
End Stock Buybacks, Save the Economy? - tysone
https://www.nytimes.com/2018/08/23/opinion/ban-stock-buybacks.html
======
lr4444lr
I've asked numerous friends who work in finance and do graduate studies in
econ. for their perspective on buybacks, and they truly don't understand why
the lay press has become so obsessed with the maneuver as a moral evil. Yeah,
it can temporarily juice a stock's price, but other major players in the
market and board members at the corporation in question aren't as stupid about
short term gain as we've been led to believe by these journalist jeremiads. If
a company wants to unleash its pent up capital into more efficient allocations
of the economy, i.e. the companies that _will_ grow and invest in workers, and
the sellers on the other end of the buyback want to trigger capital gains
taxes, by all means let them do it. Let's not leave out that other side of the
equation in a rational discussion.

~~~
tboyd47
It's really just one academic (William Lazonick) who seems to be really good
at promoting his theory to the press. It seems like every time I see this
topic on HN it's in connection with him.

That said, I actually think his theory is a reasonable one and I'm more
confused by comments on HN like this one. It sounds like you're saying
essentially (1) your buddies disagree and they know better, and (2) buybacks
may help the economy overall because they move cash from less efficient
businesses into more efficient ones.

Are you saying that the company buying its own shares is doing so because it's
not very efficient? Shouldn't efficiency be reflected in the price of a
business due to market forces? If the only place a company can find to put
extra cash is buying out its own shares then that doesn't sound like a
valuable business to me, and in a healthy market I would expect the price to
go down, not up.

~~~
lr4444lr
I'm saying that, as a lay person myself, I am happy to be convinced by a
persuasive argument made in good faith by a credible source. My friends and
acquaintances who are knowledgeable in this field talking to me privately have
less at stake professionally than someone writing an op-ed for public
consumption.

Now, I am happy to change my point of view when I am unable or haven't the
time to learn a topic more on depth even if I don't fully understand the
details or resolutions of apparent superficial paradoxes. But when even basic
explanations from an author defy logical sense - not a lack of domain
knowledge - it raises a red flag for me. I'm not going to suspend critical
thinking to entertain the fallacy of authority. I only cite the
counterarguments I cite because even in their simplicity they demonstrate gaps
in the case the author is making. I am more than happy to have someone better
versed give a better account for why buybacks are worse than, say, sitting on
cash or dividends.

~~~
tboyd47
Oops, I didn't mean to put you personally on the defensive there, I was
honestly asking your thoughts.

By the way, I managed to find a really good piece on Bloomberg that lays out
both sides in a pretty objective way:
[https://www.bloomberg.com/view/articles/2018-05-08/apple-
s-s...](https://www.bloomberg.com/view/articles/2018-05-08/apple-s-stock-
buyback-isn-t-as-simple-as-warren-buffett-says)

I'm no expert, but I feel like sitting on cash isn't as terrible a thing as
people pretend. Cash encourages risk taking and innovation. The more cash you
have, the bigger risks you can take. Nintendo keeps a lot of cash around and
they're one of the most consistently innovative game companies. Sometimes
their products flop (Wii U), but sometimes they're wild successes (Switch).

------
habosa
I wish more big stocks (looking at you, tech giants) paid regular dividends
instead of buybacks. It gives me a real, irrevocable return on my investment
and benefits all shareholders equally (on a per share basis).

The stock market seems to have lost hold of its very basic premise:

    
    
      1) Companies need money, so they sell equity in public markets
      2) The people who buy the equity, if they are rational, value each share as some fraction of the net present value of all future cash flows
      3) As the company moves forward and realizes those cash flows, they pay back cash not needed for reinvestment to the investors as dividends.
    

So many stocks have such little dividend (or buyback) activity that it's a
rounding error. That means the investors are more likely to be interested in
pure speculation, hoping to buy before the peak and sell at highs. When you're
only engaging in speculation, there's no reason the stock price has to stay
tethered to reality. You end up with companies like TSLA that have insane
multiples or TWTR that lose money for a decade without paying a penny back to
shareholders and are still somehow "worth" billions.

A rational market would be a better market, and more dividends would, in my
opinion, increase rationality.

~~~
dman
That would make sense if dividends were not double taxed. Dividends are paid
from after tax dollars and then the investor has to pay taxes on dividends
again.

~~~
torstenvl
That's not double taxation. The corporation is a different legal person. When
you receive income from a corporation, that transaction is taxed, just like
when employees receive their income from their (usually incorporated)
employers.

~~~
cynicalkane
Yes it is. A stock buyback increases shareholders' wealth with a tax of 0% on
the shareholders.

The tax code makes a bright line out of the distinction between income and
capital that is, economically speaking, quite fuzzy. Depending on your need
for liquidity and your means of acquiring it, it might not be really there.

~~~
torstenvl
When the shareholder realizes the gain from the share price, that gain is
taxed. And if it is a short-term holding, that income is taxed like regular
income. Nobody is getting taxed at 0%.

~~~
mercutio2
If you have little or no ordinary income, a decent chunk of qualified
dividends and long term capital gains pay 0% federal income tax. $77k for
joint filers in 2018. [0]

Not a particular trustworthy site, but whatever:

[0] [https://www.thebalance.com/how-to-use-the-zero-percent-
tax-r...](https://www.thebalance.com/how-to-use-the-zero-percent-tax-rate-on-
capital-gains-2388995)

------
darawk
> The stranglehold of this doctrine of “shareholder-value maximization” over
> corporate decision making has been a leading cause of ... sagging
> productivity.

lol...maximizing shareholder value is a cause of sagging productivity? Do
these people even read their own words before they publish them?

This whole 'stock buybacks are evil' meme is beyond silly. The only difference
between dividends and stock buybacks is tax efficiency. So yes, corporations
are avoiding some tax burden by doing this, and that may be a bad thing - so
change the tax policy. But there's no reason to expect stock buybacks are the
cause of anything other than a slightly lower tax bill, and, predictably, this
article doesn't even bother to try to make the actual case otherwise. It just
makes a bunch of blanket, baseless and unsupported assertions.

It's seriously irritating the absolute garbage that gets published in places
like the NYT these days. This article doesn't even try to make its case. It
just pushes a narrative with innuendo and bald assertions. How can something
like this possibly get past their editors?

~~~
coltonv
I think it's poor form to just refer to the opposing position in an argument
as a "meme", then feel as though simply referring to it as a "meme" makes it
so you don't need to actually make a counterargument. I see this a lot on the
internet lately and I'm not sure why people think that different opinions can
just be shrugged off and called "memes". That's not even what a meme is!

The author makes the point that, when companies spend so much on stock
buybacks they don't have reserves to keep things running in economic
downturns, thus leaving them in grave danger should recession come around, and
leaves their employees more exposed than they need to be. I think this is a
point worth talking about, especially if you feel it's not true, because by
calling it a meme and not countering it, you've given no chance to bat for
your own opinion and offering counterpoints.

On the subject of the first quote, I'm no economist, but it seems perfectly
feasible that optimizing for shareholder value does not perfectly correlate to
optimized productivity. For example, Musk wants to take Tesla private because
he feels the quarterly stock review cycle restricts his ability to innovate
and think long term. Musk is quite the capitalist, so I think the idea that
optimizing for share price being bad for productivity is certainly worth
presenting at the table.

~~~
darawk
> I think it's poor form to just refer to the opposing position in an argument
> as a "meme", then feel as though simply referring to it as a "meme" makes it
> so you don't need to actually make a counterargument.

If you read my comment, i'm applying Hitchen's razor: That which can be
asserted without evidence, can be dismissed without evidence. They didn't make
an argument.

> I see this a lot on the internet lately and I'm not sure why people think
> that different opinions can just be shrugged off and called "memes". That's
> not even what a meme is!

First of all, yes, it is _exactly_ what a meme is. A meme is a socially
transmitted idea with virality. That is precisely what I am asserting this
"buybacks are evil" idea is.

> The author makes the point that, when companies spend so much on stock
> buybacks they don't have reserves to keep things running in economic
> downturns, thus leaving them in grave danger should recession come around,
> and leaves their employees more exposed than they need to be.

The author does try to make that throwaway point, though of course, provides
no evidence that it was in any way related to buybacks. Just think through the
idea you're asserting here: In the interest of maximizing shareholder value
the company is going to make itself more likely to go bankrupt in the future?
How does that maximize shareholder value?

Secondly, even if they _were_ doing that, which there is no evidence that they
are: if you ban buybacks, they'll just switch to dividends. If you ban
dividends, you've now banned all mechanisms by which investors may be
remunerated for their capital investment, and thereby effectively banned the
stock market.

~~~
coltonv
I've got no stake in this. I don't really care if buybacks are good or bad.
But the author makes a point that buybacks, being so tax effective, make
companies much more likely to spend their money on stock buyback rather than
rainy day funds and investing in research/development/employees.

I think that's an interesting idea, I don't know if it's right or not, but
since you just keep saying the argument makes no points while making no points
of your own, I have no way knowing _why_ you feel this position is inaccurate.
Could you argue against that point instead of dismissing it? I'd like to hear
what you think.

~~~
darawk
> I've got no stake in this. I don't really care if buybacks are good or bad.
> But the author makes a point that buybacks, being so tax effective, make
> companies much more likely to spend their money on stock buyback rather than
> rainy day funds and investing in research/development/employees.

Can you point me to where they make that argument? I don't see it. They do
sort of hint at it, here:

> To understand the magnitude of this shift, we analyzed financial data from
> 232 companies in the S.&P. 500 Index that were publicly listed in 1981,
> before the rule, and were still public through 2016. We found that from 1981
> to 1983, these companies spent 4.3 percent of profits on buybacks. In
> comparison, from 2014 to 2016, these same companies spent 59 percent of
> their profits buying back their own stock. Dividends absorbed just under
> half of profits in both periods.

This data looks like it's trying to make you believe that these companies are
allocating _more_ capital to shareholder remuneration than they otherwise
would. But it's not actually saying that. Dividends and buybacks are what you
do with profits. If you re-invest your profits, they're not profits anymore,
they're costs, so they aren't accounted as profit.

The point that you are making (that afaik, the article doesn't explicitly
make) is a good one (if true): That buybacks shift the capital preference
curve towards returning money to shareholders. If you wanted to prove that,
you wouldn't look at the share of profits that go to buybacks, because all
that would show you is that companies are preferring buybacks over dividends.
Not that they are preferring buybacks over re-investment. Thinking briefly
about it, you'd probably want to look at changes in revenue / capex, or
changes in net-income to capex over time and correlate them with share of
profits devoted to buybacks. AFAIK, the authors have not done this, and
certainly haven't done it in this article.

EDIT: In a paper written by the authors, they do _sort of_ do this, and it
doesn't really show much:

> By decade, for 1984-1993, 1994-2003, and 2004-2013, total distributions to
> shareholders of these 248 companies were 79 percent, 79 percent, and 84
> percent respectively, with the proportion of net income devoted to buybacks
> rising from 25 percent to 37 percent to 47 percent. High total payout ratios
> among major U.S corporations, therefore, are not new, but over the past
> decade buybacks have predominated in distributions to shareholders.

Note: previously in the article they establish that preference for buybacks is
very low in 1984, and goes up dramatically through to present (2013). So, 1984
is representative of a 'low buyback' time.

So, the payout ratio from net income went from 79 to 84 percent. That's not
totally trivial, but it certainly isn't "save the economy" levels of relevant.
They basically acknowledge this: "High total payout ratios among major U.S
corporations, therefore, are not new, but over the past decade buybacks have
predominated in distributions to shareholders.". But make no real attempt to
reconcile this with their point. And notably, they make no attempt to control
for other factors here. That 5 percent bump may be caused by higher margins
(e.g. in tech) or any number of other economic factors. Being _extremely_
generous, the data is suggestive of a slight preference shift for returning
capital to shareholders over re-investment in the business. However, to
actually conclude that you'd need to do something much more rigorous than
this. And to further conclude that this preference shift has negative effects
on the economy, you'd need to do a _lot_ more than this.

Paper: [https://www.brookings.edu/wp-
content/uploads/2016/06/lazonic...](https://www.brookings.edu/wp-
content/uploads/2016/06/lazonick.pdf)

~~~
mercutio2
Nitpick:

> Dividends and buybacks are what you do with profits.

Retained earnings are a thing, and they are not automatically accounted for as
investments.

In practice, growing a cash hoard might conceivably be better for an
individual firm, allowing it to make new types of investments or add stability
across the business cycle.

In practice, I think most of the capital returns people get all upset about
are coming from companies that have gargantuan cash hoards. Wishing those
companies would expand their investment and hiring is nice and all, but that’s
all it is. A wish.

------
bepotts
The reason the press is so obsessed with stock buybacks is because the press
loves talking about how much the middle class is getting "screwed" by big
corporations, no matter how benign the issue at hand is. If you make a lot of
money, you probably did/are doing something shady.

It's part of the reason why the press has gotten so focused Silicon Valley and
"tech bros".

The media has a narrative and will promote anything that confirms that
narrative, and will ignore anything that doesn't.

~~~
koboll
Real wages have been stagnant for decades, while corporate profits have
skyrocketed.

So I'd say an obsession on the middle class getting screwed is not exactly
misplaced.

~~~
refurb
Real wages may have stagnated, but overall compensation hasn’t.

[https://www.cnbc.com/2014/01/29/-wage-
stagnationcommentary.h...](https://www.cnbc.com/2014/01/29/-wage-
stagnationcommentary.html)

~~~
freehunter
There are a lot of instances of "technically true, but wildly missing the
point" in that article. A washing machine is cheaper today than it was in 1959
because in 1959 automatic electric washing machines were brand new on the
market. Same thing with televisions: it's hard to argue TVs were ubiquitous in
1959 compared to today. It's not a very valid comparison to say that something
that was cutting edge technology in 1959 is cheaper now than it was 60 years
ago. And more benefits going to health care and daycare merely reflects the
astronomical increases in the cost of health care and daycare. That's the
entire argument over "real wages": costs have gone up more than or on par with
people's ability to pay them.

But I wasn't surprised when I got to the bottom and found it was written by
someone from the Johnson Center at Troy University, which is backed by the far
right-wing Koch Foundation, so much that two years after this CNBC article was
written, Troy University put out a statement saying they were going to stop
getting involved in politics:
[https://www.al.com/news/index.ssf/2016/07/troys_johnson_cent...](https://www.al.com/news/index.ssf/2016/07/troys_johnson_center_steers_aw.html)

This CNBC article is a submarine from the very people who created this
economic model. Of course they're going to try to put a positive spin on it...
because washing machines are cheaper now than they were in 1959! Proof that
the average American worker is doing _just fine_.

~~~
hueving
>It's not a very valid comparison to say that something that was cutting edge
technology in 1959 is cheaper now than it was 60 years ago

Of course it's valid in the context of comparing how workers are doing today
vs 60 years ago. The salaries today are buying the same perks.

~~~
freehunter
It'd be valid if washing machines and televisions were the only things workers
today need. Back then they were luxuries, today they're standard issue and we
have a whole host of new things that need to be bought. You didn't need an
Internet connection, a computer, or a cell phone back then. But none of that
matters, it's a ridiculous argument to say that a washing machine is
indicative of real wage growth.

What really matters isn't "how much does a washing machine cost", it's "does
your salary keep up with inflation" and the answer is no:
[https://www.glassdoor.com/research/are-wages-keeping-up-
with...](https://www.glassdoor.com/research/are-wages-keeping-up-with-
inflation/)

------
gnicholas
I understand that buybacks are good for executives and good for buy-and-hold
shareholders. Executives benefit because a large part of their comp is tied to
stock performance. So if companies couldn't do buybacks all of a sudden,
executives would have less comp. Shareholders benefit because they can defer
the taxes until they sell – instead of paying taxes each year on dividends.

If companies were prevented from buying back stock, then executives would ask
for their compensation packages and targets to be restructured to take this
into account. So at the end of the day, executives would get the same amount
of benefit, more or less.

Ordinary buy-and-hold shareholders wouldn't be able to rejigger their affairs
in the same way, so they'd be somewhat worse off. It's not clear to me that
this solves any big problems though...

~~~
vkou
For every tax dollars that this structuring saves long-term investers, that's
one extra dollar that average Joe, who owns 0-10k in stock, has to pay.

~~~
Nokinside
Is average Joe in US free from taxes from dividends if he reinvests? If not,
then it's bad for him too.

~~~
vkou
He has very few savings to invest, and derives almost no benefits from this,
compared to his wealthy neighbour. Tax advantages for shareholders are a
transfer of wealth from the poor to the rich.

~~~
ryandrake
Around 50% of Americans hold no stock at all, including indirect holdings like
pensions, 401k etc.

~~~
refurb
24% of American are under 18, so wouldn’t be expected to hold stock.

That means 2/3rds if adults do, which is pretty good!

~~~
ryandrake
The figure is 50% of US adults, my bad.

------
Nokinside
I don't see how stock buybacks are meaningfully different from dividends. If
anyone cares to explain without any gaping logical holes in their explanation,
it would be nice.

In buyback the money comes to shareholder in the form of increased stock price
(and the investor can choose if he wants to get the value by selling). In the
case of dividends, all investors must buy more of the stock. That should be
just technical difference, not a substantial issue.

For example, if buybacks are forbidden because CEO pay is a problem, obviously
the compensations will change to reflect the change. In the end total
compensation will stay the same.

As a investor look at the total return of stocks (price + dividends
reinvested) and it has little effect on my decisions if buybacks change into
dividends.

~~~
xapata
Regularity. Dividends are typically given on a frequent, predictable schedule.
Buybacks are not.

~~~
tylerhou
Why can't buybacks be scheduled on a frequent, predictable schedule? IANAL,
but I don't see anything preventing a company from disclosing that they will
buy back $foo amount of stock every quarter.

~~~
mercutio2
To avoid stock manipulation, there are strict limits on how much of its own
stock a company can purchase in a given trading day.

So in practice, legally, companies have a ceiling on how much they can
technically purchase in a given quarter.

But most companies aren’t in the lucky position of wanting to do buybacks
larger than their normal daily stock flow.

------
ahelwer
If you work for a large public company, it's a fun exercise to add up all the
money the corporation has spent on dividends & stock buybacks for the past
year (such info is publicly available) then divide it by the number of
employees. You often end up with a truly staggering amount, on the order of
hundreds of thousands of dollars per employee per year. Some might object to
such extravagant handouts to people who (by a vast, vast majority) played no
part in the creation of that wealth.

~~~
graeme
You have to step back a few links in the chain to see the error here.

For example, let's say a private owner starts a company, hired employees, pays
them the agreed wage, and makes a profit. The owner should get the profit,
right? They didn't do all the work, but they directed things, and took the
risk that their capital would be lost.

Now, suppose you had the same situation, except the owner sold to a private
shareholder. This private shareholder wouldn't seem to be in a different
position. They risked their capital that the enterprise might succeed.

What about a public IPO? Well, the investors are putting their capital at risk
to sustain the enterprise. Still seems fair.

The objection is that subsequent shareholders have done nothing. They haven't
worked on the business, and they haven't injected capital. Instead the stock
merely changed hands from the original owners.

So, the idea is we don't pay these people, or we don't pay them very much.
What are the options:

1\. We pay out less to shareholders. But then, this would affect ALL
shareholders, including the original owner who put capital in.

2\. We reduce payments to shareholders who didn't put capital in. All very
good, except this means that those who did put capital in can never sell at
the real price. The share is worth more to a capital injector than to
subsequent purchaser. So, these people would be more reluctant to invest
capital in the first place, knowing the shares could not be adequately resold.

3\. Cut payouts for everyone except employees. In this scenario, the business
simply doesn't get created. There is no reward for the capital at risk.

There's no way I can see to get the outcome you want without wrecking the
whole system that creates the wealth in the first place.

~~~
ABCLAW
>You have to step back a few links in the chain to see the error here.

What error? He isn't indicating that the mechanics of capital equity valuation
are wrong, but that the sheer size of the value extraction from employees
which occurs in de-risked large entities far exceeds what most people would
expect.

You can have all of the conditions leading to wealth creation as in your post
in a system where labour has far better leverage to capture a larger portion
of their own value creation.

The interesting knock-on effect is that reviews of inequality indicate that
firm formation is actually amplified in situations where labour has that
leverage, as workers are able to get more self-generated capital through
labour to finance their own bootstrapped projects/businesses.

~~~
harryh
"sheer size of the value extraction from employees"

It is incorrect to assert that the employees are creating all the value
created by a company. Companies are not just people but also a lot of other
things:

Easy to see and measure things like equipment, facilities and bank account
balances.

Somewhat harder to quantify but still important things like business
relationships, contracts, brands and reputation.

Even more effervescent but still important things like corporate culture &
values; the so called "DNA" of a company.

All of this stuff matters a lot and exists mostly independent of the
employees. It is owned (quite literally) by the stockholders so the value
accrues to them.

~~~
ABCLAW
>It is incorrect to assert that the employees are creating all the value
created by a company.

This wasn't asserted, so it isn't really worthwhile to argue against it.
Obviously other stakeholders can participant in value generation, including by
providing influxes of capital.

Obviously employees are going to generate more value than they capture on the
whole; if they didn't, the firm would crater over time.

The key here is the proportion.

~~~
harryh
My apologies if I misunderstood, but your use of the term "extraction" implied
(to me at least) that money accruing to shareholders was being taken out of
value produced solely by employees.

I agree that the key is the proportion. One way to think about this is to
imagine if one of the employees in question quit and started operating
independently. How much $ could they make? If it's more than they made while
working for the company then the proportion taken by shareholders might indeed
be too high. But if it is not more, then you've got a hard hill to climb when
making your argument that the proportion is significantly off.

------
harryh
For a pretty general rebuttal to essays like this (which are pretty ignorant)
I recommend Buyback Derangement Syndrome recently published in the WSJ:

[https://www.wsj.com/articles/buyback-derangement-
syndrome-15...](https://www.wsj.com/articles/buyback-derangement-
syndrome-1534460606)

~~~
kgwgk
The thesis that Apple got to its one trillion market cap helped by buybacks is
so absurd that it hurts to see how many people repeated it. Matt Levine also
commented on the issue
([https://www.bloomberg.com/view/articles/2018-08-07/buying-
yo...](https://www.bloomberg.com/view/articles/2018-08-07/buying-your-way-
back-to-riches)):

“The theory here is essentially that if Apple had 220 billion more
dollars—roughly the amount of buybacks it has done in the last six years—then
it would be worth less money. It doesn’t sound especially plausible.
Presumably Apple plus $220 billion would be worth at least, like, a dollar
more than Apple alone? And if the buybacks work so well, why not do more? Why
not sell off all of Apple’s businesses, use the money to buy back stock, and
leave Apple as an empty shell with a reduced share count and a $2 trillion
valuation?”

~~~
philwelch
Increasing your market cap by buying back stock is the economic version of a
perpetual motion machine.

------
slg
A buyback is just a dividend except instead of cash the stockholder receives
more ownership. I never see this type of article written about dividends which
makes me wonder why we see them about buybacks.

~~~
WalterBright
Yes, and long term capital gains are taxed at a lower rate than dividends, so
long term shareholders prefer it.

~~~
nilsbunger
Not quite true. Qualified dividends tax rate are 15% nowadays, while capital
gains are 20% (or 23.8% if you make a lot of income).

However, you can defer the capital gains tax (by not selling), thus allowing
that money to compound and work for you.

~~~
loeg
I don't know where you're getting that from. Qualified dividends are taxed as
long-term capital gains. They have the exact same 0-23.8% brackets as LTCG do.

Wikipedia:
[https://en.wikipedia.org/wiki/Qualified_dividend](https://en.wikipedia.org/wiki/Qualified_dividend)
(perhaps not a "legitimate" source, but at least a jumping off point for more
information).

~~~
nilsbunger
thanks, I was definitely wrong. Not sure where I got that from either

~~~
loeg
The 15% LTCG bracket is so wide, especially prior to NIIT (the 3.8% extra for
high earners), that you could be forgiven for assuming everyone paid 15% on
LTCG income!

------
simonsarris
The most succinct way I've found to explain this to normal humes is this:

When you buy stock, to make money, one of two things must happen:

* The company pays a dividend regularly

* The company's share price increases, then you sell

A dividend is just like a salary. A buyback is just like a bonus. Everyone
understands salaries and bonuses, there's no reason to lose your mind over
thinking buybacks are nefarious unless you thinking giving employees a bonus
is nefarious.

Then, there are two key plusses to buybacks:

* You choose the year in which you sell. This has favorable tax advantages, just like if you could choose the year in which you book a bonus.

* Investors punish companies, sometimes heavily, when they decrease dividends. If you cannot guarantee a dividend indefinitely, you probably shouldn't give it out. Instead you should do a buyback. "Things are good right now, so here's a bonus." This is _identical_ to how people think about salaries, so it should come as no surprise. Lowering a dividend later is like giving someone a pay cut, but people don't balk so much if you tell them you're giving them a one time bonus.

~~~
erikpukinskis
It's not a great analogy. A bonus is extra cash in your bank account. A
buyback is not extra cash in your account, unless you sell the equivalent
amount of stock.

Actually, the dividend is more like a bonus.

Actually, I don't really see any merit to the analogy at all.

------
paulsutter
What happens when the last share is bought back? (yes I know, that share would
be worth just more than the company can afford to pay, but what if?)

Stock buybacks are better than dividends (shareholders get to choose when they
liquidate), and I can see no actual downside. They only goose the per share
price because suddenly there are fewer shares to represent the same company.

More and more, politicians seem to focus on issues with little actual merit,
instead of super important issues like healthcare costs, because no donors can
get upset. For example, if buybacks are outlawed, it’s not really a big deal
and there won’t be pushback. They can claim a victory without actually
changing anything, for better or worse, for anyone.

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the_watcher
There's a lot of reference to research that the authors claim show that stock
buybacks are bad and terrible, but no description or quantification of how
exactly their research showed this. The closest I can see is "According to our
research, when trillions of dollars of corporate cash are extracted from
companies through buybacks, on top of dividends, the result is a dramatic
concentration of income among the richest American households and the
destruction of middle-class employment opportunities." To me, this is phrased
the way politicians phrase descriptions of studies, stats, or findings that
they are wildly misusing.

~~~
noelsusman
It's an op-ed, you only have so many words. Here's a much longer article on
the same topic written by one of the authors of this op-ed:
[https://hbr.org/2014/09/profits-without-
prosperity](https://hbr.org/2014/09/profits-without-prosperity)

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alanlamm
One issue Im surprised never comes up in discussion of buybacks vs. dividends
is, apart from the tax issue, whether buybacks drive stock prices up because
of how large orders to buy stock at market price interact with the outstanding
order book - ie that in a buyback you buy specifically from those of the
current shareholders who attribute the lowest valuation to the stock at any
given time. To simplify lets say 2 mutual funds each hold 50% of the stock of
a corp. Mutual Fund A values the stock (ie is willing to sell at) $100, and
mutual fund B is willing to sell at $120. Other potential buyers value the
stock at $99 or less. The company decides to buyback 50% of its stock. It buys
all of A’s stock, and thereby drives the new market price to $120. Meaning it
drives up the market price even before you consider the effect of reducing the
# of outstanding shares (fewer shares > higher EPS > higher stock price at a
given P/E multiple). Of course, in the real world stockholding is less
concentrated, the gap between valuations in the order book wouldn’t be so
wide, shortsellers would also play a role and over time one would argue that
efficient-markets-hypothesis factors in. But still... any thoughts?

~~~
OscarCunningham
> Meaning it drives up the market price even before you consider the effect of
> reducing the # of outstanding shares (fewer shares > higher EPS > higher
> stock price at a given P/E multiple).

These aren't two separate effects. The interaction between the buyback and the
order-book is the _mechanism through which_ the stock price is adjusted to
take into account the smaller number of shares.

~~~
kgwgk
Not really. If the company buys $100mn in shares or any other market
participant buys $100mn in shares the stock price adjustment caused by the
interaction between these orders and the order book will be the same. In one
case the market will learn later that the share count has been reduced. In the
other case no share count reduction will happen.

~~~
OscarCunningham
Your comment caused me to spend a bit longer thinking about this. I think I
was wrong before and that in fact there's no effect at all of reducing the
number of shares. If a company buys back 10% of its shares then it needs to
spend 10% of its market-cap to do so. So company is now worth 90% of what it
was, and there are 90% as many shares. So the share price stays the same.

But there's also a second-order effect of the buyback on the share price. If
the buyback is a wise thing to do (the shareholders can make better use of the
cash than the business) then the shares should be more valuable after than
before. I think it's this rise in the price that corresponds to the effect of
buying the shares on the order book.

~~~
kgwgk
You are right that there is no "magical" effect in doing buybucks. The price
stays the same. But it will go up from there as the company continues to make
money. If the net income remains constant, the EPS will be ~10% higher. When
the company accumulates again the cash that it just paid the price of the
stock will be ~10% higher than before (at constant PE ratio).

In the case of dividends, the price goes down. If the company distributes 10%
of its market-cap as dividends, the price will go down 10% (actually less
because a 10% dividend represents less that that to the recipients after
taxes). And as time goes by the price will recover. If the net income (and
therefore the EPS) remains constant, the stock price will get back to the
original price when they accumulate again the cash they just distributed (at
constant PE ratio).

Still, my point was that the long-term effect of the capital allocation choice
(which cannot be anticipated by the market until they know that it has been
made, or at least that it is going to be made, but in any case the information
is not being incorporated into prices at the precise time of the actual
transactions) is not the same as the short-term market effect. The capital
allocation is usually implemented through a market operation but it doesn't
even have to be the case (they could get the shares in an off-market
operation, a real example is company A buying another company B which has a
stake in A, they can then eliminate those shares). And even if it is done in
the market, the effect on the price would be the same if any other party
(let's say the Saudi Arabia sovereign fund) decides to buy a large position in
the stock.

If the buyback is a wise thing to do, you say, the price of the stock should
be higher and the price is adjusted through the open-market repurchasing of
shares. The problem is that if the buyback is not a wise thing to do, the
market effect of the buyback is still to push prices up!

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jl2718
I totally disagree with this. A company holding cash is a moral hazard for
board members and executives because it’s so easy to extract. Company profits
should be paid out or invested quarterly. It’s not pumping the price, it’s
just giving the shareholders what they own.

Here’s an example. Board members invest in a startup and then use the cash to
purchase it at a much higher valuation. In a cash deal, nothing gets reported.
If the company uses stock for the transaction, they would have to report it to
the SEC as a distribution to an insider. Other than this, there is basically
no good reason to use cash for acquisition versus stock equivalent.

That’s just one example, but a very common one.

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Animats
Stock buybacks, borrowing, and dividends are all ways of paying for capital.
They should all be taxed at the same rate.

Whether or not stock buybacks should be prohibited, they should not be
encouraged by tax policy.

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ryandrake
To me, a stock buyback or dividend is a bad sign. It means the company
literally can think of nothing better to do with the money than shrug and
return it to shareholders. “We’re out of ideas and innovation, guys! Go find
somewhere to invest this where it will be put to good use!”

I guess if you’re an electric utility that’s fine. If you’re supposed to be an
innovative tech company, and you don’t know what to do with your cash???

~~~
erikpukinskis
I don't think your logic makes sense.

Let's assume the company has an infinite fountain of moneymaking ideas, as you
posit.

Why would there need to be any earnings at all to fund those ideas? Why not
just take on debt to fund those ideas? Presumably companies are already taking
debt to fund all of their good ideas, and any ideas that are left are "not
that good".

The appearance of earnings should have no effect on the number of good ideas
available. Why would it?

~~~
harryh
You (perhaps intentionally, perhaps not) have stumbled into a whole other
topic:

Companies need capital. There are generally two ways to raise capital: debt
and equity.

How do companies choose between these two options? It turns out that there are
a pretty large number of factors and it's a complex and interesting topic.

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naveen99
Do companies have to announce buy backs in advance like large shareholders ?

I am annoyed that some of my secondary market purchase attempts are thwarted
by right of first refusal exercised by the company.

On the other hand, I think dividends reduce volatility, make option pricing a
little more complicated and trading less fun.

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purplezooey
_Defenders of buybacks contend that they do no harm because the funds are
reallocated through financial markets and used elsewhere in the economy._

When is this "rising tide" horse shit argument going to wear out. It's used to
justify almost anything now.

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phlakaton
I too was a little flustered trying to follow the argument here. These
additional sources helped a little:

Troy Segal, "Why would a company buy back its own shares?", Investopedia, 20
Jun 2018.

Annie Lowry, "Are Stock Buybacks Starving the Economy?", The Atlantic, 31 Jul
2018

Katy Milani, Irene Tung, "Curbing Stock Buybacks: A Crucial Step to Raising
Worker Pay and Reducing Inequality", Roosevelt Institute, 31 Jul 2018

I'm new to this, so let me share my thinking here and see if I've got it
right.

The argument is that money that could be going towards investment in growing
the company and/or rewarding the employees is instead going towards buybacks.
Buybacks have the benefit of increasing the stock price and consolidating
ownership, which generally benefit both stockholders and executives, but
exclude many classes of workers who don't own shares.

Dividends would be a similar thing to plow a company's dollars into. Again:
benefiting stockholders, but excluding workers who don't own shares.

Companies these days who are involved in feeding money back to investors like
to balance between issuing dividends and buying back stock--in many cases,
biasing strongly in favor of buybacks. There are a few reasons for this,
including investors wigging out far less if you have to cut back on buybacks
vs dividends during a recession.

Nevertheless, there seems to be an expectation that shareholders will continue
to increase their profits--specifically, that dividends will increase if the
company is issuing dividends. Indeed, it seems to me that a company runs a
risk of activist shareholders taking them over if they don't do a good enough
job of satisfying them. So if a company shifts those dollars away from
shareholders and into wages, and the shareholders revolt as a result, does
that necessarily make those companies or their employees any better off?

I can see a problem for sure, since the increase in income inequality in the
US is an undeniable problem, a lot of workers are not getting any better off
from either stock buybacks or dividends, and the Roosevelt Institute makes
some compelling arguments for why stock buybacks are not great for long-term
strategy and profitability even among shareholders--including the startling
fact that some companies, particularly in the restaurant business, are
actually putting themselves significantly into the red to buy back shares! I'm
not sure that it's a problem that regulators are obligated to fix by going
directly after stock buybacks, though.

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fipple
Without buybacks or dividends every stock is worth $0.

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ohiovr
Why should the sole focus of a corporation be making itself expensive?

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ry4n413
stocks would probably crash if this happened due to a sharp increase in the
costs of capital and decrease in cash flow profitability.

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marketgod
Less dividends is good. This helps the $SPY $300 targets for this year. Also,
helps AAPL go higher, $250 targets as they pay dividends. Everything is coming
together for 2018!

