stores and nobody knows where it went because all the bread companies
stopped manufacturing because the marginal returns from the poor by feeding
them didn't justify the capital expenditure over playing books and offshoring
profits.

Its not even some hypothetical far future happening. The water is already
undrinkably contaminated with lead and nobody has the capital to fix it. Shops
supplying the lifeblood food of towns just stop getting deliveries. The houses
are just left abandoned, the roads rotting, the people just leave with no idea
where they are going. Its not uniform, but no collapse ever is, but nobody
accounts for it or really even seems to care.

~~~
JMTQp8lwXL
> Its not in any one businesses self interest to be philanthropic by paying
> their workers more or slashing their prices to drive up the available
> consumption of the working class.

Tragedy of the commons, I suppose. All large business want a slice of consumer
spending, but if they don't support consumers, there is no consumer spending
to capture.

> Eventually the thread is drawn taught enough that bread stops showing up in
> the stores and nobody knows where it went because all the bread companies
> stopped manufacturing because the marginal returns from the poor by feeding
> them didn't justify the capital expenditure over playing books and
> offshoring profits.

I hope things don't get that bad. I'm all for the idea of motivating people
with money. Some inequality is a good thing. But too much inequality is a
disservice to everybody: widespread food instability in the country with the
highest number of guns per capita would be a national security crisis that
even the wealthy could not ignore. I hope we act with some foresight. We have
plenty of distance between here and that point. But I do wonder what level of
inequality this country will sustain before things become slightly more
egalitarian.

------
hn_throwaway_99
So many comments here along the lines of "So what, they're making an efficient
use of capital." That's missing the point. So much of the argument behind the
2017 tax cuts and the Fed's low interest rates was that they would spur _real_
investment (that is, investment which increases productive capacity or
improves productivity) that would benefit everyone, mainly through jobs. If
all this extra money is just resulting in a more tax-efficient way for
companies to give money to their shareholders, which in reality is a small
slice of the populace, highly skewed towards the wealthy, it's certainly worth
it to call bullshit that these governmental moves that everyone ends up paying
for only end up benefiting the wealthy.

~~~
Lazare
> So much of the argument behind the 2017 tax cuts and the Fed's low interest
> rates was that they would spur real investment (that is, investment which
> increases productive capacity or improves productivity) that would benefit
> everyone, mainly through jobs.

Sure. Do we have any reason to think that's not working? When an investor
makes a successful investment, and the company becomes very profitable and has
spare cash they can't find a productive use for, and give it back to the
original investors...

...what do you think the investor is going to do with it?

1) Look for another good investment (something they have a track record for
doing)

2) Pile the money up in a big pile and have a bonfire, as they literally have
no other ideas for what to do with the money.

3) Something else?

1 is the obvious answer, yet you seem to be the answer must be 2 and can't
possibly be 1, but you provide no reason to think so, the linked article
provides no reason to think so, and you don't even seem to have realised 1 is
a possible outcome.

Further, you seem to be implicitly assuming that a company management who are
not professional investors and who don't think they can find a good use for
the money will still do a better job of making investments than the firm's
investors, who are. Is there a reason for this?

~~~
dumbfoundded
Much of the money isn't going to other investments. It goes to savings. The
top 1% save ~40% of their income. The bottom 90% save 4% of their income. The
problem with giving money to the wealthy is that it doesn't go to startups, it
leaves the economy and increases a number on someone's terminal. The best way
to spur economic growth is to give money to people who will spend it quickly
whether rich or poor. In general, it turns out most very wealthy people have
little incentive to spend money quickly. Instead, they save to hedge against
and profit from recessions. Your option 2) isn't some foolish strategy, it's
literally what is happening. Some of the money goes to investments and the
rest seeks to hedge against the risk of those investments.

I really don't understand how people still push some version of trickle-down
economics. Corporate buybacks are exactly this. Using taxpayer money to fund
it only hurts the long term value of the economy.

~~~
dodobirdlord
> Much of the money isn't going to other investments. It goes to savings.

This is nonsense. Saving in a bank expands the bank's ability to lend. Saving
in treasury bonds finances government operations. Saving in the stock market
provides the incentive for VCs to invest in startups. Saving in municipal or
corporate bonds finances the leveraged operations of those entities,
contributing to better long-term planning. Saving in gold at least turns the
money over to someone else who will probably spend it on something more useful
than gold. For the most part, saving _is_ investment. Only in niche scenarios
does saved money leave the money supply.

~~~
skybrian
While investment and savings aren't opposites, they also aren't guaranteed to
be linked, at least if by investment you mean "increase in productive
capacity" rather than an accounting identity in some macroeconomic models.

Increasing a bank's ability to lend doesn't mean they will necessarily do it;
the reserve ratio is an upper bound.

Also, even when they do make a loan, it also doesn't mean it will necessarily
go towards building or improving productive assets. Sometimes loans go towards
buying existing assets (such as houses) in a way that might just result in
asset inflation. (As in, for example, stock buybacks.)

The idea of a "global savings glut" is somewhat controversial but not
obviously nonsense. We can't learn anything by defining it away.

~~~
aeternus
Buying existing assets only results in asset inflation if you lack a free
market.

Otherwise, buying existing assets (such as houses) will increase the price
which will trigger increased production of that asset.

------
Animats
Yeah, we know.

Good arguments for taxing dividends, stock buybacks, and interest paid at the
same rate. They're all paying for capital. The tax preference of debt creates
a debt-heavy financial system.

Some countries prohibit stock buybacks. How's that working out?

To prohibit buybacks and make it stick, you also have to prohibit cross-
ownership. The US used to do that, but only for utility companies. The Utility
Holding Company Act (1935-2005) limited utility ownership structure to a tree
depth of 3 with no backlinks. This allowed regulators to track where the money
and ownership were.

~~~
danieltillett
Yes the key is to stop taxing capital gains and dividends at different rates.
Interestingly here in Australia any company tax paid is passed through to the
shareholders as a tax credit. This not only encourages companies to pay tax,
but it encourages companies to pay dividends rather than buy back shares.

The price of gold suggests even buy backs are coming to an end of their
effectiveness. There is so much money now sloshing around that nobody has any
idea what to do with it.

~~~
sokoloff
In the US, long term capital gains and qualified dividends (which is most of
them) are _already_ taxed at the same rate.

~~~
Animats
Interest paid, though, is not. Which gives debt a tax edge over equity.

~~~
tomatocracy
But banks are taxed on their net interest margin at the corporate tax rate.
Its the same argument as for the 'dividend tax credit' system which Australia
has and the UK had 20+ years ago (which used to be called 'Advance Corporation
Tax'), ie tax capital returns only once and in the hands of the investor not
the payer where possible.

------
PeterisP
And? The investors receive these billions in cash for the stock they sell, and
they'll invest in other companies directly, instead of having that megaholding
company do acquisitions.

~~~
dctoedt
> _The investors receive these billions in cash for the stock they sell, and
> they 'll invest in other companies directly, instead of having that
> megaholding company do acquisitions._

That's a really appealing supposition (seriously), in part because the
inherent diversification spreads the risk. And there's also the factor that
more cash in the shareholders' pockets could mean more job-producing economic
demand generally, even if the shareholders just spent the money on yachts and
mansions.

But there's an empirical question: Is that what actually happens in the real
world — or do the shareholders just hoard the money, taking it out of
circulation without either investing it or using it to create more demand?

~~~
dodobirdlord
> or do the shareholders just hoard the money, taking it out of circulation
> without either investing it or using it to create more demand?

Hoard as in like, under a mattress? No. Investors keep pretty much all of
their money invested pretty much all of the time, or the banks that they store
their money in do by proxy.

~~~
dctoedt
> _Investors keep pretty much all of their money invested pretty much all of
> the time, or the banks that they store their money in do by proxy._

That's only true when banks actually lend. In the wake of the Great Recession,
however, many banks drastically cut back on their lending — and to that extent
they were no more than giant virtual mattresses into which their depositors'
money was stuffed. As a Federal Reserve official said in 2015 about the Great
Recession's aftermath: "... the sharper decline in outstanding bank loans to
businesses that I mentioned earlier was likely a contributing factor to the
slower economic recovery we have observed this time around." [0]

[0]
[https://www.bis.org/review/r150417b.pdf](https://www.bis.org/review/r150417b.pdf)

------
TazeTSchnitzel
In the 21st century, I am increasingly convinced one of the biggest problems
with capitalism is that entities with large amounts of cash (corporations or
individuals) are just sloshing it around pointlessly instead of investing it
in actually beneficial things. Maybe central banks should try the forbidden
“helicopter money”. I'm sure the average person would actually spend money
they get on improving their lives.

~~~
conanbatt
Don't be deceived by the appearence of cash. IT is not paper money that makes
goods and services exist: burning a bill of paper does not impoverish society,
and neither does putting it under the mattress.

------
unreal37
Buying your own stock is like returning money to shareholders. It's
effectively a dividend, by raising the stock price by the same amount they use
to buy back stock.

Like if they use $1 billion to buy back stock, the aggregate value of the
outstanding stock should go up by $1 billion. Doesn't matter if they borrowed
the money, the company retains the value.

Having a high company value must have some benefits to them in other ways.
Perhaps even less negative news articles in the press, and an easier time
hiring good employees, just to name two.

~~~
harryh
_the aggregate value of the outstanding stock should go up by $1 billion_

This isn't quite right. Look at it this way:

There is a company that has the following assets

    
    
      1) $100 in cash
      2) $100 in other assets
    

There are 200 outstanding shares, so each share is worth $1.

The company spends its $100 in cash to buy back 100 shares. So now its asset
list is:

    
    
      1) $100 in other assets
    

But there are now only 100 shares outstanding so each one is still worth $1.

So why do a buyback if it doesn't raise the share price? Two reasons:

    
    
      1) it returns cash to the shareholders who want it (those that sell the stock)
      2) future gains in value will now accrue to fewer shares of outstanding stock

~~~
aerophilic
Love your example, but to throw this aspect in, the market doesn’t always
“value” companies the same way.

Therefore, in your above example if the shares were actually being sold at $2
each, then the company is doing a disservice to the investors by buying the
stock back.

However, if the stock is under pressure (below its “fair” price), say 50 cents
in the above example, then by buying the stock back, you are creating true
value for your investors.

Problem of course is that rarely do people running the company think this way.

~~~
scotty79
> However, if the stock is under pressure (below its “fair” price), say 50
> cents in the above example, then by buying the stock back, you are creating
> true value for your investors.

Which means that your company just gambles its money at the stock market by
betting on its own price.

------
1e-9
The central theme of this article does not appear to be well supported by the
data presented. I interpret the scatter plot a bit differently they did:

1) The average amount of corporate borrowing as a share of total assets
appears remarkably consistent over the last 66 years.

2) The average amount of capital expenditures as a share of total assets
appears to be have been declining at a roughly consistent rate for 66 years.

3) The data does not appear to support any firm conclusions regarding changes
to the correlation between capital expenditures and borrowing, which was the
main topic of the article. The slopes of those regression lines are highly
suspect given the amount of data and the outliers in later years. Certainly,
there is nothing in the presented data suggesting a change over the last 17
years, much less the last 2 years.

It would have been nice to see some of the raw data or the statistical
analysis, but clearly that is for a different audience than what they were
targeting.

------
User23
I always find it interesting when the same story (not link, but actual story)
makes the front page of both Hackernews and Zerohedge. Here is the version
from the latter: [1]. It doesn't happen very often, but when it does it's
usually something of consequence, so I think there may be some signal here.

[1] [https://www.zerohedge.com/news/2019-08-10/do-investors-
reali...](https://www.zerohedge.com/news/2019-08-10/do-investors-realize-how-
much-risk-theyre-taking)

Edit: I entirely concur with the concerns about ZH, but the observation that
buybacks are being used to juice EPS is a good and informative one.

~~~
ackbar03
I used to read zero hedge a lot, but then they started getting a bit extreme
with the "down with the establishment" theme and I stopped reading which is a
bit of a shame cause they do have some good analysis. You sublimaly get
influenced by all the propaganda-esque rhetoric until you can't distinguish
the good analysis from conspiracy and consequently miss the entire bull market

------
NTDF9
Good discussion. Buybacks are also investments. The problem is that all the
low interest printed money and tax breaks are circulating among the same
people/families that own assets in the first place.

The trickle down isn't happening because every single printed dollar and every
single tax break is making more money circulate among the rich/asset owners.

That's also the reason yields are low. That's also the reason Softbank can
raise so much. That's also the reason nurses and teachers and firefighters and
factory workers aren't making enough. Whatever trickles down to them is spent
back as income for corporations. They don't have assets.

------
useful
Most people miss that this is a way to move money without paying taxes. If you
pay to onshore profits, you can avoid taxes until another tax holiday by
taking out a loan, paying minimal interest, and avoiding having to onshore
money for a long time.

------
WalterBright
If a company is very good at making X, it may not be very good at making
anything else. Hence, returning the money via stock buybacks to investors is
likely a better strategy than doing a crummy job doing something outside their
core competency.

~~~
newshorts
Tell that to the slide rule companies...

------
pascalxus
Based Outlays of U.S. Corporations, we can see their at an all time high. But,
the chart, as far as i know is not inflation adjusted, so it's likely not as
steep as indicated.

honest question: does anyone have a reading on how sustainable this practice
is? Surely, there must be some calculation you can do. Take the aggregate
amount of capital (cash holdings) of all the companies and graph it, along
with their ability to borrow more funds. If that graph is going super down and
the cash outlay is going super up, then surely it means we're heading for a
crash, right?

------
Scoundreller
I'd rather receive profits from my investments in capital gains than in
dividends. I pay more in taxes on dividends, and lose the opportunity to time
my profits.

Since I'm buy-and-hold, the dividends get reinvested anyway, but can creating
more paperwork as each reinvestment is another purchase.

As a non-American with US-stock holdings, the IRS withholds taxes on dividends
(15% for me), while I owe no local taxes because the holdings are in a tax-
free account.

~~~
NotSammyHagar
There's also no reason cap gains should be taxed less. It's just another way
that wealthy have screwed the tax system. It's little different than allowing
stock buybacks. Those actually used to be illegal - until 1982.
[https://www.forbes.com/sites/aalsin/2017/02/28/shareholders-...](https://www.forbes.com/sites/aalsin/2017/02/28/shareholders-
should-be-required-to-vote-on-stock-buybacks/#7c9518ea6b1e)

------
whatever1
Honest question, why do (some) public companies distribute dividends? Why
instead of increasing the wages or investing in the future of the company you
just burn cash in a way that may or may not help the stock price of the
company (which is just pure massive speculation of the market players to begin
with)?

~~~
greenleafjacob
Suppose you follow your argument to the conclusion, and no companies issue
dividends. What is the point of owning a share of a company then?

~~~
whatever1
People happily own Amazon/FB/Alphabet stock with no dividend payments.

~~~
greenleafjacob
They don't (currently) issue dividends because the expectation is they will
buy back their stock or will issue dividends in the future.

If a company never issued dividends and never bought back their own stock,
then there would be no reason for investors to buy stocks in the first place.
Most investors don't invest out of the goodness of their hearts, they invest
to get a return on capital.

~~~
K2L8M11N2
Berkshire Hathaway doesn’t pay dividends and most probably never will.

~~~
mrep
But they have bought their own stock back and they are even considering a
whopping $100 billion dollar buyback [0].

[0]: [https://qz.com/1611997/warren-buffett-hints-on-timing-of-
big...](https://qz.com/1611997/warren-buffett-hints-on-timing-of-big-
berkshire-hathaway-buyback/)

------
adamsvystun
I'm curious. Isn't buyback a kind of investment in yourself?

If you think that stock of your company is undervalued in the market, wouldn't
it be reasonable that you would buyback your own stock? This can be seen as
correct allocation of capital. Am I not seeing something?

~~~
anthony_doan
Well the main argument is that the politicians want companies to invest from
the tax cuts into more jobs.

Where as companies, in reality, are just doing buy back which reward
shareholders.

Whether buy back is an investment or not is up to whoever definition's and I
guess can be up for debate. But I think it derail the main point which is tax
cuts and low federal rates aren't incentivizing companies into investing but
instead buyback.

------
Bostonian
Money is fungible. When a company buys back shares owned by an equity mutual
fund, the fund uses the cash to buy shares of other companies, including the
shares of IPOs, if the manager thinks they are good investments.

------
porlune
I was under the impression that purchasing stocks was an investment (i.e. an
investment into your own company). Seems like there can be instances in which
that can be favorable to everyone involved.

~~~
porlune
I am not sure why this was down-voted. Am I in error? If so, please explain
how.

------
iopq
If it's a good thing to own stocks for a person, why would it be bad for a
corporation?

------
chris123
This is old news. Actually, it is very old signal that is lost in the noise
that is generated to distract. Company execs and Wall St. do this to enrich
themselves at the expense of pretty much everyone else. It's the same old
socialism for the rich, transference of gains to the few (now), risks and
costs (later) to the many. Just distract the masses with politics. Seems to
work better very year. Will never change until the red and blue little stop
fighting and realize they are both being played. Come together, people. Or at
least open your eyes, think for yourselves, stop parroting the talking points
coming from your side, instead question them. Do that for the talking points
from the other side. What do you see? Sorry, little buzzed and ranting
incoherently unless you are on the same wavelength. What's the frequency,
Kenneth?

------
psadri
Have P/E ratios been rising?

Stock prices have likely risen thanks to the buy backs. Have earnings
increased proportionally?

------
thinkingkong
So what. Use whatever money you have to put yourself into a more favourable
position. Isnt that the whole way weve set this up?

~~~
_delirium
The argument isn't that the companies are necessarily doing the wrong thing
for shareholders, but that cheap money is not spurring investment in capital
equipment, R&D, etc., which is a change from what historically happened. The
opinion of some people quoted in the article (not all) is that this lack of
investment is bad for the economy long-term.

------
mikhailfranco
Another distortion and subversion of capitalism by central banks. They are
either stupid and naive, or colluding in the channeling of newly printed money
directly into executives' pockets.

Sometimes before, and inevitably after, their stint at the Fed/BoE/BoJ/ECB,
they will be executives at those same companies, or the banks that take a cut
of the transaction (print, repo, bond, equity, option - rinse, repeat).

If those same CBs lose control and rates rise, and/or business turns down and
margins decrease, those bonds will still be due, even when the shares they
replaced would have fallen without any obligation. The company credit rating
decreases. As they pass the BBB event horizon to a junk black hole, most
fiduciary holders of those bonds will have to sell, thus accelerating the
crash in corporate bonds as they all turn to junk and spreads blow out.

So CBs turn robust capitalism into brittle cronyism.

------
KaoruAoiShiho
Very strange that this article comes from bloomberg, you would think they
would understand business a bit better.

~~~
dang
" _Please don 't post shallow dismissals, especially of other people's work. A
good critical comment teaches us something._"

[https://news.ycombinator.com/newsguidelines.html](https://news.ycombinator.com/newsguidelines.html)

------
decebalus1
We just need for that wealth to trickle down. Any day now..

~~~
briandear
[https://www.nytimes.com/2019/05/02/business/economy/wage-
gro...](https://www.nytimes.com/2019/05/02/business/economy/wage-growth-
economy.html)

------
rv-de
the interesting question is why did the government cut taxes promoting
investments despite knowing companies would but back stocks. this was an
obvious outcome.

~~~
cyborgx7
>why did the government cut taxes

What do you think?

------
bitxbit
Stock buy backs lead to higher market concentrations. That’s the biggest
economic impact of the past 5-7 years from cheap money afforded to large AND
profitable corporations.

~~~
kgwgk
> Stock buy backs lead to higher market concentrations.

Compared to what? If Apple, for example, had not spent billions in buybacks
and had done something else with that money its market cap would be higher
today so the market would be more concentrated.

------
taurath
Yet they need more tax breaks so the wealth trickles down to the...
shareholders? No. We need to invest in infrastructure and research so that
companies have places to invest in. Share buybacks are just propping the
economy up until assets blow up.

~~~
dmix
Who exactly is calling for tax breaks for the wealthy?

The fact they do it doesn’t mean the people were calling for it. A "Trickle
down" tax system isn't in any economics textbook or taught/debated in
economics courses.

~~~
taurath
Somehow it seems to have happened in a huge way every time a republican is in
office though. It’s not like politicians respond to the people, they respond
to their donors.

~~~
dmix
Even then it's rarely the actual goal of the policy either. It's usually a
side effect that gets packed in to wider reductions. "Trickle down" as a
concept is a political invention.

The disconnect between real-life economics and policy isn't limited to just
that either. Just like how all the private equity businesses were the first to
be brought in front of congress immediately after the 2008 financial crisis
because everyone wanted to blame them (they wanted to blame "neo" Gordon Gekko
corporate raiders for all the problems, but quickly discovered all the LBO
firms out-performed the market and had invested in companies which would have
stagnated or died otherwise). Yet they ended up being the few firms who could
had the LBO capital market not existed). In the end much of the capital for
the bailouts the Obama administration used came from the same group they
wanted to blame.

Then a bunch of new rules got put in place which only solidifier the
stranglehold the top-5 banks had as the smaller banks could never have
survived had they met the capital and oversight requirements.

------
enlyth
HN is probably the only place I regularly visit on the internet where a large
portion of the regular user base will passionately defend these kind of
practices. It makes sense, a lot of people here have vested interest in these
kind of corporations.

~~~
lmagno
It's kind of amazing, really. Maybe because I'm middle class in a third world
country, but I'm always dumfounded with the argument that "actually, rich
people having _more_ money is good for everyone".

------
topmonk
This trend of borrowing money to buy your own stock reeks of market
manipulation.

Corporate debt to gdp is at a record high, and they're funneling the money
into stock buybacks and dividends. I don't know why this isn't of interest to
the other commentors here.

The stock market has been eerily predictable and calm for the last few years,
and I think this is why. The game is to lull investors into a false sense of
confidence that the market _never_ falls beyond the scope of a few weeks or
so.

To the low information investor, everything looks great, and also when there
are a lot of low information investors in the market, stock buybacks tend to
increase the price.

~~~
skybrian
Suppose there are two profitable companies. One returns profits to investors
with a regular dividend. The other spends a similar amount of money on share
buybacks.

Fundamentally, they are both good companies to buy for similar reasons. Unless
something changes to make the company unprofitable, both could continue doing
this indefinitely.

They both make the stock price harder to interpret, but for different reasons.
In theory the price of a stock that pays a good dividend should be a sawtooth
curve - it drops when the dividend happens. Chartists have it hard. What else
is new?

The low-information investor probably shouldn't be watching the price at all.
They should either buy an index fund or be doing buy-and-hold. So this doesn't
affect them.

~~~
topmonk
We're not talking about profits here. Companies are _borrowing_ money to buy
back their own shares. And this trend continues to accelerate. Debt to GDP is
at an all time high right now.

An index fund, or someone who is buying-and-holding would have the exact same
effect.

The company makes a bid on it's own shares, and regardless if you are doing a
buy-and-hold, or investing in an index fund, or a low information investor,
you are not selling, even if the share price passes their inherit value.

The point I'm making is this gives corporations an easy way to keep their
stock prices stable and rising, without having to perform. This attracts more
investors, which raises the price even further until it's way past what is
should be valued at.

If it keeps going like this, eventually the whole stock market will become way
overpriced (a bubble) and crash like we've never seen before.

~~~
skybrian
It's true that if they keep borrowing, eventually they will borrow too much.

But I would guess CFO's know that. They may not be _right_ about what's a
sustainable level of debt, but they probably think there is a limit and not go
past that.

I speculated more about this here:
[https://news.ycombinator.com/item?id=20666217](https://news.ycombinator.com/item?id=20666217)

~~~
topmonk
You can call it a "service to bondholders" but just because a company does
something doesn't mean its profitable and there isn't much profit in this, as
far as I can see.

It's like if you had 6 people who owned a pizza restaurant and one of them was
the CEO. One day he calls a meeting and says, "Great news! I went to the bank
to take out a loan, and paid Bob and Fred to buy their shares out. Now, as
long as we continue to make a profit, we'll each make 50% more on our
investment, the only catch is we have this debt hanging over our heads, and
have to pay interest on that. Of course, if we start to lose money, your
investment will lose out 50% quicker, but we won't talk about that. Also, I
had to pay Bob and Fred enough that, in their opinion, it was more profitable
to take the cash than own the company."

The only thing this does for the investor is make their investment more
volatile. It's the same effect as if you opened an account at a brokerage,
bought one stock, and took out margin so you could own more shares. Only the
company is basically forcing you to take on margin in this way.

It's possible that it may make sense in some situations to do this, but given
that it's so popular, I think the real reason is slight of hand.

The EPS goes up and the stock price goes up to a premium compared to the rest
of the market. Take anybody that's not doing their DD, by either using a
system, such as "dogs of the dow", or buying an index fund or simply choosing
stocks at random. If you can sell your stock at a higher price, you make more
money per share sold, and since these investors basically can't tell shit from
shinola, you might as well sell them at the shittiest price you can manage.

If what I'm thinking is true, its somewhat hilarious that common wisdom is
index funds and systems like "dogs of the dow" are commonly espoused as the
best investments for new investors.

------
WheelsAtLarge
Corporate raiders have been doing this for years. They have also forced
companies to increase the dividend. It's an easy way to make it seem like
profits are rising so the stock goes up. They don't care because they will
exit the stock as soon as they can make a profit.

The problem is that the companies never progress and eventually they lose
their ability to compete. If it's a tech company it will eventually get beaten
by another more nimble company. We have seen this over and over again. A good
example is IBM. They've lost their ability to compete and have had to settle
on servicing the customers that are still using older technologies like
mainframes. Their niche is still profitable but don't expect IBM to be a
powerhouse again.

Buying stock is financial engineering that's used to goose the stock price
short term but does nothing to keep the company competitive over time.

