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Dividends and Buybacks Now Larger Than Total Reported Earnings for Entire S&P500 (thesoundingline.com)
92 points by Fifth_Star 23 days ago | hide | past | web | favorite | 110 comments



This is how its supposed to work. The whole reason stocks have fundamental value in the first place is because they're claims on the future profits of the company. 100% of a company's earnings legally belongs to the shareholders; it's nice to see them actually returned to the shareholders (vs. blown on overpriced acquisitions) for a change.

It does mean the end of a cycle, though, and not just a "stocks go up, stocks go down" cycle. It's rational for corporate management to retain earnings and invest in future growth opportunities when the expected returns from those growth opportunities are greater than the cost of capital. That they're returning capital to shareholders, even in an era of historically low capital costs, indicates that they can't find growth opportunities at any price.


Or, market fundamentals have hit or crossed a marginal point where the probability of a contracting market is beginning to diminish capital valuations. They’re keeping stock price trends positive at the expense of cash on hand.

I’m not sure of this argument, but I sense meaning going on at the margin.

My Econ professors had a saying. Something like “you know a correction will start when the last stalwart holdout is convinced he can make money in this market [meaning no one else is left willing to jump in].” Paraphrasing a decade old quote.


> The whole reason stocks have fundamental value in the first place is because they're claims on the future profits of the company.

If earnings are low then so is the free cash flow too. In which case most of these companies are borrowing cash to pay out dividends which is not a good sign.

Similarly, buybacks are supposed to be value accretive. Paying for it using borrowed cash is not adding value. Additionally, buying back a stock which is trading well over its fundamental value is same as overpriced acquisition.


Corporate profits were at historic highs up through the end of 2018. That's why everybody was complaining about greedy corporate profiteering. Many of them are sitting on huge cash hoards (eg. Apple and Oracle both have about $65B in cash & short-term investments), which is why they're returning cash to shareholders.


Oracle and Apple are exceptions than norm. Many companies have shown growth on back of the low interest rate environment. For them to spend money for dividends and buybacks in excess of earnings is not good. Buybacks are especially concerning if they happen at well above company's fair value. That is actually throwing good money to buy an expensive company.


That's who we're talking about in this thread, though. vonmoltke posted the actual list of companies doing buybacks. Apple is #1 and Oracle is #2; the remainder of the top 5 is rounded out by Wells Fargo ($253B in cash, albeit as a bank), Microsoft ($133B in cash and short-term investments), and Cisco ($46B in cash and short-term investments). Together they're responsible for over 20% of the $800B in 2018 share buybacks. The top 20 is responsible for about 45% and includes companies like JP Morgan, Bank of America, Facebook, Alphabet, Starbucks, Pfizer, Citigroup, etc.

Arguably they're buying back stock now because they believe it's undervalued. The other prevailing narrative in the media today is that corporations are too powerful and are bleeding the American consumer & worker dry. Which is it? If they're actually bleeding the American consumer dry you'd have to be an idiot not to want a piece of the action, while if they're overvalued and about to collapse there's no reason to be afraid of them.


To determine "who is doing buybacks", don't we need to normalize by market cap, annual revenue or profit, or some similar metric?

Apple having the largest buyback amount doesn't seem to tell us a ton by itself, given that they are among the top few most valuable companies in the world.


Depends on the conclusion you're trying to draw from the data.

The headline is "Dividends and buybacks now larger than the total reported earnings of the S&P 500." For that conclusion, it's absolutely relevant that Apple et al are doing the buybacks and that their market cap dwarfs many of the companies on the S&P 500 (which has a threshold of $6B to enter, vs. close to $1T for Apple). Apple deciding that they're going to return some of the cash to shareholders they've been stockpiling for the last 5ish years would dwarf the entire earnings of most of the bottom 200 stocks in the S&P 500. That's not a report on weakness or danger in the market, it's a report of what a small number of companies are doing with a large cash hoard. It's sorta like reporting that "Residents of Medina, WA lost more money to divorce in 2019 than they made in total wages" without reporting that Jeff Bezos is a resident.


Ah ok, I see what you mean. Thanks.


> indicates that they can't find growth opportunities at any price.

This is a great way to put it! Thank you. Would it be fair to say that this suggests the market isn't really expanding and has essentially become zero-sum (or technically I guess it could mean that expansion is free, but that seems unlikely)?


The public market isn't really expanding and has essentially become zero-sum. This doesn't preclude the existence of other capital markets that might actually be taking share away from publicly-traded companies - for example, late-stage VC/PE financing (a la Uber, Lyft, and most other Silicon Valley unicorns), crowdfunding, or cryptocurrency ICOs & STOs.

Nature usually abhors a steady-state: when you think you've reached one, it often means that there's a competitor that's too small for you to see but growing exponentially.


Good distinction, thank you. I wonder if there are stats somewhere to see what percent of capital is in public markets vs private.

Also, now that so many of the unicorns like Uber and Lyft are going public, I wonder how much of the market is currently still private. Not to mention, many of the unicorns are horribly unprofitable and potential a net negative for the market.


Even if the companies never expand and the stocks are priced perfectly the market is not zero-sum. It's still an asset that produces value and pays back every year. There are people for whom it makes sense to own something that gives steady returns and there are people who for whom it makes sense to have cash on hand. Trading might be zero-sum which is great for everyone but owning stocks isn't.


Fair point, stocks do have inherent value even if they are just paying dividends. I guess that in that case it's market growth that is zero sum (eg, one company growing must mean that another company is shrinking).


No, the market can still expand, it's just that shareholders (as proxied for by boards and management) would today rather have the marginal dollar in pocket rather than invested in some growth opportunity. Companies have invested billions in growth opportunities in past decades and we're currently seeing how the returns from those investments play out, and that's where today's growth is coming from. There just aren't as many good places to put money to work in the market right now.


Good point. And this is why value stocks (that return money to shareholders) outperform growth stocks over time.


Naive question: istn't the idea of "growth stocks" to become value stocks at some point?


Yes - stocks don’t stay in their category forever. Most start needing capital, and then eventually return in.


But they aren't just using their earnings. They are borrowing too.


That just means that at current interest rates, the stock's forward P/E exceeds the rate of interest. It's rational to borrow money to buy stock if the earnings spun off by the stock exceed the rate of interest. You're basically arbitraging against the bank: the bank gives you money to buy out people who think the stock is overvalued, you give them a set amount of interest for the money, and if it turns out you're right and the stock's future earnings exceed the price of that money, you pocket the difference at the expense of people who left the market. If you're wrong and earnings are less than the interest rate, it's reflected in net income, the stock drops, and you (and the rest of the shareholders) eat the difference, often in a dramatic fashion.

With low interest rates, high corporate profits, and low growth, I'd expect to see a lot of debt added to balance sheets; it's a way to lever up the capital structure to the benefit of existing shareholders, as long as profits remain high and interest rates remain low. (And corporate bonds/loans are usually fixed interest, so the interest rates are locked in until they need to go back to the debt markets.)


> If you're wrong and earnings are less than the interest rate, it's reflected in net income, the stock drops, and you (and the rest of the shareholders) eat the difference, often in a dramatic fashion.

Or you’ve already moved on, and the next CEO eats the difference. The incentives between those two vary wildly.


> it's a way to lever up the capital structure to the benefit of existing shareholders, as long as profits remain high and interest rates remain low

It’s only rational up to some level of indebtness (and often companies go too far). If you take on debt just because you can, how are you going to delever the balance sheet when earnings go down and interest rates go up?


The S&P Global source data[1] has a list of the top 20 Q4 buyback totals, as well as their buyback numbers for selected historical periods. It would be interesting to see how much debt those companies took on during those periods. The top company over the past 5 years, Apple, has been notorious for sitting on a massive cash reserve.

[1] http://press.spglobal.com/2019-03-25-S-P-500-Q4-2018-Buyback...


Our tax policy encourages this. You can write off the interest you pay to bondholders, but you can’t write off the dividends you pay to shareholders. Everyone involved (except for the government) is better off if you sell bonds and buy back stock.


Prior debt holders get punished as companies lever up. (But they usually don’t get a say in the matter unless they have strong covenants)

Heavily indebted companies struggle to survive distress too.


The recent reform puts some limits on deductibility of interest expenses, but I don’t know what is the practical impact of that cap (30% of adjusted taxable income = earnings before interest, depreciation, amortization, and taxes).


Theoretically as interest rates go up and corporate taxes go down the benefits of such leveraged recaps should soften. On a stand-alone basis if a firm needs to increase leverage to find an optimal cost of capital, adding debt and buying back stock is a reasonable strategy.


100% of a company's earnings legally belongs to the shareholders

That's simply not true. Next you'll be telling us it's illegal for a company to do anything that isn't about maximising shareholder value.


Who do they belong to if not to the owner of the company?


"Shareholders" and "owner" are not synonymous terms. Shareholders don't "own" the company; they hold shares in the company.

https://www.lawschool.cornell.edu/academics/clarke_business_...

"First, shareholders do not own business corporations, nor do they own the assets of the corporate entities... Shareholders own shares."

Somewhere back in the eighties, it became popular in the business community to say that the purpose of a company is to maximise shareholder value. That opinion and others like it have now so saturated society that people take it as received truth, but it's not. Likewise the idea that shareholders are owners.

Now, as in many things, laws do change over time and if enough people continue to believe this hard enough for long enough, there will eventually be enough case law that it ultimately become true. One day, it might be true, and law. That day has not yet come.


You are right at least in part, strictly speaking the owner(s) of a company do(es) own its assets only in an indirect way.

But I don't get the "shareholders do not own business corporations" bit. Would a sole owner "own" a business corporation? Do real estate owners "own" real estate or do they own "bundles of intangible rights"?


But I don't get the "shareholders do not own business corporations" bit.

Well, why would they? At risk of horrifically simplifying things, I have a company, I decide I want some more money. I sell you the right to vote in some things that concern the company, and I sell you a share of any dividends that get paid out in the future. That's what you get. Do you now own the company? Do you own the company assets? I didn't sell that to you. I sold you the right to vote in some company meetings and decision making processes, and I sold you a piece of any future dividends that get paid out to you and others like you. Doesn't sound like "owning" something to me.


> I have a company

What does that mean? You don’t “own” the company, do you?


Certainly not in the same way that I can own a pen or a nice wristwatch. Now we're getting somewhere! So what does it mean to "own" a company?

If the company is just me and a bag of tools, fixing people's cars on their driveway, do I own that company? What does it even mean for me to "own" it?


You're making a good argument to point out that 'ownership' takes a lot of different forms. And an interest in one class of thing isn't the same as others. Ownership comes with differing, restrictions, rights, and responsibilities depending on the thing.

An opinion of mine the ownership of a company through stocks is secondary to stocks being a quasi-cash financial instrument like bonds.


Wasn't there that Michigan Supreme Court decision that states that was precisely the purpose of a company -- to maximize shareholder value?


You're thinking of https://en.wikipedia.org/wiki/Dodge_v._Ford_Motor_Co. , which was literally a century ago.

If you scroll down to "Significance", you can read for yourself that it's by no means universally accepted ("that this interpretation has not represented the law in most states for some time").

Let's come forwards a little; as the U.S. Supreme Court recently stated, "modern corporate law does not require for-profit corporations to pursue profit at the expense of everything else, and many do not do so."

Where this is basically going is that the common belief - that there is some clear, absolute law that totally says the shareholders are the owners and the company is all about giving money to them - simply isn't true.


Thank you! I just remember reading about it before, but didn't know much more. Thanks for the info, and definitely glad that's changed!


It is true. The company is owned by its shareholders, collectively.


Even if they did "own" the company (which they don't, unless you choose to define the terms identically - "owner" and "shareholder" are not synonymous), just owning a company doesn't mean all the earnings belong to you.

Here's some legal people on the subject; https://www.lawschool.cornell.edu/academics/clarke_business_...

Key phrases include "shareholders do not own business corporations, nor do they own the assets of the corporate entities".

Now, there are other opinions, but the very fact that this is an ongoing discussion suggests strongly that it is not as cut and dried as you claim.


They do, collectively, own most companies. It is possible to create shares that do not represent an ownership interest, but most companies are structured such that they do. Shareholders are generally able to reconstitute the board, which can appoint a CEO, who is in control over the assets of that company. They may then appoint a board, who would appoint a CEO who would liquidate the assets and return them as a dividend to the shareholders. That is the sense in which they own the company.

Now, some companies sell shares that don't have voting rights (e.g. Google, Facebook). Those are a bit more nuanced. Though even in those cases, there are voting shares, they're just not traded in the public markets. So, the statement that the company is owned/controlled by its shareholders remains correct.


I was taught in economics classes that buybacks make sense when there is nothing the company believes it can spend the money on instead to increase its profit. If this is true, should we be concerned that this is a market signal that the economy as a whole is running out of opportunities to invest in new technologies and instead just trying to hold onto its own value? If that is the case, I imagine that buybacks could be viewed as a signal that the market is moving more in the direction of being zero-sum and less in the direction of expanding. And if that is true, does that suggest that this phase of growth in the business cycle is coming to a close?

I agree with the logic behind the arguments that a company buying its own stock should be a signal that the company believes in its business and valuation, but it also seems that many companies that also believe in their business and valuation also sell stock to raise money in order to expand, with the belief that the sale will result in individual stocks increasing in value even after the dilution. It seems hard for both cases to be true, but perhaps they are.

If this logic is sound, it seems that we should be at least somewhat concerned about this.

Also, I didn't understand how cheap credit is encouraging buybacks if companies aren't buying their own shares on credit. Would someone be able to explain this better than the article? (Thanks!)


Dividends and buybacks both indicate that the company is willing to return cash to shareholders. One big difference is that dividends are typically a long-term commitment to returning cash (unless it's a "special dividend"), whereas buybacks are more ad-hoc. The other difference is that buybacks imply an opinion that the stock is undervalued, whereas dividends are agnostic about valuation. In most cases, buybacks seem to be motivated by the former difference more than the latter. However, some companies like Berkshire are more principled about valuation driving buyback decisions.

I would disagree with your point about stock issuance suggesting belief in the company. Issuing stock is usually a negative signal that not only is your company struggling with cash flow, but it can't issue debt at a reasonable cost. (Startups issue equity because it is difficult to borrow at such a risky stage of the company, but more established companies like Tesla issuing equity is usually a sign of difficulties with cash flow.) Read up on cost of equity vs cost of debt for more info.


Interesting. Would it be fair to say that startups issuing stock is a positive or at least neutral signal whereas a public company issuing stock is a negative signal?


I was taught in economics classes that buybacks shouldn't increase the stock price at all, which clearly isn't true in practice. It ends up being more complicated than the simple models would suggest.


How could the price not go up? I understand buybacks as reverse dilution. Each share represents a larger percentage of the company, therefore it is more valuable and it's price should be higher. Is that wrong?


You're not accounting for the transfer of cash out of the company. If you have a company with a business worth a billion dollars and a billion dollars in cash, it should have a market cap of two billion dollars. If it uses half a billion dollars to buy back shares then it should have a market cap of $1.5B because it has $500M less cash. Then it also has 75% as many outstanding shares, so the value of each share is the same.

But the buyback often increases the value of the shares because it allows investors to express their preferences better. If the company has a $1B business and $1B in cash, there is no option to invest in only the business, only the combined business+cash entity. If you think the business will give 9% returns and the cash 2% returns and you have an alternative investment that gives 6% returns, you won't invest in that company. But if they separate the cash from the business then you're willing to invest in the business, which makes the business worth more to investors and increases its share price.


The company becomes equally less valuable after a buyback.

Consider a company with value of $1000, with 100 shares outstanding. Each share is $10. Buying back 10 shares, the company spent $100, so the company is now worth $900 and has 90 shares outstanding. Each share is still $10.

This is the basic model that shows share price should be unaffected by buybacks, but there are other effects. The buyback could signal to investors that the company is unlikely to be inefficient with capital, so investors would value the company at $910 instead of $900.

Alternatively, in a demand/supply model of shares, the buybacks could have exhausted some of the supply of shares, so the valuation for the company settled on by the rest of the market is higher.

There's no clear answer here, but reality is probably somewhere between these models.


> Consider a company with value of $1000, with 100 shares outstanding. Each share is $10. Buying back 10 shares, the company spent $100

How would you buy 10% of the outstanding stock of a real company and pay exactly the market price for the entire block? On a public exchange, you'd need to bid higher than the market price for someone to sell you a block that big (otherwise it wouldn't be worth their while to sell).

If you're buying in the public market, other sellers will see that some party is willing to pay above the market price for this stock. They'll raise their own ask price as a result. In private, off-exchange sales, you'll be dealing with seasoned investors (family offices, hedge funds etc) where they're likely to know your situation, and you'll almost definitely pay a premium to acquire that stock.


I think you may be confusing market cap with share price. Market cap does not generally increase with buybacks, only share price does.


There are fewer shares, but the book value of the company goes down as well because it is spending cash to buy the shares. So it's not necessarily true that the price should go up.


Because the company cash to buy the stocks should decrease the amount of capital cash on hand by the same amount resulting in no change in the capitalized value of the stock.

The stock doesn't just vanish. It is held and owned by the company. So no, each share doesn't represent a larger percentage of the company. Unless the company retires the shares.


A bigger percentage of a less valuable company, because buying the shares back costs money. Ignoring taxes and other “minor” details (like a discount applied go cash that could be “wasted”), if a company market cap is $10bn and it has $1bn in cash after a buyback investors in aggregate would still have $10bn after the cash is used to repurchase 10% of shares: $1bn in cash and $9bn in stock trading at the same price as before (there are 10% fewer shares, but the company is worth 10% less).


The simple version of the theory is that stock buybacks should be price neutral because shareholders effectively lose cash now (for the buyback) but get a higher proportion of future earnings for that cash. If the price of the stock is perfectly efficient, these values should be equal.


I recall learning this too. I never heard that prices shouldn't go up. Maybe the above person meant that the total valuation shouldn't go up? If so, that logic does check out.


I think we’re talking about Miller-Modigliani [1] which says that enterprise value should not change as capital structure changes. However it presumes many untrue aspects of the world in order to make this claim.

[1] https://en.m.wikipedia.org/wiki/Modigliani–Miller_theorem


Can't see this ending without a lot of pain. Credit is so easy that it becomes easier to reduce the amount of shares out there to prop up their price than do what capital markets are supposedly designed for - offering more shares to invest in capital. Yet raising interest rates would crash the market. At some point true price signals will leak through and the tiny hole in the wall will become a flood...


Once a company has no need for more cash, there is no point to sell shares. The whole point of a IPO is to fund growth / give founders and early employees a payout.

Share buybacks aren’t about propping up the price (when done correctly). They’re about tax efficiently increasing your ownership share. Or you can think of it as paying money now to reduce the amount you need to pay in dividends, all else equal.

Share repurchasing is just a tax efficient way to return money to shareholders. People love dividends yet look at buybacks as insane. Why?

* Note: buying back shares when your company is overvalued is insanity. I’m not endorsing that. But if you’re in a situation like AAPL, they are hands down the correct move.


Because it's difficult to distinguish between executive leadership trying to efficiently return money to shareholders vs propping up the share price so that they see a personal benefit via their own shares increasing or via contractual bonuses.

Given that there's an incentive to spend other peoples money(shareholders who bought shares) to increase their own(via bonuses, salary, or granted shares) it's fairly safe to assume that execs are following the incentive


“Spend other people’s money” is a really weird way to put it IMO - people chose to invest in the company because they thought it was a good investment. Investors would rather have the stock than the cash they paid for it. When the company does a buyback, the shareholder investment in the company becomes more concentrated. Each share represents more stock and less cash, making it possible to construct a higher-equity lower-cash portfolio. This more purely fulfills the investor’s revealed preference of owning the stock. If they change their mind, they can always sell.


I'd agree that it would be a weird way to put it if both sides had the same level of information. In this case execs okaying the buybacks have access to more accurate and immediate information than the potential investors and they have a way to funnel that investor money into their own pockets. In this situation I stand by characterization of this


> via their own shares increasing

This isn't any more true for the executives than any other shareholder, and doesn't really work that way anyway. Buybacks don't increase the value of shares unless the company was undervalued or making less efficient use of the cash than their other capital, and in that case they're smart to have done it.

> via contractual bonuses

The way to solve this is to do accounting for buybacks (and, for that matter, dividends) when calculating bonuses. You obviously don't want to have executives choosing whether to do these things based on that, so don't.


>Buybacks don't increase the value of shares

There was a price at the current supply and demand. Buybacks increase the demand which increases the price. The buybacks may be a bad idea and lower the demand from the marketplace but that information takes more time to disseminate and is harder to actually determine where as someone buying up millions of shares is a piece of information that is immediatley known.

>You obviously don't want to have executives choosing whether to do these things based on that, so don't.

That is what people who have problems with buybacks but not dividends, would like to see happen


> There was a price at the current supply and demand. Buybacks increase the demand which increases the price.

The company has a value. If the P/E ratio gets worse because the share price went up with the same earnings, more investors will find it profitable to cash out and invest in something with a better ROI. That doesn't happen instantly, but it happens quickly, because cash-flush investment banks realize they can front-run the correction for a profit, which makes it happen.

But the buyback itself often actually improves the ROI of the company and legitimately makes it worth more, because the company itself was getting high returns on its productive capital and low returns on its cash, and now less of its share value is represented by the low productivity cash.

> That is what people who have problems with buybacks but not dividends, would like to see happen

Except that then the perverse incentive for managers becomes to boost the stock price by not issuing dividends, since dividends reduce the stock price. The only real way to fix it is to fix their incentives, and once you do that you're back to preferring buybacks due to the tax treatment.


Doesn’t apply if the incentives are structured based on market cap, not per-share price.


Issuing shares is borrowing money.

Buying back shares is repaying that money.

It's a good thing that companies can repay the money they have borrowed, and a good thing that they are doing it.


If companies were throwing off dividends exceeding their collective earnings, wouldn’t you be concerned?


Not if they've been sitting on a pile of cash for years and doing nothing with it. What are they supposed to do with money they don't need? Store it in a mattress forever?


This is just what it is.

Given an interest rate regime, CFO's will react accordingly and this is that reaction.

Also, it's odd to see dividends and buybacks in the same data.

Finally - both activities are not bad at all. Buybacks are a strong signal to the market the company believes in it's valuation (FYI investors have access to the same 'cheap capital') and dividends are profits getting out.

None of this is bad, but it's going to get hard to get off of the sugar addiction.


Don't get me wrong, don't think there is anything wrong in principal with a buyback - but when we are talking about macro-economics and not any specific business, data like this is a bit strange...


Where are there companies using credit to issue dividends?

If companies just took on debt to issue a dividend, the share price would be devalued by the market by the dividend amount due to the debt so it would be a pointless exercise.


IIRC Apple is borrowing hundreds of billions to pay as dividends/buybacks because it's cheaper to pay interest than it is to pay taxes on money earned overseas.


They were doing that but I believe this is not something that makes sense any longer.

The TCJA passed by the republicans got rid of the tax system that was causing the problem and switched the USA to a territorial income tax system like other countries have.

https://www.taxpolicycenter.org/taxvox/explaining-tcjas-inte...

> The TCJA’s international reforms are significant. Combined with the reduced corporate rate, they largely eliminate the incentive for US firms to accrue assets overseas, while seeking to protect the tax base from avoidance by both US and foreign-based multinationals.


I think it's more about the trade-off. There's no obvious opportunity to deploy the capital, and if one pops up later, easy credit makes it trivial to take advantage of the new investment.


After the 2017 tax bill this was bound to happen. consolidating stocks allows greater control over the corporation by the high % owners, minimizes activist investors, reduces accountability, and further funnels profit to the top. Whatever that "poll" advertisement is at the bottom with a caricature of AOC was misleading and dishonest at best. What agenda is this site pushing i that's their biggest ad on this article?


The site probably doesn't control the ads that appear, and such an ideological slant doesn't look evident looking at the titles of their other articles.

The first bit is bang-on.


For some counterpoints, consider this paper from Cliff Asness of AQR fame. https://www.aqr.com/Insights/Research/Journal-Article/Buybac...


Surely it ends when the corporate Credit Default Swap (CDS) rate rises, and credit rating drops, so the interest rate paid by the company rises when they have to refinance their bonds. Eventually, interest on bonds exceeds cashflow, and they have to borrow more to pay interest (Ponzi phase).

At the margin, the lowest investment-grade BBB company drops one notch and becomes High Yield 'junk'. Then insurance companies and pension funds with fiduciary obligations must divest themselves of the bonds, so they sell and force the yield (interest rate) even higher.

Companies have borrowed too much to perpetuate buybacks, jack up the share price, and reward executives with profits on share options. Half of all bonds are at BBB, just one downgrade from junk [1]. This situation is highly unstable, just one snowflake will create an avalanche of downgrades, and a true Black Swan will bankrupt many companies [2].

These companies have run off the cliff, and if they look down into the abyss, they will fall (e.g. GE [3], IBM). As with sub-prime mortgages, CDOs and MBSs during the Great Financial Crisis, pulling the trigger depends on the ratings agencies. Last time they were asleep, or perhaps complicit (euphemism for corrupt). Let's see what they do this time.

[1] https://www.marketwatch.com/story/half-of-investment-grade-b...

[2] https://www.zerohedge.com/news/2019-03-05/bis-warns-market-c...

[3] https://www.zerohedge.com/news/2018-11-13/collapse-has-begun...


If you need evidence that our economy is at least partly broken, this is it right here. Companies that are swimming in cash reserves are using their money to artificially boost shareholder returns instead of actually investing in things like capital expenditures, R&D, or higher salaries. On one hand (as the article points out), this is driven by cheap credit, but on the other hand I think the question needs to be asked: have large corporations just run out of things worth investing in?


> have large corporations just run out of things worth investing in?

Businesses don't expand just because capital is cheap, they need some kind of demand to fill. That's the fundamental problem with "trickle down" economics, it assumes the economy is supply constrained when it is more commonly demand constrained. And worse, the polices that it produces tend to squeeze the lower and middle classes, further reducing demand.


That's the fundamental problem with "trickle down" economics, it assumes the economy is supply constrained when it is more commonly demand constrained.

I was of the understanding that most orthodox schools of economics fundamentally view demand as infinite. Supply-siders hope to meet demand by increasing supply, lowering prices, and making more goods available to those with fewer resources. Policy-wise, this is achieved through production subsidies, fewer regulations, and tax cuts.

Their opponents (demand-siders?) hope to increase access to goods by increasing the purchasing power of consumers. Policies like social safety nets, public education, and tax increases on the investor class promote this goal.


If they don't know high(-enough)-RoR uses of the money, then paying it out as a dividend is exactly what they should do as good stewards of the investors' capital.

And share buybacks are just a tax-efficient version of dividends (since they don't trigger a taxable event for the investors that don't want to convert shares to cash yet).


Agreed!

It's easy to say 'you should be investing that capital into projects.'

But I think people don't realize how much money is actually generated by some of these companies.

I know AAPL is the strongest possible case for my argument, but bear with me.

Their operating cash flow net of CAPEX is ~$65B as of their 2018 year ending in September. I.e., after paying for all of the investments they want to make, they still have $65B in straight up cash left over.

I mean -- what are you supposed to do with all of that?


There's no problem with returning capital to shareholders. There is a problem when shareholders just plow it back into index funds. Does Apple have a better use of money than shareholders? Well, there are investments available to Apple that aren't even available to shareholders, so on the face of it, how could they not?

Therefore the issue isn't so much Apple not being able to find better opportunities than shareholders, but that it can't find better opportunities than Apple -- making those actually good investments would look bad for Apple because of how absurdly profitable it is. That's not a good reason to return capital, if you think about it carefully.


Stock buybacks aren’t artificial boosting. It’s the correct move when your company is undervalued and you don’t have better investment options.

See Apple for an example of doing it right.

See Chipotle for an example of doing it wrong.


It's also a more tax efficient way of distributing returns to shareholders than dividends. GP does not know what he's talking about.


Non-American with no position in Chipotle here. Could you elaborate a bit on how they did their buyback wrong? I see their stock have climbed in the past year, so wasn't the buyback worth it?


"Companies that are swimming in cash reserves are using their money to artificially boost "

There is nothing artificial about it

CFO's are reacting rationally to the credit situation that they do not control.

Consider that labour markets are tight, and 'productive investments' are not easy to make. They are generally very risky.


You think returning money to investors is a sign the economy is broken?

IMO it’s a sign companies are doing the intelligent thing and are assuming investors are better investors than throwing money at random shit.


Asking that question seems to imply that you didn't really see the commenter's reasons for asserting that...

"instead of actually investing in things like capital expenditures, R&D, or higher salaries"

Specifically the last one. The pay gap is larger than ever. The efficiency gains over the last 20 years or more are systematically being funneled up the food chain to executives and shareholders. Even in tech there's a ton of wage stagnation compared to the real cost of living over this period.

I think this is the crux of the assertion if I'm not mistaken. It's broken that the share of increased prosperity isn't anywhere near equally distributed. I wouldn't call that throwing money at random shit.


Right. Wouldn't it be great if Google would start paying a dividend instead of throwing away money on goofy acquisitions like Boston Dynamics? How the hell is a robot dog that does flips or whatever supposed to improve their advertising business exactly? Give me a break.


...it was supposed to get them into the highly lucrative world of military contracting. But then it caused too much of a PR stink, so they had to back off from that idea.


" How the hell is a robot dog that does flips or whatever supposed to improve their advertising business exactly?"

Because a robot that does flips can also flip burgers, pick inventory, sneak up on people (i.e. military) and ultimately that stuff will be worth a lot.

One of their lesser goofy investments.


Yeah, it was so less goofy they had to unload it on Softbank, the goofy investment kings.


Softbank is not making goofy investments (hover skatebaords), they are making ROI investments (real estate leasing).

Google dumped the robots for strategic reasons, moreover, it's going to be a while before payoff.


Softbank going all in on ARM at this late stage of the game seemed a little on the goofy side. I didn't know they were into real estate. Isn't it kind of a bad idea to buy real estate, but not be structured like a REIT since you'd lose tax advantages? Then again, I don't know how it works in Japan. I just know I've been suspicious of Softbank ever since they put a ton of money into Yahoo, and I haven't seen any evidence countering this admitted bias.


Softbank is not making 'goofy' investments along the lines of Google's 'loon' projects, like putting Wifi in air balloons.

They are making 'real' investments in late stage companies with actual business models, or things that have obvious potential upsides.

Softbank is basically where companies go for D and E rounds instead of going public. So there is some risk, but way less risk than left-field, early stage investments.

Their 'real estate' investment is in WeWork, which probably will make them a lot of money as long as interest rates don't flinch higher, and as long as there is no real-estate crash.

Sprint, ARM, Yahoo, Uber, Slack - these are not 'crazy' investments, especially depending on price. Yahoo might actually have some 'decent fundamentals' on some level, and be worth something at some price. They have a gigantic audience, and some small changes might make them be profitable at some level, and they could very well be worth something, at some price.

It's a cross between classic private equity and late stage venture capital, all of their investments make sense in that context.


The unceasing robot dog terminator hunts you down, pins you, and shows you ads on its visor/eyes.


This comment reminds me of one of my favorite pieces of Internet fiction titled Attention Deficit Disorder[1]. The original context was a thread where the OP was arguing for a literal "attention economy" and the story is meant to extrapolate their arguments into absurdity.

[1]: https://pastebin.com/KCbP6rbr


Lol this is terrifying.


If a company is swimming in cash, shouldn't that be going to investors in the form of dividends? This ideology of hoarding cash pushed by guys like Buffet is a sign of a warped economy.


Buybacks are equivalent to dividends, but with less taxation.


I don't have a problem with buybacks either. There was a time when Buffet argued to people that holding cash was worth some multiple greater than returning the cash, and he was probably right. I'm just saying that is more indicative of a "warped economy" than a business actually returning money.


Giving money back to shareholders sounds a lot like giving money to venture capitalists to me.


Could you explain? They sound almost totally different to me, with "giving money" being the only point in common.


Credit is attractive for two reasons:

1. Interest rates have been held artificially low by the Fed and other Central Banks, which have also flooded the financial markets with trillions of new dollars/euros/yen.

2. Interest payments are tax deductible, but dividends are not. Debt and equity should be treated equally.

Also, there are now many weak corporate bonds (CoCo, convenant-light), which mean that bondholders have fewer rights and priorities in the line of creditors, should the company get into financial difficulties. So the debts are treated as bonds for the purposes of taxation, but the rights of the bondholders are little more than shareholders - a double whammy for the company makes it a simple decision.


1. Companies are borrowing money and going into debt to buy their own stocks. 2. Some stock holders and insiders have huge holdings, a perfect supplier for the stocks to buy. 3. Stock volume exploded soon after trump was elected in the s&p 500 and the Dow. But a comparable surge in volume in the Russel 2000 and NASDAQ is not there. 4. As a result of the buying pressure, stocks rise, the market looks to rise in value. 5. Eventually money is not cheap to borrow any more. 6. More than 50% of the buying power suddenly stops.


This is not a good sign. One of the important things for companies to do is to turn the total earnings into a stable flow of cash.

But if cash outflow is larger than inflow then companies are mostly sitting on negative cash flow. The difference is being covered up by borrowing at low rates. These loans put strain on the future cash flow. Without any reserves to fall back on there might come a time when these companies will be strapped for cash.



This sounds very sustainable and rational.




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