
Buybacks by Companies Like Apple May Signal Danger, Not Growth - pavornyoh
http://www.nytimes.com/2016/06/26/your-money/buybacks-by-companies-like-apple-may-signal-danger-not-growth.html?ref=technology&_r=0
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nostrademons
It's kinda ironic that on one hand the financial press decries public
companies for not offering dividends anymore, and on the other hand the
financial press decries them for offering buybacks.

A buyback is a tax-advantaged dividend. Period. Instead of distributing
profits to shareholders as dividends, which are taxed as ordinary income at
33+%, the additional money flows out as capital gains, which are taxed at 20%.
The shareholders who sell into the buyback receive cash directly for their
shares, taxed at long-term capital gains rates. The shareholders who don't
sell receive capital appreciation, as the intrinsic value of the corporation
is divided among fewer shares.

Now, if you are an ordinary not-stock-holding laborer, you may have a legit
complaint that buybacks fleece the U.S. government of money that rich people
would otherwise pay in taxes. But if you're a rich person and not an idiot,
you should be glad to see public companies offer buybacks.

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devinhelton
_But if you 're a rich person and not an idiot, you should be glad to see
public companies offer buybacks._

No, because there is a principle-agent problem. As a non-professional, long-
term investor, I want the interests of the executive team to be aligned with
my own interests. If a company puts all its profits into buybacks, it is very
easy for the company to never return a penny to investors. The executives can
continually dilute shareholders by issuing stock options, and then use
buybacks to counter-act the dilution and prop up the share price so that they
can cash out on the options. The buyback program enables short-term thinking
by the executives, which is contrary to my own interests as a long-term
shareholder.

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nostrademons
The principal agent problem works in the opposite direction from how you
describe. Companies are incentivized to offer buybacks _when they, with their
inside information, believe the stock price is undervalued_. They get more of
a pop in EPS for a given amount of cash returned to stockholders, which - as
someone who is usually compensated in stock - will make them personally
wealthier.

A buyback _is_ a return of cash to the shareholders. The mechanics of it is
that the company buys its own shares on the open market, and in exchange for
that, pays out cash from the company treasury to the shareholders.

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devinhelton
_The principal agent problem works in the opposite direction from how you
describe. Companies are incentivized to offer buybacks when they, with their
inside information, believe the stock price is undervalued._

This is how buybacks are rationalized, but I don't think it makes any sense.
The company, ie, the CEO, are not experts in knowing if their own stock is
undervalued, nor should they be. CEO's are, and ought to be, irrationally
optimistic. They also are the chief salesmen for their company, they are
always pitching how the next product line is going to be a home-run. And to
pitch effectively, you have to really believe it, even if rationally you
should know that most product lines fail.

There was a quote from Andy Grove about this, via Ben Horowitz
[http://a16z.com/2015/11/13/high-output-
management/](http://a16z.com/2015/11/13/high-output-management/):

 _“In order to build anything great, you have to be an optimist, because by
definition you are trying to do something that most people would consider
impossible. Optimists most certainly do not listen to leading indicators of
bad news.”_

 _But this insight won’t be in any book. When I suggested he write something
on the topic, his response was: “Why would I do that? It would be a waste of
time to write about how to not follow human nature. It would be like trying to
stop the Peter Principle_. CEOs must be optimists and all in all that’s a good
thing.”*

 _A buyback is a return of cash to the shareholders._

I agree that in theory, a buyback should be identical to a dividend. But, when
taking account the difficulties of aligning interests between shareholders and
execs, buybacks make it a lot easier for executives to profit short-term, even
when their company does not do so well in the long-term.

