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US corporations announced $437B of buybacks in Q2 2018, doubling previous record (cnn.com)
46 points by kaycebasques 6 months ago | hide | past | web | favorite | 70 comments

Buybacks generally benefit top 1% or the C-level and make them richer. The impact on 401k of common is just a gain in few percentages or maybe some extra dividend. Also there is a conflict of interest CEO's are paid in stock and the only way in which they ensure they make more money is to take actions which boost the value of company stock.

Market cap and higher the stock values also can be used in so many different ways, like acquisitions and also as a tool to leverage as an equity against which money can be borrowed.

It's also a sign the companies have too much money and not enough opportunities to spend it on.

Companies hoard cash because they want to ensure continuity.

I loose respect for companies which go an extra mile to exploit loopholes. All companies do it. For example - Apple borrows money to pay dividend to stock owners even though they have unbelievable amount of money. But somehow the messed up US tax code this action sounds logical.

That's just what you get when you hire accountants that know what they're doing and are obligated to pursue the path which results in the lowest amount of tax paid as permitted by law.

If Apple didn't do this they'd get sued. Activist shareholders would be all over them in an instant.

That puts them in a tough spot. I'm sure Apple would rather that loophole was closed, it's really absurd that they have to do all this just to make it work, but there's nothing they can do about it.

The problem here is that the US tax system is utterly bizarre.

It's an utter myth that a company can be punished by its shareholder's for paying too much tax, just as it's a myth that they could be punished for letting their employees due paid volunteer work.

Tell that to Carl Icahn.

And yet Chinese investors and Softbank keep finding dozens of places to throw Billions.

That because SoftBank isn't stuck with an immediate 35% tax bill when they invest in a US company.


What's wrong with gaining a few percentages or extra dividends?!

To me, the increasing buyback trend is an indicator that the US economy is effectively nearing a peak and the underlying economic model that depends on infinite growth is going to need rework in the not too distant future. Companies generally do buybacks when they don't have any productive use of their profits that would contribute to fundamentals (and thus boost share price the old-fashioned way). Companies are piling up profits and then realizing that it's easier to boost share price by just buying their own shares than by investing in more long-term things.

As per-worker productivity increases and wages continue to see only modest gains this trend is likely to continue. That's worrying for the vast majority of Americans who aren't executives or shareholders.

I agree with the other commenters on this subthread that buybacks are most often times simply a more tax efficient way of handing back profits to shareholders. I think it's a good thing that companies share profit gains with shareholders. At a certain point, well run and well focused companies can saturate their market domain but still have amazing fundamentals.

You have to ask yourself, particularly as a shareholder but also a member of society, do you want the company to extend into other industries where they could not only be over-extending themselves beyond their core competency but also over-exposing themselves to macro-economics, geo-politics and anti-trust issues.

Do we want all companies to chase monopolies in multiple domains like Amazon? Should Verizon/Comcast/etc. use its monopoly profits from telecom to go after media, then cloud computing and then conquer consumer goods and healthcare or should it just return profits to share holders? If the money goes back to the shareholder, then the shareholder can go find the category leader in those other domains and invest it more wisely.

That said buybacks can definitely be manipulated by some management teams to game their compensation, which is a definitely bad thing.

If we were seeing occasional buybacks obviously tied to company performance, you might have a point.

But realistically we're in a situation where that is not the case, and it's dishonest to make arguments as if it is, or to have a hand-wavy "I guess it's possible it could be bad" throwaway line at the end to dismiss the pretty obvious reality that buybacks are not being used for the purpose you yourself advocate.

Fair point! I'm not an economist by training, just a hobby/armchair economist :).

That said, this economist that some HN'er recommended seems to think earnings are strong and much of the buyback is funded by repatriated money if I understand him correctly.


I'd look at it more as:

The current power structure in the US believes tax cuts are always a good thing, since they put money back in the hands of individuals and companies, who will then allocate that money more efficiently than the government. They argue that with their tax breaks, companies will invest in capital improvements and raises for their workers, and individuals will spend more on consumer goods, indirectly benefiting the average worker by creating more demand for such goods.

The reality is companies that get tax breaks now use that money to do stock buybacks which pay off mostly already-wealthy investors, and the prime direct individual beneficiaries of tax cuts also are already-wealthy people, who then use their double windfall (lower tax rate + buyback profits) to throw even more money into playing the markets.

And somehow the promised benefits, of raises for workers, increased demand for the average worker's labor, etc. never actually materialize.

There are good charts floating around showing how corporate behavior has been pretty much entirely driven by the last few decades of tax policy, primarily the reduction of corporate and top individual rates, and how the changes in behavior have almost universally made economic inequality in the US much much worse than it previously was (see, for example, ballooning executive compensation while average workers' wages are stagnant or even lower than previously when adjusted for inflation, the complete decoupling of wages from productivity, etc. etc.).

More fair points. And, yes at the individual level, I agree, a higher wage, trickle up approach seems better/fairer than a trickle down approach.

However, at the macro level, the environmentalist in me worries, at the extreme end if wealth really was fully distributed and everyone was living like Richard Branson, Imelda Marcos, etc. with multiple houses in every city (each with a 4 bedroom layout, TVs and wet bar in every room and an SUV in every garage), a yacht, a private jet guzzles premium fuel and a private island, the environmental ramifications would be disastrous.

You seem to be setting up a false dichotomy where the only options are the status quo, or your extreme hypothetical.

There are other options. Some countries use taxation policy to try to set a floor through which nobody is allowed to fall, and as a side effect also limit the ceiling of how high up someone can be on the wealth continuum. Why isn't the "environmentalist" in you familiar with this idea?

Are you saying that a billionaire's carbon impact per dollar spent is lower than an average person's? That's an extraordinary claim.

The environmentalist in me is thinking a single billionaire's carbon impact is probably lower than a 1,000 millionaire's carbon impact. A single billionaire (say Warren Buffet) has a consumption of probably $200,000 a year with the remainder held in investments. A 1,000 millionaire's consumption is probably also $100,000 a year, with the remainder held in investments. So the 1,000 millionaires have basically about 500x the environmental impact than a single billionaire.

Buybacks, in practice, are not good for investors. They are basically always abused by management to defraud investors. I'm not sure why people focus on the theory of buy backs and not the actual application. Study the history of how corporations like Cisco actually use buybacks, it is best described as "shareholder rape."[1]

[1] http://www.businessinsider.com/congratulations-to-cisco-insi...

Why haven't institutional investors fought back?

Buybacks have significant tax advantages and are little different from dividends. Really, the entire point of companies is to give shareholders money, so buybacks don't say much about the wider economy.

It is certainly one point of companies.

It's a very common point of view, famously championed by Milton Friedman[1]

1: https://en.wikipedia.org/wiki/Friedman_doctrine

More like a common misconception. If shares were distributed broadly, Friedman's view might make sense, and perhaps he was assuming that overall, it is. But stock ownership is not broad, it is exceedingly narrow---a tiny fraction of the population holds a wildly disproportionate share. So if corporations, which impact virtually everyone's lives, truly owe a duty only to their shareholders, it would be deeply autocratic. Friedman is simply wrong: all corporations are chartered by government, and consequently have a duty to promote the general welfare, above and beyond their duty to enrich their shareholders.

In practice companies don't act that way.

Further, organizations can be for profit, non profit, or not for profit each of those are distinct things. So what distinguishes companies from other organizations is simply the profit motive, otherwise they would be something else.

That said, they can have other motives on top of profit seeking and need not seek profit over all other goals.

It's not a question of motive, but of duty. Corporations, as creations of democratic government and not purely private property, should be held to a higher standard of public responsibility than individuals. Regardless of motive, corporations should not be permitted to put profit ahead of the public interest.

I feel like your statement just moves the goal posts, though. Yes, buybacks are a substitute for dividends, but that doesn't address the broader issue that I'm seeing: companies don't have anything productive to do with their profits. Whether it's buybacks or dividends is irrelevant - giving large amounts of money back to shareholders directly isn't what companies with strong growth plans do. We're reaching a point where profits are just getting continuously recycled back into the top 10% of the population instead of being used to expand the economy in more traditional ways.

it is obviously natural to take money out of business (like give back to shareholders) when taxes are low and invest into and expand business when taxes are high. The taxes were just lowered to allow to take the cream off the top. While i'm not a supporter of it, i can't not agree that the economy probably can take and survive this hit right now.

curious if taxing buy backs was any part of the proposed tax reform. kinda highly doubt it but still hopeful

> the underlying economic model that depends on infinite growth is going to need rework in the not too distant future.

particularly when we're cutting off a key historical component of those models: immigration. people are the drivers of growth; more people ==> more economic activity.

and whatever your politics, it was pretty obvious to anyone with a pulse that the tax holiday would go to shareholders, not to wage increases.

and without more people to sell things to, the ROI on capital investment is not so great.

so rather than into reinvestment or rewarding workers, money principally flows to capital holders.

It is really just an acknowledgement that buybacks are more tax efficient dividends. So now "value" companies, instead of paying dividends, perform stock buybacks.

It is a tax efficiency thing, nothing more.

Companies don’t buy stock when they think it’s going to go down in the future.

Actually the data suggests the reverse.

Good thing companies are putting that big tax cut into hiring more worker and increasing wages. Otherwise, it would just be a big plus for corporate bottom lines and yet again invalidate trickle down, voodoo economics.

God forbid!

Goldman Sachs : "every percentage-point increase in labor-cost inflation will drag down earnings of companies in the S&P 500 by 0.8%"


I'm not an economist, but doesn't that make people .2% better off on average? It's almost like GS is interested in something other than the common good. :)

Stock buybacks disproportionately benefit option holders and executives. That's why they're doing it. They're robbing shareholders of future growth or returned cash.


Quoting Steve Perlstein of the Washington Post, who recently wrote:

Let’s recall those heady days of 2006 when home prices were rising 10, 15, even 20 percent a year, allowing millions of homeowners to refinance mortgages and collectively take out more than $300 billion in cash from the increased value of their properties. Some spent the money on furniture, appliances, cars and vacations, adding fuel to an already roaring economy. Others reinvested it in the already booming real estate and stock markets. When it finally occurred to everyone that those houses and those stocks weren’t really worth what the ­debt-fueled market said they were, markets crashed, banks flirted with insolvency, and the economy sank into a deep global recession.

Now, 12 years later, it’s happening again. This time, however, it’s not households using cheap debt to take cash out of their overvalued homes. Rather, it is giant corporations using cheap debt — and a one-time tax windfall — to take cash from their balance sheets and send it to shareholders in the form of increased dividends and, in particular, stock buybacks. As before, the cash-outs are helping to drive debt — corporate debt — to record levels. As before, they are adding a short-term sugar high to an already booming economy. And once again, they are diverting capital from productive long-term investment to further inflate a financial bubble — this one in corporate stocks and bonds — that, when it bursts, will send the economy into another recession.

Go read the whole piece. Whether you agree or not, it will make you think:


Wouldn't it make more sense to issue more stock when the stock is at all time high and buyback when the stock is low like during a recession?

That would dilute the share price when it's high and boost it when it's low. Reaching some kind of equilibrium in the middle...

What would be the point of that? A stock buyback is not an investment, but rather a transfer of wealth that's not taxed very much.

For a company, it would be obtaining capital cheaply on a per share basis. Most of these companies have huge debt. Take for example, Amgen which is spending $10 billion to buy back shares. They have over 31 billion in debt or which is $10 billion is short term.

That’s what Warren buffett advocates.

why do these buybacks happen (seemingly) closer to market top rather than bottom? thats just reflecting a common theme across market over last year or so. seems like a very dumb way to utilize cash on hand. is there a more structural reason for this?

It's often coincidental. The stock is flying high because the company is producing a lot of free cash-flow, and the company can't find a use for the cash so it does a buy-back.

When the stock is tanking your company is usually in rough shape and has no money for such reserves for a buy-back, the cash will be necessary to survive or restructure. In those situations, when things get really dicey, they'll do share consolidation. That's often to avoid getting de-listed when their stock price dips too low.

Some boards have given CEOs earnings per share based compensation plans, so it’s also a quick way for those to meet their compensation objective. Wise boards don’t structure compensation plans in such a manner, but some do.

It's all about jacking up the stock price for shareholders. Unfortunately.

Unfortunately? Shareholders buy shares for two reasons:

1. The share price may go up

2. The dividends pay out

These have been the reasons for buying shares since shares of the Dutch East India company was chartered. If neither of these ever happened, there would be no shares purchased.

A buyback is just a bonus instead of a salary.

You could make the criticism that a company having nothing better to do with its money is bad, and I agree, but in the interim paying it out as a bonus is a great way to reward shareholders for holding. It's also better than a dividend in case next year the company does find something better to invest the money in, because investors really don't like when companies decrease dividends.

once the stock price hits certain highs, the CEOs get huge bonuses. So, it doesn't really make sense to buy back when the stock is low.

A lot of publications predicted this exact scenario as the tax cuts where being sold as a job/wage booster.

What boggles my mind is how so many people vote "for jobs" promised by a particular party, get shafted, then go right back to the same party next election cycle and eat up the same rhetoric about job creation in exchange for votes.

This is all about price to value.

Price < Value

This is very interesting and shows that there is an amazing amount of cheap cash available that is just piling up. Spending that cash on buybacks increases the value of the outstanding stock that existing shareholders have and then supply goes down, price goes up and the stock price goes up.

Dumb investors.

I'm always a bit unclear on how stock buybacks get reported so badly, though I suppose it is in the complexity of the transaction. If that $437B was in dividends I doubt anyone would think twice about it, yet that is in essence what they are.

Except they're not. Buybacks increase the share price, that means leveraged investments (such as options) have a disproportionate increase in value.

Sure - but is anyone complaining that companies are getting rich off options?

Buybacks increase the share price and that is why board of directors prefer them over dividends (since their bonuses may be tied to them) but this is simply an aligning of preferences. If I own a company I want it's value to go up.

If I could choose between my $100 stock going to $110 or my $100 going to $105 with a $5 dividend I'd choose the first since it is more tax efficient.

Buybacks are almost solely to artificially trigger stock option targets for CEOs, right? Otherwise that is money that should be paid out as a dividend or reinvested into operations and research.

> Buybacks are almost solely to artificially trigger stock option targets for CEOs, right? Otherwise that is money that should be paid out as a dividend or reinvested into operations and research.

No buybacks provide a potential tax advantage for investors. Dividends have tax consequences in the year that they're received. Buybacks lift the price of the stock by an equivalent amount but do not force the investor to realize the gains so they can defer the taxes to a later date.

> so they can defer the taxes to a later date.

This assumes that the share price has maintained that elevated level at a later date.

Ideally, you want to cash out on some long-term positions right around the time of the buybacks. The buybacks have raised the share price, but you’re only paying long-term capital gains taxes, which used to be capped at (I think) 15% for all investors, regardless of income bracket.

No, its the diffence between a bonus and a salary. A stock buyback is like giving employees [shareholders] a bonus.

Some employees get bonuses every year based on how the company is doing. Employees are OK with getting a lower bonus next year. Employees get very, very unhappy when their salary gets decreased in a bad year.

Investors are the same way. They punish a stock when a company decreases its dividend. If you aren't sure you can make a promise in perpetuity, don't increase your dividend, instead give shareholders a bonus, aka stock buyback. Then, if next year you need the cash to invest in the company, instead of another buyback, you do that. Investors stay happy because you didn't decrease your dividend.

Some companies, like Target (which has never decreased its dividend ever) might have a hard time competing with Amazon because Amazon can make almost no profits on paper (until recent years) while funneling all their revenue back into the company. Target does not have this luxury. They DEFINITELY cannot say to investors "okay we're cutting our dividend for 2 years to compete with amazon by funneling it into growth." They'd get crushed.

tl;dr, buybacks are wiser than dividends for any company that might want to spend the money on growth in following years, instead of doling it out to shareholders, as is done with dividends.

Another reply already explained the tax implication reason.

Wait... the majority of the corporate tax cuts wound up going to the 1% and not to create new jobs? If I had pearls, I'd be clutching them.

A related analysis of the economics of the 'Buyback Economy', from about a month ago:


Meanwhile, in March real wages fell 0.1% despite low unemployment: https://twitter.com/erikbryn/status/1016667480771780610

Three cheers for the Trump tax cuts that we were promised would boost wages. How much did we add to the deficit for this crap?

Anyone who thought the working class would benefit in any way from these tax cuts was delusional. Profit is almost never seen by the creators (workers) of the profit in this current system.

> Anyone who thought the working class would benefit in any way from these tax cuts was delusional.

Sure, but the 'anyone' includes a large (though not majority) portion of the US voting population. Now what?

A large but not majority portion of the US voting population can't find America on a map. Now what?

So we should accept that a large but not majority portion of the US voting population is relatively uneducated? Or do something about it? I fail to see how your comment is making a different point than mine, maybe it's not?

I'm just saying we need to accept that a concerningly large portion of the US voting population has no clue, no understanding at all, and further, they don't care. They just vote for representatives of their tribe.

Until there's a way to disrupt that, to break up this tribe into smaller, less significant groups, this is how things are going to be.

It's not that they're relatively uneducated, but that they're negatively uneducated: viewers of Fox News know less about world events than people who don't watch any news at all.

Well said. I used the term 'relatively' because most(?) of them can at least turn on fox news, whereas 70 years ago very few would be able to operate a modern TV to get at fox news without at least 30 seconds of being taught how.

Seventy years ago things like Fox News didn't exist. Although various news stations had their bias, it wasn't as overt as what Fox does with crafting their narratives and painting every story with their brush.

Now you can exist in a bubble of Rush Libaugh, Alex Jones, Fox News and other extreme right-wing publications and find yourself utterly isolated from anything resembling objective truth or actual journalism. In that bubble you won't know up from down, you'll just cheer for your "team" to win.

>Seventy years ago things like Fox News didn't exist.

There was also much more variety, but since then most of the newspapers and news networks have been bought up by a relatively small amount of companies. Clear Channel was allowed to own thousands of radio stations.

[0] http://www.businessinsider.com/these-6-corporations-control-...

Fast forward to a few years from now when six becomes three, and then three becomes two.

Or one.

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