These last two pieces that you've written since going solo are the best stuff you've written in years. Well worth the price of admission and my personal broadcast to anyone that would listen to subscribe as fast as humanly possible. Oh, and Kellerher is Da Man!
Matt. you have returned with a vengeance with this great article concerning buybacks in the form of looting! Kudos. I consider this article, great investigative journalism I was used to reading in Rolling Stone. It appears that Trump has executed the junkyard dog that was to watch over pandemic related funds distributions. I thought there was to be, language in this bill to prohibit TrumpCo. from looting us, again and again. What can stop this madman dictator? Thank you. Stay healthy and please continue turning the knife, only faster.
I like your stuff typically but this is a really weakly written story from a factual or mechanical perspective and I'm a little disappointed as you've fallen into the trap of every other media outlets' click-bait style reporting. I was holding off on subscribing to get a sense of the type of work you'd be doing independently and this is pushing me against subscribing -- hopefully future stories won't do so. To be specific about my qualms It doesn't appear you've interviewed anyone involved in capital markets, corporate / securities law etc (ie people who do the economic analysis and are in the board rooms). Just as examples of factually incorrect items or weak arguments:
1. when you state that buybacks boost the stock price that's not really true mathematically (though you could argue the demand pressure of the company purchasing shares pushes up the value marginally but I wouldn't go into a boardroom advocating that as a basis for distributions). I can illustrate the math for you if you like but a buyback (or any other capital structure change) doesn't change the value of the enterprise or the stock price (there are some technical reasons this isn't totally true at the extremes but those are exceptions)
2. capital decisions (invest / return) typically don't flow the way you suggest they do ... ie the company wants to juice their stock price therefore they return instead of invest in R&D or something else ... more typically they allocate the capital to investments that return their cost of capital, once there are no other investment opportunities that are attractive they then return anything left to shareholders to be good stewards of capital. In fact companies who don't return capital often end up being wasteful with that capital (corporate planes, executive perks fancy offices, etc). You should also remember that capital isn't a one way street -- if I return capital today because I don't have a good project to invest in doesn't mean i can't go to the capital markets and raise that capital again (follow on offerings) to invest ... in fact if I show a history of responsibility it's typically easier.
3. an underlying assumption in your article is that corporations should have been prepared to sustain a shock that essentially amounts to all their revenue going to zero (while still needing to maintain all their costs) -- why would anyone assume a shock like that is possible? Certainly none of the small businesses or restaurants in the country did! This is a very unusual situation and that shouldn't be forgotten ... there are certainly cases where companies push things too far and therefore have no cushion for normal risks but this is not that type of situation.
To argue buybacks are somehow inherently problematic because they reduce your cushion for the unexpected you would need to argue that any other use of capital (wages, r&d, capex dividends) is problematic for the same reason (as they all reduce cash available to sustain disruption).
Moreover a corporation does not exist to accumulate cash in its coffers - it's a productive engine that exists to return capital to stakeholders. Your argument that these returns to shareholders are somehow flowing to the richest also shows a lack of depth on the topic. If you dig into ultimate attribution of the majority of (domestic) capital in the capital markets it will trace back to large public employee pension funds (teachers, firefighters, public employees) and individual retirement funds so in many cases typical middle class people (at least as the majority) ... even big pools of actively managed capital such as private equity or hedge funds are fiduciaries investing capital on behalf of these large pension funds so it's a bit erroneous as an argument.
I typically tell people to think about large companies as you would think about your own assets. Imagine you own a rental property that you rent out to a tenant. Arguing that returning corporate profits to their shareholders is wrong is like arguing you shouldn't be able to use your rental income to buy groceries ... does that make any sense? If it doesn't for your rental property why should it for your 401k?!
Oh yeah, it's all the little people who gain from the stock market....
The share of stocks owned by the bottom half of all Americans was less than one percent at the end of September 2019. In comparison, the top 10% of the household wealth distribution held 88.1% of all stocks and mutual fund shares at that time.
And with buybacks rich people get to cash out via capital gains and duck paying taxes at their much higher personal rate.
Bingo. Dividends on stock options are not "qualified." So the executive insider would likely be taxed at 37%-instead of at 18 or 20 as a capitalist gainer...
The dividends actually are typically qualified -- that's not the reason it's more tax efficient to buy back -- the reason is if I'm currently working and just investing for retirement I don't really want that dividend because I'll get taxed today on it. I'd rather the company use it to grow -- if it doesn't have a good place to invest it and wants to distribute it doing a buyback allows them to increase my ownership (I own 1/90th post buyback vs 1/100th pre buyback) so I do get the value of that distribution but in a form that doesn't trigger a tax now for me. Most investors in their accumulation phase of life "turn on" the "reinvest dividend" setting which means I get some dividends, I then take those and reinvest them so similarly my ownership goes up (from 1/100th = 1% to 1.1/100th = 1.1% which is the same thing as if the company takes the cash and buys stock (1/100th = 1% to 1/90th = 1.1%) except in the dividend I have to pay some tax on that whereas in the buyback I don't. Its more efficient for the people who don't want the money back now and lets investors "select their option" also remember these are all "open market purchases" that we're talking about so it's just buying from the regular sales flow.
There's this insinuation above that the little guy can't own stock. Why not? Go buy some if they want it. Frankly I think companies should grant stock to employees more to get them invested in the benefits. This should really be combined with a more robust financial education system because the worry is people don't really understand what they're buying and that creates a ripe environment for fraud and people to be taken advantage of. I think the solution is better education, better DETAILED reporting on the topic etc.
"There's this insinuation above that the little guy can't own stock. Why not? Go buy some if they want it."
Oh, yeah. The "let them eat cake" rejoinder.
The main reason that "the little guy can't own stock" is that they don't have the money to buy any. The allied reason is that it's the small investors in the market who typically get taken, no matter how "robust their financial education." The middle income people just beneath the 20% top earner level that is arguably the main class stratification in this society who possess "robust financial educations" in the school of hard knocks know this, or they're just plain cynical and they intuit that reality (a justified cynicism, in this case.) Notwithstanding the small number of poster child exceptions, that is the governing reality. So they stay out of the market.
The main reason that this is the case is Money, vs. the lack of it. High-income people who play the stock market can ride out the recessions- and even buy during the plunges. Very often they buy from the people in the market who are closer to the margins, who are the ones who find themselves needing to sell those assets simply to remain afloat. You know, consider your statement about "Its more efficient for the people who don't want the money back now"...those would be the set of all investors who already have enough of a margin to simply roll it over, while reaping the tax advantage you spoke of by doing so. You don't appear to have noticed, but an increasing number of Americans are learning that the only people capable of increasing their net worth- and, crucially, holding on to it securely- are those who already have a lot of material wealth to begin with, and moreover that attributes like intelligence, perspicacity, thrift, and foresight are secondary considerations at most. To say nothing of ethics. And most of those Americans are inclined to view that as a serious problem. For what it's worth, I don't think that lowering middle-class income taxes by another few percentage points is going to distract the rest of them from eventually figuring out that this is the case, and that their personal tax burden is not actually to blame for their inability to achieve financial stability and security.
As for the "little guys" who do have a stake in the stock market, most of them are invested in mutual funds or exchange-traded funds, which some cynics would say are the means by which the wealthy dispense (or functionally impose) perpetual dependency on Wall Street (and its shifting fortunes) to everyone from the beneficiaries of State government public employee pension plans to the holders of 401k accounts and IRAs. So what used to be a simple matter of a savings account or employer-funded pension plan is now wedded to return on investment, which incurs the risk that the investment can shrink as well as grow. Although it is worth pointing out that if those small players in the market use financial advisers, the advisers make money no matter what.
Also, how much direct influence do mutual fund or ETF investors have on the decisions made in individual corporation boardrooms? None. They're "passive investors." Although it is worth noting that there are now ETFs, like PKW, that specialize in playing the angle of stock buybacks. (I'd be wary.)
You wanted more detailed reporting on the topic; there it is.
And btw my first response was probably unfairly dismissive of the fact that it’s really hard for people to save up a little and invest in the market though I’d attribute that to the horrendous debasing of our economy’s good paying manufacturing jobs that both party’s establishments have presided over for the last 30 years. Unfortunately it seems all we have left are a few measley Walmart jobs because our boarderline treasonous political and business leaders have sold us out. It’s not the same place it used to be when I was a kid.
I should just stop commenting because the hostility is so effing blinding in this group that you’re unwilling to even listen to what I’m saying openly. You of course don’t need to disagree but stop misconstruing what I say with illiterate references to bourgeois elite. Your comment that they can’t afford it is silly. Anyone with a good job and grit can scrape together a little savings as a start and discipline / dedication Will get you there. People do it all the time. Your argument that “the little guy always gets screwed” isn’t factually correct. I’m by no means a billionaire captain of industry but I’m invested in the same super Low cost index mutual funds that are highly diversified that anyone here can participate in for as little at $100. If you squirrel away $100 a week/year whatever compounding will do the rest. I haven’t been screwed and if I’m in the same exact security that a billionaire or little guy is in why would any of us be treated differently. Let them eat cake is a refrain that means the common man has no say and the elite don’t care. Everything I’ve said here as been contrary to that sentiment. I’m pointing out that I believe we have a very cool system here that allows anyone big or small to invest on an equal footing in enterprises that generate profits. In other countries and historically these profit making entities were controlled by a few elite and there would be no way for a normal person to share in that. If you think it’s a bad deal and a scam that’s fine don’t participate. I don’t think it is and it think it’s quite amazing that it’s egalitarian and accessible. That’s a good faith assessment / belief so don’t put words in my mouth that weren’t there
I contradicted your first-person experience and your abstractions with some reality-based reminders of the actual economic condition of most of the working people of this country, and the way that they're treated- or not- by the current status quo of the financial system. That does not equate to "blind hostility."
These articles don't rely on blind hostility for the analyses that they present, either
If that data-heavy document is read through to the end, the statistical tables are reviewed, and time is taken to reflect on the implications, they should supply enough information to put these two essays into an accurate context
If you intend to refute or contest those data findings and critique those views, you're going to need to supply your own factual support. Simply relying on your own first-person case is anecdotal (and unverifiable) evidence. I'm not interested in prying into your income, wealth, or social class background; I'm not going to demand that you reveal your educational background or level, occupation, level of personal income, level of total household income, or what fraction of your income you need to pay in order to keep a roof over your head. But I think you should review those features of your life and think on how they might be influencing your perspective- especially in terms of trying to use your personal case as the sole basis for making generalizations about the ability of American workers to invest $5000/year in the stock market. You can't base the case that anybody can do it on evidence that's all about you.
To give you an idea of what I mean: I once had an on-line exchange with a guy who claimed to have put himself through an expensive private college as a hotshot car salesman, and then went on to wonder why everyone else couldn't do the same thing. I took him at his word. But he could not quite get that 1) that was one of a very few entry-level jobs available where someone could possibly make more than $10000/year in a 20 hour week; 2) there aren't enough auto sales jobs in the entire country to account for even 5% of the undergraduate college students, even if all of the jobs were reserved for them; and 3) even then, few commission salespeople make as much as the stars in the game. And of course, the game has changed in the years since that fellow was selling cars; auto salespeople are almost always salaried employees these days. College expenses have also skyrocketed (he didn't say when he was doing his car sales hustle- it might have been as early as the 1980s.)
The point of that recollection is to underscore my point that someone's personal experience in and of itself doesn't work as evidential support on these questions. To think or insist that it does only reveals someone's self-absorption. Even if everything that guy said was true- that he found an entry-level sales job and ended up making a middle-class income in his teens that allowed him to pay his own way through college- he was fooled by randomness. He was in the right place at the right time, possibly benefiting from the right connections; he might have been perfect for the job, but he also got exceptionally lucky. And the claim he was making- "if I can do that, anyone can"- was bullshit disguised as a humble-brag.
"The median rent on a new apartment was $1,381 in 2015, according to the report, which means a renter would have to make at least $55,000 a year to be able to afford the rent. And with the typical renter making about $34,000 a year, that means an affordable rental would be about $850..."
That's a very general ballpark estimate, but anyone who claims that it can be discounted as misleading is going to have to find other numbers to refute it. And they certainly won't find them in the other information found in that story.
Very interesting -- I actually didn't know that and just looked it up (employee benefits are not in my area of experience). Not sure why you need the insult at the end about not knowing difference between are and are not. :-/ Anyway, I don't think options (was the original post's claim) accrue dividends until exercise or vested though again not my area of expertise so might be wrong though that may make their point anyway.
Next time look it up first before posting an erroneous statement in contradiction; then no more sarcasm...or a little less. Of course the options would not earn dividends but that would just fortify the argument that the buyback (as opposed to the declaration of a dividend) is a means to enrich management.
Is your argument that buybacks don’t increase price per share because the overall value of the co decreases in proportion to the assets expended on the buyback, thereby negating the per gains? And if it buybacks really do result in a constructive wash, what function do they serve?
You describe their function essentially as that of dividends - a mechanism for returning excess earnings to stock holders, which would otherwise be wasted on private jets & baby tigers & stripper parties & other ostentatious corporate fetishes.
I think the point your missing is that most of us aren’t burdened with the decision to either pay ourselves huge, lump sums of money or ball out on a new company yacht. We as individuals are forced to save for unexpected exigencies, and if one arises & we aren’t prepared, Big Bro doesn’t dump heaping bags of taxpayer dollars on our front door to help us make rent. So it doesn’t seem fair that big airline executives & the like get to pad their pockets with would-be rainy day reserve money, & then thrust the burden on the taxpayers, who are already subsidizing their massive gains with huge tax breaks, to bail them out when they don’t budget properly. If my grandma bought a new pearl necklace every time she had a little extra cash, you think the gov or the banks would bail her out if she got sick & couldn’t afford to pay her medical bills? No. Granny would die. If Delta blows its reserves on private jets & astronomical dividends, it shouldn’t expect the taxpayers to sweep in & save it’s ass. It should die just like my granny would, especially since she’s contributed a much larger share of her total earnings to the greater good than has Delta. If anything, we should recognize that the economy can replace a Delta (and should if Delta isn’t economically viable) but it can’t replace my granny, so we shouldn’t be spending billions of dollars bailing out industries who have a proven track record of reckless frivolousness. We should allocate tax dollars to help people who need it, rather than sustaining a catch-all corporate safety net for egregiously wasteful & socially irresponsible profiteers. Don’t you agree with Matt’s general assessment of the health of the proverbial economic forest, if not the exact genus of the trees he’s identified?
Yes you're pretty much right on why they don't juice the price -- I do the math in another response. I don't disagree with your point that they shouldn't be bailed out for nothing by the tax payer -- ultimately the people who benefitted from the buybacks are the shareholders the govt can definitely take their pound of flesh out for bailing out and they did in the financial crisis in a lot of cases (in fact the government profited on a number of the deals). The way this is done is by diluting the shareholders. As I said my real issue is that you're all clearly smart readers and so if you were informed with the actual facts you'd be better positioned to have a view on the issue. I don't think this article does that unfortunately and the MSM does a poor job as well so I was hoping a highly capable author like Matt T would fill that gap and just present the facts in a more accurate way so people can decide with full information. To be fair there's a lot of stuff you'd need to have a lot of experience in to fully understand so not an easy task
It's a complicated constellation of issues to be sure but I think Matt excels at explaining it to readers like myself who don't have as much experience with or understanding of the financial sector as you do. I'd never heard the term buybacks before reading this article so it was eye-opening for me, even setting aside the possibility that some of the precise mechanisms of buybacks are less cut and dry than the article lets on. I appreciate your informed insights and I wonder if you agree with Matt's ultimate conclusion that we should put the brakes on buybacks? They feel shady to me and seem to pose an unjustifiable risk to the overall health of businesses and to economic stability writ large. Do you think the benefits they afford investors outweigh the risks? And do you agree that companies should maintain enough cushion to weather sudden storms, just as individuals are expected to do? In sum, how do the specific flaws you perceive in the article change your perception of its general conclusion?
In a LOT of cases, the buybacks do artificially inflate share prices. It's a little bit Ponzi, if you ask me. Seeing the share price climbing attracts new investors. Momentum guys ride it up a little, then dump.
Thanks for the kind comment. I don't agree we should put breaks on it because the rationale is if we did the companies would have more money on their balance sheet but how do the shareholders get compensated for investing? Remember that shareholder could be you. I'd also point out while there are of course flaws in our system we have a really amazing one where we all can participate. If you're saying the buybacks are "shady" as in someone is profiting in an illicit way I disagree with you but if that's what you really believe why wouldn't you just go buy a shares in public companies that do buybacks (which is really most of the good reputable ones with real underlying businesses)? If it's really a boon for the shareholders then you're missing a great opportunity to be a profiteer! I'd say its just a return of capital like any other return of capital. The reason it's even a thing (versus dividends) is two fold: 1) there's a big stigma against cutting a dividend for whatever reason so companies like to just put them at very low safe levels they can always support and never pull back; they then use buybacks typically for the excess over that (so you have a good year or you don't have any attractive targets to acquire or no good R&D projects you can just give the profits back to shareholders) and 2) it's better for your shareholder from a tax perspective so say you don't need the cash if you get a dividend you're forced to pay the tax and then reinvest which is inefficient I on the other hand am retired and want the cash -- it's more efficient to just have enough buyback activity that I can sell a little bit for income (and pay the tax) and you just get your ownership "accreted" buy the buybacks (so if you owned 1% before you probably own 1.5% after the share retirement). Make sense? You could get into a debate of whether that makes any sense as a tax policy but changing it would require a whole gutting of the system and would just be different not necessarily better.
Does the rub here arise from a fundamental difference of opinion as to how we should structure our societal carrots & sticks? I’m personally less concerned with the mechanism for distributing excess corporate profits than I am with the outcome. I’d like to see less risk (& perhaps lower short-term gains) in the financial sector & greater security in social programs because I believe that the economy performs better when the bulk of its actors aren’t laboring under a financial Damoclean Sword. But the counter-argument seems to be that more room for risk allows for greater innovation, higher earnings & thus a stronger, though more volatile economy. Is the divergence in public opinion on this point something we can reconcile by somehow “agreeing on the facts,” or does it lie with a difference in our fixed world-views?
True Matt and if you don't distribute the cash and it just sits on the balance sheet gathering dust arguably the share price goes up by the amount of cash per share accumulated so it's somewhat meaningless (other than that big pile of cash is just ripe for corporate misuse and you don't have the discretion over it)...this all which goes back to my underlying issue which is the buybacks are irrelevant and your piece doesn't really make that clear because it attributes too much importance to the mechanism of distribution. I don't really care about buybacks. Do you have issues with dividends? If you ban buybacks companies can just increase dividend and move people away from this fixation on dividends never decreasing which I think is silly anyway. So what have you done? If you're however arguing that if the govt bails you out as a precondition to the bailout no dividends or buybacks for x years I totally think that's reasonable. That's what a private investor would do if they were bailing you out and the govt should totally act commercially in these "bail outs." Anyway look I hope I wasn't too scathing I just think there's a huge hole in the MSM for truly informative reporting that does an accurate job of presenting the facts, I'm hoping independent authors like you can fill that gap and educate people about the subtleties in an accurate way. I don't really care about the conclusion I'd just love to see accuracy on the basics on this topic and others.
That is the absurdity of buybacks. Shareholders are not rewarded for investing but for trading. The only way to benefit from having shares in what looks like a good company is to get rid of them.
I’d argue that in an era of low interest rates, share buybacks can be accretive to EPS and represent a change in capital structure that can increase valuation. So if the company trades on a P/E multiple, assuming your multiple is constant (no reason for that to change unless you’re levering up way too much), your share price will go up. Exec comp is also tied to metrics such as EPS growth and DPS growth, which are boosted by the financial engineering of share buybacks. Way easier to do this rather than do the hard work of developing new products / entering adjacent markets.
That being said, I think public investors, including activist investors can be too short-sighted and stifle innovation in public companies because they are too focused on the short-term and destroy long-term value - Elliott isn’t holding their position for 5 years, they just want the bump from the cost-cuts and get out a year or two later. It’s not a coincidence that the greatest value creation in the market over the past decade comes from founder-led and controlled tech companies who don’t care as much about their stock price gyrations every quarter.
Every analyst call ever..."Hey, this is XYZ, filling in for ABC, at NYC Capital. Congrats on the great quarter guys [very little emotion]. I see gross margins are up 10 bps. So can you give me some 'color' on how you are going to use all that new cash flow from this quarter? M&A or buybacks?"
That said this is financial mumbo jumbo..and part of the fallacy of PEs vs say EBITDA multiples ... I'd argue if you're doing your math right on the PE basis you should use a PE ex cash which shouldn't change then just add the cash per share to your valuation but now we're nerding out
Tried to make sense of rental property example. Here is my interpretation. And not that Boeing will receive any epidemic related funding, I would be upset if they receive funding, knowing that they recently participated in stock buyback(s), thereby having non-shareholders subsiding wealth distribution to shareholders.
Boeing doing business as Boeing Defense Space and Security, St. Louis, provides for the extension of the contract for an additional five years, and increases the contract ceiling by $6,534,283,787. Work will be performed in St. Louis, Missouri, and is expected to be complete by Feb. 28, 2025. (One of many DoD contracts).
Yeah, after a rocky start, I thought he may be picking up a tiny bit of momentum before the rental property blurb. At that point, it was clear I had just wasted my time. lol
Yeah, instead of buying back back their own stock they could have spent a few bucks ironing out the new autopilot glitches and printing the manual in different languages. Claw back the buybacks!!!
Mr. Taibbi didn't say that stock buybacks alone raise stock prices but that the retiring of those stocks purchased raises the prices. He said that the corps have purchased their own stocks, retired them, and their stock prices rose. It's akin to what happens when the fed purchases T bills on the open market -- it makes them scarcer, so their prices rise. Here, a corporation uses its corporate $ to purchase their stocks, then retire them, so that individuals, like board members, who hold said corporate stocks get wealthier. So that's one problem. The other is that the company could have used those corporate funds to further Research and Development, pay their workers better, or keep the $ for a rainy day. But no need, as the federal government will save them when that day comes, which it always does.
What company or business doesn't do upkeep that makes no sense - the underlying argument is they should have had a bigger cash buffer for the unexpected. I'm not sure that has anything to do with buybacks. It may say that boards and management overly discounted the frequency of crises
"What company or business doesn't do upkeep that makes no sense" Did you even understand the article? A mob bust-out outfit, that kind of company. A company that is too big to fail, and wants to cash in an implied bailout. That kind. A company that leverages its reputation to sell inferior product at a premium. GE come to mind? Why do upkeep if your bonus options just got unlocked? How was the upkeep on the 737 max? Survivorship bias, indeed...
I personally think the removal of the stupid incentive to keep capital outside the US (trapped cash) combined with the horrible flaws in our supply chain (ie its all in china) that this COVID outbreak has cause will prompt a return of manufacturing. That's an opinion -- we shall see if I'm right. Hopefully you can agree that a law that taxes a multi-national's earnings outside the US at 0% if you leave it outside but applies the tax if you bring it back (as the old law did) only incentivizes corporations to not bring it back here. The new law now taxes foreign earnings regardless of whether you do or don't "bring them back" meaning the decision is no longer skewed against the US which is much better. Second I don't know where I implied there's some 3d chess game going on. I really don't care about buybacks - I think they're fine but if the majority of people decide they're bad go for it at and ban it I don't think it does anything to ban it. If I was a corp and you ban buybacks I'd just shrug and distribute via dividends -- I'd view it as a silly law that doesn't do much of anything. My point is that this article attributes a lot to a very mundane topic in my opinion. I don't think having buybacks or not having them does anything. I actually think if you apply occam's razor my explanation is the simpler of the two (i.e., I'm saying they're just a distribution mechanism like dividends that are slightly tax advantaged because dividends are taxed to all the shareholders now whereas buybacks are taxed to only those who want the proceeds now and the rest later, whereas the various counter arguments that buybacks are some nefarious tool to manipulate things and are jumping around to find all sorts what-aboutisms to counter my assertion based on experience that they're not that complicated). Again I really don't care about buybacks -- ban them they don't matter my only objection is I think the article did a weak job of presenting the facts not what conclusion he or anyone else here wants to come to. At least I'm being consistent.
I agree there are multiple conversations going on here. I'm trying to stick to my original point which is that a distribution is a distribution whether its a dividend or a buyback and that i just don't really think buybacks in and of themselves really do anything overly positive or negative they just get money to the owners. There's a corporate policy question which is: if I give this money back can I get new money if I need to grow or do cover a cost or hit a speed bump? Frankly that question applies to any other use of capital too -- if I spend it on R&D will it be good R&D? If I spend on a new plant will it be a good investment? If I acquire another company will I pay too much, etc. Those are all ways you could use the capital and would lead to the same disastrous outcome if you make what turns out to be a wrong choice at the wrong time. Ultimately those questions are about prudence, judgement and luck and there's no rule or formula that will give you a fool proof answer. There's also the whole public policy issue which I wasn't really dealing with before with my original post but I keep getting dragged into. I think if your point is that Matt was saying "hey with the benefit of hindsight these guys stripped the company of resources leaving it barren and unable to cope and that seems dumb" then yes that's a valid point and I agree its part of his article and one that I didn't object to. My point is he attributed it all to buybacks which I believe is just a mechanism by which the bad decision was implemented -- the problem was the decision not the mechanism as there are other mechanisms that could have been used if this one was not available. Second there's no discussion of a way to apply breaks so that companies don't over do it (frankly because I'm not sure there is one because you only know you've over done it if the proverbial sh*t hits the fan ... I truly doubt any of these companies made these decisions knowing it would wreck the companies and the reputations of the management teams). I sort of get lost in the second part of your response but I think what you're positing is that "individual self benefit may often lead to collective disaster" ... yup I agree someone else here referenced the tragedy of the commons as an example from classic game theory. I definitely agree there's an element of that in our economy and any smart solutions to put boundaries around things so as to direct the natural desires of individuals to benefit themselves in a way that creates positive outcomes collectively (or at the very least avoids negative collective outcomes) I am supportive of. What I'm not supportive of is actions or laws that require you to suspend belief that individuals will act in a narcissistic selfish way (at least on average across large numbers) because I don't believe that will happen. Just to go back to my original point banning buybacks does nothing to help any of these bigger issues and is irrelevant either way -- that's the weakness of Matt's article (in my opinion).
yes but I'm saying he stuck to the wrong thesis if the thesis is eliminating buybacks would solve the problem then that thesis isn't correct because there are 15 ways to do the same thing so you'd have to limit all 15 and if you limit all 15 no one would invest. I guess if you did that then no one would invest and there would be no companies to fail so sort of problem solved?
Also I personally believe that when presented with two scenarios of explanations: 1) nefarious scheming evil mastermind(s) who has somehow made a rube-goldberg-like sequence of events happen in order to profiteer; or 2) stupidity, laziness and general shortsightedness. I typically opt for #2 as the more likely explanation. No one is as smart as #1 would require
Dude (or dudette?) read my other posts -- you're right currently corporations have one duty (to their shareholders) I say elsewhere I think a more expansive duty set is required. It also exists already in other countries (e.g. Germany if I'm not mistaken). There the board has a duty to the various constituencies including employees, community etc. So the question is not only "what is best for my shareholders" but rather "what is best for my constituents broadly." I personally like the construct. You argue that the foundation of my belief is self interest -- I don't really have a very strong self interest tied to buybacks frankly limiting them and other distributions would probably be better for my own self interest. I'm partial to software engineers -- the ability to think algorithmically is a huge asset.
"You are dinging Matt for not understanding the corporate foundation is purely self-interest." I thought you were saying I'm defending buybacks out of personal interest. I was saying eliminating buybacks would serve my personal interest because I'm in a business that competes for capital with buybacks.
This entire response makes no sense -- I have multiple decades of experience advising companies and boards on mergers and acquisitions and capital markets so your "they hoard cash to buy companies" statement is simplistic. I can finance a deal many ways beyond cash (e.g. I can just issue shares of the acquirer as consideration for the target I can go out and do a follow on offering of equity to get cash if they want a cash deal, I can raise debt in the debt markets -- I don't need cash on my balance sheet. Your argument that the business and shareholders are not the same is obvious. Stewardship of capital means I am the shareholder (ie owner) I hire the management (through my ability to vote for the board of directors) and if they're wasting money buying corporate jets to feel special I'm going to vote the board out and replace them with a board that fires that team. If they blow the capital on crappy R&D projects that never generate a return same thing. You're going to say the individual shareholder doesn't have power to do this which is true -- BUT there is an entire industry of activist hedge funds that make a career out of chasing down companies that are not shareholder friendly and don't act in the interest of shareholders so that's been handled. Anyway on the share price math ... If I have an enterprise that is worth $1,000 and it has $500 of debt and $300 of cash the equity (shares) is worth 1000-500+300 = 800. If there are 20 shares then each share is worth $800/20 = $40.00 .... If I take all that 300 and buy back shares then I retire 300/40.00 = 7.5 so now I have 20-7.5 = 12.5 shares. Following? So what's the equity worth after doing this? The "enterprise" is still worth 1000 because it's still the same company so it's 1000-500+0 = 500 of equity. The new stock price is 500/12.5 = $40.00 ... if you're wondering why the equity changed value just think about a house worth 1000 with 500 mortgage -- you've got 500 of equity ... If I leave $300 i the table when I sell it to you you'd have the 500 equity + 300 = 800. The reason you could argue price moves a bit is because the trading day to day depends on the supply and demand of shares to a degree but it really should be anchored to what people think the company is worth not supply demand. Anyway my underlying point is I have no real issue with arguing against buybacks if that's someone's opinion but I'd prefer that the factual basis be at least informed because otherwise the whole rest of the argument falls apart.
Do you have any clue as to the spectacular irony of your trying to support a logical argument with "I have multiple decades of experience advising [on high finance]...? Hilarious. And it's a math problem, to boot. Let me give you a little unpaid advice: your ad hominem revealing that 'your job depends on your believing it' is unlikely to score you any points from readers of this article- quite the opposite. Your assumption that the buyer of the insider's shares is tracking every dollar of "true underlying valuation"- and not some sucker-a-minute (or shill)- is right out of textbook Econ 101. 'Assume you have a can opener!'
Because I'm a cynic I'll give you credit for pointing that out and a tip of the hat. Though actually barring buybacks would be great for me as I do M&A so it would probably be good for business. My point is i'm not talking my book I just understand the mechanics which is a statement of fact. My job doesn't depend at all on buybacks but as a shareholder (i like many own diversified stocks) think its good policy. If you or anyone else wants to argue its bad policy that's totally fine and I'm willing to listen but as a starting point you should get the facts right.
" I just understand the mechanics which is a statement of fact. "
Once again, your conclusory posit of hard science terms ("mechanics"; "fact") in a policy context is a huge tell. The mechanics of this financial scam are not at issue. Neither is your personal understanding. ( I'm going to guess that you are skeptical about whether insider trading should even be policed.)
Well, public companies- even big boys like Chrysler- are FREE to delist and tell the SEC to go fuck itself. But then they shouldn't get to score the bailout in the lean years like GM. That's just kar-ma. The SEC's JOB is to assure the mom and pop 401k suckers that they might get an even break. "Don't quit your day job, we'll keep an eye on the pro sharks..."
I don’t see how you would infer I don’t think insider trading should be policed. I think protecting the individual investor is sacrosanct and an amazing feature of our capital markets. I don’t see how buybacks don’t protect the mom and pop investor. When I said I was a shareholder before which you mocked me for I was making the point that I’m a small individual investor (mom and pop) I hold companies in mutual funds that do buybacks I’m sure. I don’t think I’m being harmed by them as a matter of policy. Are you suggesting someone is? How? I’m sure I’m these diversified mutual funds there’s probably some of these companies that did too much and I’ll probably lose money on those but that’s why you diversify. That’s also why you should fire management that takes undue risk.
The best ponzi schemes are of course the ones where the players actually believe in the artificial valuation. (Even Ponzi himself had a good arbitrage going, until large number law kicked in). I tip my hat to you for admitting to your special interest as a shareholder.
My U. Sinclair reference was broader, not literal. Of course you can prove on paper that "greed is good". Creative destruction by busting a monopsonist labor union is "efficient""enterprise". Taibbi does not suggest "banning buybacks". You have erected a straw man. He is talking about welfare handouts to corporations that buy back stock. Different calculation, no?
Anyway you're right market valuation is a bit of a squishy concept but you can't argue a business that generates profits has no value (though a business that generates no profits is a different question to your point about the .com bubble). To use my example of a house with $300 in it and $500 mortgage ... is that worth -200??? You're confusing the rationality of the value with whether it exists as a concept. Doesn't matter, whatever the enterprise is worth the math always comes out the same -- buybacks shouldn't alter value (as long as you're not in the "extreme" ... so if I leverage the business to 99% and they have zero wiggle room the value should be lower as someone else said due to going concern value ... ie I'm probably going to go bust at that level .. what about 90%? 80%? 50%? 10%? there's some point where it doesn't pose undue risk)
MA, don't bother trying to educate these people. Unfortunately finance and economics are poorly understood by the masses and it takes years of study and experience to understand these topics. Most of these people (including Matt) lean left and so they are generally statists who don't understand the difference between capitalism and crony capitalism. I'm getting to the point where it's not worth the time to try to educate people over social media. All of our points are out there already. None of this is original. These people just don't want to do the work like we did and figure it out.
MA is 100% right in his/her analysis. I also advise companies in raising capital and M&A. Matt's article is not accurate.
If a company can sell stock to raise cash to grow (because it determines it's equity cost of capital is reasonable for the project they are investing in), then they have every right to do so and no one complains. If the company determines that they have excess cash and don't have investments that will return the cost of capital or more (in a mature industry for example), then they can dividend the cash out or buyback stock. IT'S A VOLUNTARY TRADE EITHER WAY, and it allows the free market to allocate capital efficiently. Those who sold stock back to the company can invest it elsewhere. The buyback may also keep the price up for other shareholders who choose not to sell their stock back. The reason we have more buybacks over the last five to ten years is because the Fed (which is government sponsored monopoly) interferes in the market with money printing (they call in QE) and keeps rates low. The Fed protects the banks and bails them out. They create a moral hazard. So they have artificially lowered the cost of debt capital (which is an inflation tax). This is a signal to companies they should borrow more. This creates distortions and mal-investment. So currency holders (who get diluted in money printing and lose purchasing power) are subsidizing borrowers. So companies see the lower rates and borrow more and/or they buy back stock. Then they get over-leveraged which leads to restructurings and recessions. The buybacks are a symptom (a reaction) to a core problem - the Fed's market interference with the free markets. Rates would be much higher right now with no Fed interference. Matt fail to understand this important dynamic.
Finally, regulation doesn't work. Matt should compare the tech market to education and healthcare (note regulation makes things more expensive and less efficient by keeping out competition). Banning stock buybacks won't solve anything. Voluntary trade is never a problem. Look for the artificial inputs like the Fed's money printing fraud that signals to the markets to go borrow too much. Seriously, a small group of people know what the interest rate for money should be but virtually everything else is priced through voluntary trade?
Matt's article just doesn't hold up. More on this topic that supports my logic:
What? I have a business that throws of cash flow and it's worth -200? Goodwill? Are you an accountant? What if that business throws off 300 a year post tax / interest? is it worth -200? Sorry I don't want to be dismissive but that makes no sense.
this isn't going anywhere -- would love to buy a business off you though! I'm using worth generically -- yes valuation. Where do you think that comes from? The reason a cash flow business has any valuation is because it generates the expectation of positive cash flows to the shareholders. You do a discounted cash flow analysis with your cost of capital and arrive at a value -- everyone will have different views which is the "market" you speak of but ultimately if they're doing multiples or DCFs or asking a ouija board its to get at an assessment of what that profitability is "worth"
Matt, thank you so much! This is one of the most timely and informative pieces of writing I have ever encountered, and it will require much more than one reading.
Good luck on your newly enhanced independence and association. Of course, it is good to know that you will continue to contribute to Rolling Stone.
By the way, I have attempted to subscribe online using a valid prepaid VISA "Gift" debit card. This method of payment was refused with no explanation, or suggestion of a secure alternative. Please advise at your convenience.
On the whole, this is an excellent article (putting aside the temptation to quibble). One point that it overlooks: buybacks are an alternative to dividends. Buybacks favor management and short-term investors for all the reasons recited. But their benefits of higher stock prices are ephemeral and essentially irrelevant for long-term stockholders. They, however, actually benefit from money in their pockets when dividends are paid, and this is the most transparent and measurable way of returning capital that the company can't use to stockholders, if that's the real (as opposed to BS) reason for a given company's buybacks. Moreover, dividends are typically set at predictable levels (often to attract long-term stockholders), which, on the one hand, is beneficial to pension funds and other institutions and, on the other, creates fixed expectations for management's performance. Dividends are, and have traditionally been, the best and most transparent way to share the actual, sustainable returns on investments in corporations which, at the end of the day, is the only legitimate reason for investing in them.
I am also a little disappointed by this article, as somebody who usually loves Matt's reporting. Clearly, stock buybacks are just another way of returning capital that, for various reasons, has simply become more fashionable than dividends. Companies could have been stripped the same amount of capital through massive dividend payments, which would be reprehensible to the same degree. Apparently that is just "not done" because people love their stable dividend payments, which seems more like a cultural quirk than anything else.
The underlying issues remain though. If you are bailed out, your equity should be wiped out. If you can take the gains, you should also take the losses. If you don't like that, maybe build up a cushion.
One step further would be to argue about the concept of limited liability itself, which helps with much of the "socialisation of the losses". There are great reasons in favour of it of course, but maybe that is something that could actually benefit of review in the age of the MegaCorp?
There's nothing wrong with stock buybacks - except when they're poorly executed.
The problem is not stock buybacks, it is with crony capitalism. The airlines, for example, were irresponsible in using funds to buy stocks, but also in many other ways.
The solution is not to bail the airlines (or any other company) out. What happened to the "creative destructive" of true capitalism? Let them go bankrupt and you'll see that the companies that follow them are suddenly more prudent in their allocation of funds.
"There's nothing wrong with stock buybacks - except when they're poorly executed."
And there is nothing wrong with assault rifles. "Poorly executed" from whose perspecive? If they enrich the insider executives, that sounds well-executed.
When I say there's nothing inherently wrong with it, I'm simply claiming it can be valid use of the company's funds under certain circumstances. If you're running a business and you see shares of that business floating around for below their value, it might be a prudent decision to buy some of these shares (depends on alternative uses for money, of course).
You cannot solve executive irresponsibility and lack of future-focus by forbidding buybacks, because then those managers will simply spend the money on dividends (and maybe even bigger bonuses for themselves). Stock buybacks are simply not the right point in the system to stop this. Irresponsible executives will keep being irresponsible. It's akin to blocking a downstream creek when the problem is a dam breaking down much further upstream.
"When I say there's nothing inherently wrong with it, I'm simply claiming it can be valid use of the company's funds under certain circumstances. "
And if there is a gang of hungry vicious thieves outside my house, and the police and National Guard all have coronavirus, I would like to have an assault rifle- for "valid use".
Do you think a company, like an airline, that bought back billions in stock recently, instead of putting away cash for a rainy 3 months, should get a taxpayer bailout or be allowed to get bankruptcy protection (or neither)?
Bankruptcy protection- especially corporate (added in 1867) is itself a form of bailout, welfare, etc., via government intervention.
So at least we appear to have a consensus that any company taking bailout money should not be allowed to buy back stock with it. Some of us would gladly add dividends and executive bonuses to the package. Some of us would like to look at the last 10 years of cash management before dumping taxpayer cash in. Some of us would demand an overhaul of management- almost as a condition. But what if Congress prohibits buybacks and the Fed does "whatever it takes"?
"You cannot solve executive (greed) by forbidding buybacks". Lolz. Never heard a more honest endorsement for co-op owned businesses and the elimination of the current hierarchical corporate executive structure. No, you can't eliminate greed, and since capitalism doesn't even try to mitigate it, it's time for something else.
isn't a coop just equity owned by the employees? i think that's great but it's the same thing. who manages it? you have the same issues it's just the employees holding the bag if there's corrupt management rather than 3rd party shareholders. the only way to combat corrupt crony capitalism is transparency, information, educated equity holders, etc. ultimately the owners have to be equipped to monitor the board and board needs to be equipped to monitor the management.
Lets not get to the gun debate -- I'm sure we'd land on opposite ends as well. There's nothing wrong with hammers unless they are used to crack your skull open. Statement of fact.
But I'm reminded of the arguments supporting the MBS and CDO squared ponzi scams. According to the smartest guys at MIT in finance, there was nothing wrong with splitting mortgages into a milllion tranches in the name of liquidity. In perfect world theory, it "works". In practice, they are selling bits of the Brooklyn Bridge over and over.
I don’t think there is anything inherently wrong with splitting them up into tranches. Again it’s a matter of degree and frankly your oft cited tragedy of commons is most relevant to securitization. There’s a limited quantity of “credit worthiness” in the system. You can split up the risks to offer some diversification and get closer to that capacity but the problem with how that system was designed was that there were no breaks. Everyone socialized the risks and individualized the benefits and the result was it dragged us all down. It’s not lost in me that that last statement is exactly what you’re citing as the problem with the current system and I think I agree with that though I’m not sure that buybacks are the culprit to that artifact. I honestly don’t know what is or how to fix that piece. All the suggestions I’ve ever heard to date to fix it I think don’t really address that problem and frankly dampen the good features of the system. I suppose if it were easy someone would have done it already.
The "nothing inherently wrong..." standard is part of the problem. There is nothing inherently wrong with bacteria on your person (in fact, you need some to live). There is nothing inherently addictive about heroin. Etc....
In the law we refer to "cui bono"- "who benefits?". Deregulation as an ideology has been radically oversold. Of course my Congresswoman doesn't understand the intricacies of high finace. She is a young woman who worked her way up. But she understands haves and have-nots. And she knows who will be saved if ventilators go to the highest bidder.
you made my point with the bacteria comment -- overdoing antibiotics to kill it all off kills to the good bacteria and the bad and creates antibiotic resistant death bugs. A little securitization is good, creates more access to capital and lowers its cost. Too much is terrible. The problem is where's the line and how do you create a break system. I have no problem with regulation as a concept but its often implemented as some ill-informed under motivated bureaucrat who doesn't really do much of anything other than complicate things. Smart regulation would be great.
Without the assault rifle, outnumbered armies would have no defense. This may be good or bad, historically, but what you probably mean is 'assault rifles in the hands of civilians exist solely to murder people'. Which is my point.
Listen, try to follow: I agree that assault rifles exist solely to murder people. You must posit the most extreme example to argue they should not be banned: such as, a neighboring country has roving gangs of thugs who have these assault rifles, and our border patrol needs their own stock to deter them; or, there are similar gangs in our country they who like to surround a remote farmhouse and terrorize the outgunned inhabitants and their local sherriff
Nvertheless, otherwise sane people still say, "Guns don't kill people..." My point is that all but the most extreme gun nuts would agree that assault rifles should be regulated- maybe heavily, almost to the point of extinction- even though there might be a justifiable use. The distinction with a hammer is merely one of degree. You might reasonably ban hammers at a protest rally. You might not let violent prisoners keep one in jail, or allow them in a public sandbox.
Nuclear weapons may be wrong in anyone's hands. Who shall unilaterally disarm first? How about nuclear power plants? I fear them, but I rely on electric power to live in comfort, and can afford it. If banning them effectively denies others refrigeration, air conditioning, ventilator when they have pneumonia?
The point is even the use of hammers requires some regulation; and the use of assault rifles may be so heavily weighted toward the offensive over the defensive (or deterrent) as to require an outright ban. So it is with stock buybacks. If the risk of systemic abuse is too extreme, consider a ban. If the instances of "prudent" or "reasonable" use as a mechanism to return cash to investors (superior to a dividend) are many, consider limited regulation.
But you can't look at individual instances in a vacuum. You must examine the social effects. Because if my reckless violent cellmate has a hammer, to be prudent I want a gun.
Thanks for writing and publishing. I've seen some good charts showing another aspect of this story: that almost all the "gains" the Dow has made since the GFC, perhaps since earlier, were attributable to stock buybacks, rather than actual gains in productivity or profitability. If you strip out the buybacks, financial trendlines have been flatlining or declining for a very long time. Can't remember exactly which analysts have put these charts together, but they turn up at Zerohedge, Epsilon Theory (mentioned by commenter below), Wolf Street and other non-mainstream financial websites. The point being, that political leaders had a stake in allowing the corporations to goose their own stock prices, because it would allow the political leaders to take credit for an overall booming stock market that was, in fact, an illusion. But maintaining the illusion kept the pitchforks at bay for a time, and so the political leaders did their part to keep the grift going. The corporate-state nexus of power and corruption frequently the target of your excellent work.
I don't think it's fair to lay the shareholder value theory at the feet of Milton Friedman. His point was that companies should eschew "social" spending and focus on making as much PROFIT as possible, so long as they didn't run foul of social norms or the law and were not engaged in deception or fraud. That's a pretty reasonable position. I'm 100% certain that Friedman would NOT have agreed with the notion that juicing the stock price is good, desirable, or even a smart idea. In his article in the NYT and other talks he gave on the subject, it was clear he was talking about focusing on competition and making as much money as possible through competition, and that he was not talking about things like massive lobbying or attempts to monopolize a market through legislation. He was NOT a fan of getting the government involved in the free market.
I am a fan... however. I started and ran a company that ultimately went public. We consistently generated more in earnings than we could put to work sensibly in our business. My choices were to sit on this capital, pay large dividends or repurchase shares. As our stock typically traded at 6-7X earnings (low but not atypical for a capital intensive business), it was frequently more attractive to shareholders to repurchase stock than to pay dividends. Over a decade we repurchased several billions of dollars in stock. We never borrowed money to do it, we rigorously sized the amount of risk we would take to our ongoing capital, we never fired anyone (in fact we created several thousand jobs), and we sailed through the financial crisis without even a momentary blip in our business, despite carrying billions in investments (AA+ government securities).
I struggle to see any wrong in this action. We were a good citizen, but always worked under the premise that our capital belonged to our owners (shareholders). What we did was to buy stock from those who wanted to sell, leaving our remaining shareholders with a larger share of the future profits of the business. No different than one partner buying out another in a professional practice. I can point to at least two dozen competitors who behaved similarly. No mass layoffs, no government bailouts, no executives selling right after a buyback. In fact, very few of our executives were ever willing to sell their shares, until the business was ultimately acquired.
Both are a return of capital to shareholders. The company can always retire treasury shares and issue new shares to replace the ones they repurchased. Focusing on the mechanics of compensating capital is silly.
The dividend is received, consistently, no matter the value of the share (provided the dividend is not cut/increased/eliminated for the duration of ownership of the share. Until you decide to sell the share. The buy back will increase the value of the stock, probably. But it is a manipulation of the stock price at best and the shareholder will only realize significant proceeds if they sell, at the higher price. If they continue to hold, the stock goes back to being valued on the many other factors of the company and the market (stock price can continue higher, but can drop to prior levels and further), but the effects of the buy back quickly fade. My main point is that there is a distinct difference between the two. And the argument that a lot of people make that companies should be using profits/stimulus/grants/loans to build a stronger company through more traditional proven company strengthening avenues like core competencies, financial solvency, employee retention, etc. and not stock price manipulations ... not silly ideas, at all.
It is a return of capital to shareholders. With a dividend all shareholders receive capital, with a stock buyback only the shareholders who want capital receive it. As long as there are incentives in the tax code that tax dividends differently than capital gains, there will be stock buybacks. Nobody complains about dividends... why are stock buybacks drawing the ire of people?
Dividends draw plenty of ire also. This article focuses on buybacks. And it isn't "only the shareholders who want capital...". It's only the shareholders who sell their shares. From a very "macro-" perspective the result may be similar (can't ignore the tax code effects, however- someone has to pay if others don't). But there is a huge difference in who gets fat in the fat years.
If you don't want the capital, then don't sell your shares. Some tech companies sit on a mountain of cash for a reason...some investors do not want dividends and it can actually drive share price down. We have an economic system that is structured to loot the public treasury every decade and leaves out large swathes of the country, and world for that matter. I just don't get the focus on share buybacks. It is like shouting and stomping your feet about dirty forks on the Titanic. If you want proof how inconsequential this issue is... why would political leaders pay any attention to share buybacks if they were really a structural problem. Matt is generally better at focusing on core issue.
[see my comment above...] If I sell my shares, that lowers their price. So I get squeezed. Declaring a dividend, all else equal, makes a stock more attractive- unless the market sees it as looting the company of cash. Just because the dividend mechanism can be abused, doesn't make the buyback any more kosher.
I would dispute your first assumption. An individual selling his or her stock shouldn't impact the market capitalization. And declaring a dividend in all cases does not make the share price go up. In some cases, share prices go down between the declaration date and the ex-dividend date. Both a dividend and share buyback are methods of returning capital to shareholders and in and of themselves are not good or bad. As opposed to looting the public treasury which is bad...
I hope Taibbi hasn't gone to the dark side and is going to start writing click-bait articles.
There is no necessary relationship between dividends and/or stock buy backs and
1. executives being paid too much
2. firing employees as away to reduce OpEx
3. focusing on maximizing stockholder value
When someone suggests that dividends are not the same as a stock buy back, what they are actually not explaining is that there is not necessarily a relationship between the value of a business and the total market value of its stock - which is a completely different issue unrelated to stock buy backs. These individuals do not have a basic understanding of accounting and specifically retained earnings on a balance sheet.
The article is very helpful. The discussion generated is excellent and is just as important as the article. I think that is an important role for journalism. One of the core arguments from the investment community is that management exhausts the supply of projects that generate positive returns. I have managed factories for 45 years and can tell you that no US factory ever exhausted its ability to generate new positive returns. Toyota is a great example they make millions of mini-investments that strengthen them long term while the Big Three automakers do not. These mini investments have little NPV but high returns and result in a company with more cash to invest. As a result the big three all leave the small sedan market and Toyota is investing in the Corolla in the US. Another example is the US coal fired electric generation business. They produce coal ash. There is a market for coal ash, it can be used a concrete additive. It has to be processed when it is produced. This requires an investment. The utilities do not make the investment they just pile the ash on site next to a river waiting to be cleaned up by the public later. The investment has positive cash flow but will have a lower NPV than the plant itself so it does not get done. We now import coal ash from China for our concrete plants creating a circle of stupid nonsense.
At the risk of getting dragged back into this debate after some further consideration I will give Matt many cudos for generating an insightful discussion with his article (my qualms on technical inaccuracies / over simplifications notwithstanding). On reflection I think it's also worth noting there are differences in the types of buyback -- there are two broad types 1) is a debt fueled one time "leveraged recapitalization" which is often favored by activists who want a "quick buck" and are often resisted by more conservative management teams and 2) is ongoing normal course "flow buybacks" which in my mind are very similar to dividends but more flexible to turn on and off as the company needs money for other purposes. I personally as a rule disfavor the first as I think a sudden leveraging like that is a pretty risky proposition and is basically a "public market leveraged buyout" and really doesn't generate any value per se (hence my point that buybacks don't really juice the price). There's also a valid argument that the "short termists" are extracting resources and running off in this type of "financial engineering". The irony here is theres are not 10b-5 buybacks they're "tender offers" (I'm not a lawyer but my understanding is they're governed under a different provision) so arguably this SEC rule should be less problematic as it allows more ordinary course "flow buybacks" like I outline in 2. As I've mentioned in other posts I see a lot of validity in an argument line that boils down to "you're taking too much risk at the expense of the public (ie you might need to get bailed out", your long term shareholders, and your employees who have built careers here all accruing to the advantage of short-term activists." I think the real issue boils down to an issue of scale/prudence vs a choice of mechanism to effect distributions and how you even define "excessive or imprudent risk." The reality is that question is often answered on the basis of "comparables" and "precedents", which in simple terms means you take a look at what others are doing and do something not too far off from that. To "Open source currency's" commentary elsewhere this does in some ways lead to a "tragedy of commons" as for every 9 cases that people don't push the envelope there's always 1 that does (made up numbers) and the effect there is if it goes well the "precedents" drift up o the risk curve this systemically means you'll have market participants (management, investors, etc) convince themselves whatever envelope they're pushing isn't too risky because it's not that much more aggressive than the last situation (which worked out) ... that keeps going until a bubble pops. Now how do you solve this? I truly have no idea!
These last two pieces that you've written since going solo are the best stuff you've written in years. Well worth the price of admission and my personal broadcast to anyone that would listen to subscribe as fast as humanly possible. Oh, and Kellerher is Da Man!
Matt. you have returned with a vengeance with this great article concerning buybacks in the form of looting! Kudos. I consider this article, great investigative journalism I was used to reading in Rolling Stone. It appears that Trump has executed the junkyard dog that was to watch over pandemic related funds distributions. I thought there was to be, language in this bill to prohibit TrumpCo. from looting us, again and again. What can stop this madman dictator? Thank you. Stay healthy and please continue turning the knife, only faster.
I like your stuff typically but this is a really weakly written story from a factual or mechanical perspective and I'm a little disappointed as you've fallen into the trap of every other media outlets' click-bait style reporting. I was holding off on subscribing to get a sense of the type of work you'd be doing independently and this is pushing me against subscribing -- hopefully future stories won't do so. To be specific about my qualms It doesn't appear you've interviewed anyone involved in capital markets, corporate / securities law etc (ie people who do the economic analysis and are in the board rooms). Just as examples of factually incorrect items or weak arguments:
1. when you state that buybacks boost the stock price that's not really true mathematically (though you could argue the demand pressure of the company purchasing shares pushes up the value marginally but I wouldn't go into a boardroom advocating that as a basis for distributions). I can illustrate the math for you if you like but a buyback (or any other capital structure change) doesn't change the value of the enterprise or the stock price (there are some technical reasons this isn't totally true at the extremes but those are exceptions)
2. capital decisions (invest / return) typically don't flow the way you suggest they do ... ie the company wants to juice their stock price therefore they return instead of invest in R&D or something else ... more typically they allocate the capital to investments that return their cost of capital, once there are no other investment opportunities that are attractive they then return anything left to shareholders to be good stewards of capital. In fact companies who don't return capital often end up being wasteful with that capital (corporate planes, executive perks fancy offices, etc). You should also remember that capital isn't a one way street -- if I return capital today because I don't have a good project to invest in doesn't mean i can't go to the capital markets and raise that capital again (follow on offerings) to invest ... in fact if I show a history of responsibility it's typically easier.
3. an underlying assumption in your article is that corporations should have been prepared to sustain a shock that essentially amounts to all their revenue going to zero (while still needing to maintain all their costs) -- why would anyone assume a shock like that is possible? Certainly none of the small businesses or restaurants in the country did! This is a very unusual situation and that shouldn't be forgotten ... there are certainly cases where companies push things too far and therefore have no cushion for normal risks but this is not that type of situation.
To argue buybacks are somehow inherently problematic because they reduce your cushion for the unexpected you would need to argue that any other use of capital (wages, r&d, capex dividends) is problematic for the same reason (as they all reduce cash available to sustain disruption).
Moreover a corporation does not exist to accumulate cash in its coffers - it's a productive engine that exists to return capital to stakeholders. Your argument that these returns to shareholders are somehow flowing to the richest also shows a lack of depth on the topic. If you dig into ultimate attribution of the majority of (domestic) capital in the capital markets it will trace back to large public employee pension funds (teachers, firefighters, public employees) and individual retirement funds so in many cases typical middle class people (at least as the majority) ... even big pools of actively managed capital such as private equity or hedge funds are fiduciaries investing capital on behalf of these large pension funds so it's a bit erroneous as an argument.
I typically tell people to think about large companies as you would think about your own assets. Imagine you own a rental property that you rent out to a tenant. Arguing that returning corporate profits to their shareholders is wrong is like arguing you shouldn't be able to use your rental income to buy groceries ... does that make any sense? If it doesn't for your rental property why should it for your 401k?!
Oh yeah, it's all the little people who gain from the stock market....
The share of stocks owned by the bottom half of all Americans was less than one percent at the end of September 2019. In comparison, the top 10% of the household wealth distribution held 88.1% of all stocks and mutual fund shares at that time.
And with buybacks rich people get to cash out via capital gains and duck paying taxes at their much higher personal rate.
Bingo. Dividends on stock options are not "qualified." So the executive insider would likely be taxed at 37%-instead of at 18 or 20 as a capitalist gainer...
The dividends actually are typically qualified -- that's not the reason it's more tax efficient to buy back -- the reason is if I'm currently working and just investing for retirement I don't really want that dividend because I'll get taxed today on it. I'd rather the company use it to grow -- if it doesn't have a good place to invest it and wants to distribute it doing a buyback allows them to increase my ownership (I own 1/90th post buyback vs 1/100th pre buyback) so I do get the value of that distribution but in a form that doesn't trigger a tax now for me. Most investors in their accumulation phase of life "turn on" the "reinvest dividend" setting which means I get some dividends, I then take those and reinvest them so similarly my ownership goes up (from 1/100th = 1% to 1.1/100th = 1.1% which is the same thing as if the company takes the cash and buys stock (1/100th = 1% to 1/90th = 1.1%) except in the dividend I have to pay some tax on that whereas in the buyback I don't. Its more efficient for the people who don't want the money back now and lets investors "select their option" also remember these are all "open market purchases" that we're talking about so it's just buying from the regular sales flow.
There's this insinuation above that the little guy can't own stock. Why not? Go buy some if they want it. Frankly I think companies should grant stock to employees more to get them invested in the benefits. This should really be combined with a more robust financial education system because the worry is people don't really understand what they're buying and that creates a ripe environment for fraud and people to be taken advantage of. I think the solution is better education, better DETAILED reporting on the topic etc.
"There's this insinuation above that the little guy can't own stock. Why not? Go buy some if they want it."
Oh, yeah. The "let them eat cake" rejoinder.
The main reason that "the little guy can't own stock" is that they don't have the money to buy any. The allied reason is that it's the small investors in the market who typically get taken, no matter how "robust their financial education." The middle income people just beneath the 20% top earner level that is arguably the main class stratification in this society who possess "robust financial educations" in the school of hard knocks know this, or they're just plain cynical and they intuit that reality (a justified cynicism, in this case.) Notwithstanding the small number of poster child exceptions, that is the governing reality. So they stay out of the market.
The main reason that this is the case is Money, vs. the lack of it. High-income people who play the stock market can ride out the recessions- and even buy during the plunges. Very often they buy from the people in the market who are closer to the margins, who are the ones who find themselves needing to sell those assets simply to remain afloat. You know, consider your statement about "Its more efficient for the people who don't want the money back now"...those would be the set of all investors who already have enough of a margin to simply roll it over, while reaping the tax advantage you spoke of by doing so. You don't appear to have noticed, but an increasing number of Americans are learning that the only people capable of increasing their net worth- and, crucially, holding on to it securely- are those who already have a lot of material wealth to begin with, and moreover that attributes like intelligence, perspicacity, thrift, and foresight are secondary considerations at most. To say nothing of ethics. And most of those Americans are inclined to view that as a serious problem. For what it's worth, I don't think that lowering middle-class income taxes by another few percentage points is going to distract the rest of them from eventually figuring out that this is the case, and that their personal tax burden is not actually to blame for their inability to achieve financial stability and security.
As for the "little guys" who do have a stake in the stock market, most of them are invested in mutual funds or exchange-traded funds, which some cynics would say are the means by which the wealthy dispense (or functionally impose) perpetual dependency on Wall Street (and its shifting fortunes) to everyone from the beneficiaries of State government public employee pension plans to the holders of 401k accounts and IRAs. So what used to be a simple matter of a savings account or employer-funded pension plan is now wedded to return on investment, which incurs the risk that the investment can shrink as well as grow. Although it is worth pointing out that if those small players in the market use financial advisers, the advisers make money no matter what.
Also, how much direct influence do mutual fund or ETF investors have on the decisions made in individual corporation boardrooms? None. They're "passive investors." Although it is worth noting that there are now ETFs, like PKW, that specialize in playing the angle of stock buybacks. (I'd be wary.)
You wanted more detailed reporting on the topic; there it is.
And btw my first response was probably unfairly dismissive of the fact that it’s really hard for people to save up a little and invest in the market though I’d attribute that to the horrendous debasing of our economy’s good paying manufacturing jobs that both party’s establishments have presided over for the last 30 years. Unfortunately it seems all we have left are a few measley Walmart jobs because our boarderline treasonous political and business leaders have sold us out. It’s not the same place it used to be when I was a kid.
I should just stop commenting because the hostility is so effing blinding in this group that you’re unwilling to even listen to what I’m saying openly. You of course don’t need to disagree but stop misconstruing what I say with illiterate references to bourgeois elite. Your comment that they can’t afford it is silly. Anyone with a good job and grit can scrape together a little savings as a start and discipline / dedication Will get you there. People do it all the time. Your argument that “the little guy always gets screwed” isn’t factually correct. I’m by no means a billionaire captain of industry but I’m invested in the same super Low cost index mutual funds that are highly diversified that anyone here can participate in for as little at $100. If you squirrel away $100 a week/year whatever compounding will do the rest. I haven’t been screwed and if I’m in the same exact security that a billionaire or little guy is in why would any of us be treated differently. Let them eat cake is a refrain that means the common man has no say and the elite don’t care. Everything I’ve said here as been contrary to that sentiment. I’m pointing out that I believe we have a very cool system here that allows anyone big or small to invest on an equal footing in enterprises that generate profits. In other countries and historically these profit making entities were controlled by a few elite and there would be no way for a normal person to share in that. If you think it’s a bad deal and a scam that’s fine don’t participate. I don’t think it is and it think it’s quite amazing that it’s egalitarian and accessible. That’s a good faith assessment / belief so don’t put words in my mouth that weren’t there
I contradicted your first-person experience and your abstractions with some reality-based reminders of the actual economic condition of most of the working people of this country, and the way that they're treated- or not- by the current status quo of the financial system. That does not equate to "blind hostility."
These articles don't rely on blind hostility for the analyses that they present, either
https://whorulesamerica.ucsc.edu/power/wealth.html?2010
If that data-heavy document is read through to the end, the statistical tables are reviewed, and time is taken to reflect on the implications, they should supply enough information to put these two essays into an accurate context
https://whorulesamerica.ucsc.edu/power/investment_manager.html
https://whorulesamerica.ucsc.edu/power/investment_manager_2014.html
If you intend to refute or contest those data findings and critique those views, you're going to need to supply your own factual support. Simply relying on your own first-person case is anecdotal (and unverifiable) evidence. I'm not interested in prying into your income, wealth, or social class background; I'm not going to demand that you reveal your educational background or level, occupation, level of personal income, level of total household income, or what fraction of your income you need to pay in order to keep a roof over your head. But I think you should review those features of your life and think on how they might be influencing your perspective- especially in terms of trying to use your personal case as the sole basis for making generalizations about the ability of American workers to invest $5000/year in the stock market. You can't base the case that anybody can do it on evidence that's all about you.
To give you an idea of what I mean: I once had an on-line exchange with a guy who claimed to have put himself through an expensive private college as a hotshot car salesman, and then went on to wonder why everyone else couldn't do the same thing. I took him at his word. But he could not quite get that 1) that was one of a very few entry-level jobs available where someone could possibly make more than $10000/year in a 20 hour week; 2) there aren't enough auto sales jobs in the entire country to account for even 5% of the undergraduate college students, even if all of the jobs were reserved for them; and 3) even then, few commission salespeople make as much as the stars in the game. And of course, the game has changed in the years since that fellow was selling cars; auto salespeople are almost always salaried employees these days. College expenses have also skyrocketed (he didn't say when he was doing his car sales hustle- it might have been as early as the 1980s.)
The point of that recollection is to underscore my point that someone's personal experience in and of itself doesn't work as evidential support on these questions. To think or insist that it does only reveals someone's self-absorption. Even if everything that guy said was true- that he found an entry-level sales job and ended up making a middle-class income in his teens that allowed him to pay his own way through college- he was fooled by randomness. He was in the right place at the right time, possibly benefiting from the right connections; he might have been perfect for the job, but he also got exceptionally lucky. And the claim he was making- "if I can do that, anyone can"- was bullshit disguised as a humble-brag.
What does work to support a case on the topics we're discussing are sites like these https://www.city-data.com/ that provide data on wages, prevailing occupations, housing and utility costs, etc., and articles like these https://money.cnn.com/2016/06/22/real_estate/rent-affordability-housing-harvard/index.html
that contain metrics like these
"The median rent on a new apartment was $1,381 in 2015, according to the report, which means a renter would have to make at least $55,000 a year to be able to afford the rent. And with the typical renter making about $34,000 a year, that means an affordable rental would be about $850..."
That's a very general ballpark estimate, but anyone who claims that it can be discounted as misleading is going to have to find other numbers to refute it. And they certainly won't find them in the other information found in that story.
"The dividends actually are typically qualified"
That is not true. Employee stock dividends are NOT qualified. Do you understand the difference between "are" and "are not"?
Very interesting -- I actually didn't know that and just looked it up (employee benefits are not in my area of experience). Not sure why you need the insult at the end about not knowing difference between are and are not. :-/ Anyway, I don't think options (was the original post's claim) accrue dividends until exercise or vested though again not my area of expertise so might be wrong though that may make their point anyway.
Next time look it up first before posting an erroneous statement in contradiction; then no more sarcasm...or a little less. Of course the options would not earn dividends but that would just fortify the argument that the buyback (as opposed to the declaration of a dividend) is a means to enrich management.
Is your argument that buybacks don’t increase price per share because the overall value of the co decreases in proportion to the assets expended on the buyback, thereby negating the per gains? And if it buybacks really do result in a constructive wash, what function do they serve?
You describe their function essentially as that of dividends - a mechanism for returning excess earnings to stock holders, which would otherwise be wasted on private jets & baby tigers & stripper parties & other ostentatious corporate fetishes.
I think the point your missing is that most of us aren’t burdened with the decision to either pay ourselves huge, lump sums of money or ball out on a new company yacht. We as individuals are forced to save for unexpected exigencies, and if one arises & we aren’t prepared, Big Bro doesn’t dump heaping bags of taxpayer dollars on our front door to help us make rent. So it doesn’t seem fair that big airline executives & the like get to pad their pockets with would-be rainy day reserve money, & then thrust the burden on the taxpayers, who are already subsidizing their massive gains with huge tax breaks, to bail them out when they don’t budget properly. If my grandma bought a new pearl necklace every time she had a little extra cash, you think the gov or the banks would bail her out if she got sick & couldn’t afford to pay her medical bills? No. Granny would die. If Delta blows its reserves on private jets & astronomical dividends, it shouldn’t expect the taxpayers to sweep in & save it’s ass. It should die just like my granny would, especially since she’s contributed a much larger share of her total earnings to the greater good than has Delta. If anything, we should recognize that the economy can replace a Delta (and should if Delta isn’t economically viable) but it can’t replace my granny, so we shouldn’t be spending billions of dollars bailing out industries who have a proven track record of reckless frivolousness. We should allocate tax dollars to help people who need it, rather than sustaining a catch-all corporate safety net for egregiously wasteful & socially irresponsible profiteers. Don’t you agree with Matt’s general assessment of the health of the proverbial economic forest, if not the exact genus of the trees he’s identified?
Yes you're pretty much right on why they don't juice the price -- I do the math in another response. I don't disagree with your point that they shouldn't be bailed out for nothing by the tax payer -- ultimately the people who benefitted from the buybacks are the shareholders the govt can definitely take their pound of flesh out for bailing out and they did in the financial crisis in a lot of cases (in fact the government profited on a number of the deals). The way this is done is by diluting the shareholders. As I said my real issue is that you're all clearly smart readers and so if you were informed with the actual facts you'd be better positioned to have a view on the issue. I don't think this article does that unfortunately and the MSM does a poor job as well so I was hoping a highly capable author like Matt T would fill that gap and just present the facts in a more accurate way so people can decide with full information. To be fair there's a lot of stuff you'd need to have a lot of experience in to fully understand so not an easy task
It's a complicated constellation of issues to be sure but I think Matt excels at explaining it to readers like myself who don't have as much experience with or understanding of the financial sector as you do. I'd never heard the term buybacks before reading this article so it was eye-opening for me, even setting aside the possibility that some of the precise mechanisms of buybacks are less cut and dry than the article lets on. I appreciate your informed insights and I wonder if you agree with Matt's ultimate conclusion that we should put the brakes on buybacks? They feel shady to me and seem to pose an unjustifiable risk to the overall health of businesses and to economic stability writ large. Do you think the benefits they afford investors outweigh the risks? And do you agree that companies should maintain enough cushion to weather sudden storms, just as individuals are expected to do? In sum, how do the specific flaws you perceive in the article change your perception of its general conclusion?
In a LOT of cases, the buybacks do artificially inflate share prices. It's a little bit Ponzi, if you ask me. Seeing the share price climbing attracts new investors. Momentum guys ride it up a little, then dump.
Thanks for the kind comment. I don't agree we should put breaks on it because the rationale is if we did the companies would have more money on their balance sheet but how do the shareholders get compensated for investing? Remember that shareholder could be you. I'd also point out while there are of course flaws in our system we have a really amazing one where we all can participate. If you're saying the buybacks are "shady" as in someone is profiting in an illicit way I disagree with you but if that's what you really believe why wouldn't you just go buy a shares in public companies that do buybacks (which is really most of the good reputable ones with real underlying businesses)? If it's really a boon for the shareholders then you're missing a great opportunity to be a profiteer! I'd say its just a return of capital like any other return of capital. The reason it's even a thing (versus dividends) is two fold: 1) there's a big stigma against cutting a dividend for whatever reason so companies like to just put them at very low safe levels they can always support and never pull back; they then use buybacks typically for the excess over that (so you have a good year or you don't have any attractive targets to acquire or no good R&D projects you can just give the profits back to shareholders) and 2) it's better for your shareholder from a tax perspective so say you don't need the cash if you get a dividend you're forced to pay the tax and then reinvest which is inefficient I on the other hand am retired and want the cash -- it's more efficient to just have enough buyback activity that I can sell a little bit for income (and pay the tax) and you just get your ownership "accreted" buy the buybacks (so if you owned 1% before you probably own 1.5% after the share retirement). Make sense? You could get into a debate of whether that makes any sense as a tax policy but changing it would require a whole gutting of the system and would just be different not necessarily better.
How do you get compensated for investing? How about selling your shares once they rise in value?
Does the rub here arise from a fundamental difference of opinion as to how we should structure our societal carrots & sticks? I’m personally less concerned with the mechanism for distributing excess corporate profits than I am with the outcome. I’d like to see less risk (& perhaps lower short-term gains) in the financial sector & greater security in social programs because I believe that the economy performs better when the bulk of its actors aren’t laboring under a financial Damoclean Sword. But the counter-argument seems to be that more room for risk allows for greater innovation, higher earnings & thus a stronger, though more volatile economy. Is the divergence in public opinion on this point something we can reconcile by somehow “agreeing on the facts,” or does it lie with a difference in our fixed world-views?
True Matt and if you don't distribute the cash and it just sits on the balance sheet gathering dust arguably the share price goes up by the amount of cash per share accumulated so it's somewhat meaningless (other than that big pile of cash is just ripe for corporate misuse and you don't have the discretion over it)...this all which goes back to my underlying issue which is the buybacks are irrelevant and your piece doesn't really make that clear because it attributes too much importance to the mechanism of distribution. I don't really care about buybacks. Do you have issues with dividends? If you ban buybacks companies can just increase dividend and move people away from this fixation on dividends never decreasing which I think is silly anyway. So what have you done? If you're however arguing that if the govt bails you out as a precondition to the bailout no dividends or buybacks for x years I totally think that's reasonable. That's what a private investor would do if they were bailing you out and the govt should totally act commercially in these "bail outs." Anyway look I hope I wasn't too scathing I just think there's a huge hole in the MSM for truly informative reporting that does an accurate job of presenting the facts, I'm hoping independent authors like you can fill that gap and educate people about the subtleties in an accurate way. I don't really care about the conclusion I'd just love to see accuracy on the basics on this topic and others.
That is the absurdity of buybacks. Shareholders are not rewarded for investing but for trading. The only way to benefit from having shares in what looks like a good company is to get rid of them.
How about a steady dividend yield that beats the shit out of zero on your savings. Compound that over the useful life of Warren Buffett...
I’d argue that in an era of low interest rates, share buybacks can be accretive to EPS and represent a change in capital structure that can increase valuation. So if the company trades on a P/E multiple, assuming your multiple is constant (no reason for that to change unless you’re levering up way too much), your share price will go up. Exec comp is also tied to metrics such as EPS growth and DPS growth, which are boosted by the financial engineering of share buybacks. Way easier to do this rather than do the hard work of developing new products / entering adjacent markets.
That being said, I think public investors, including activist investors can be too short-sighted and stifle innovation in public companies because they are too focused on the short-term and destroy long-term value - Elliott isn’t holding their position for 5 years, they just want the bump from the cost-cuts and get out a year or two later. It’s not a coincidence that the greatest value creation in the market over the past decade comes from founder-led and controlled tech companies who don’t care as much about their stock price gyrations every quarter.
Every analyst call ever..."Hey, this is XYZ, filling in for ABC, at NYC Capital. Congrats on the great quarter guys [very little emotion]. I see gross margins are up 10 bps. So can you give me some 'color' on how you are going to use all that new cash flow from this quarter? M&A or buybacks?"
This is an informed response!
That said this is financial mumbo jumbo..and part of the fallacy of PEs vs say EBITDA multiples ... I'd argue if you're doing your math right on the PE basis you should use a PE ex cash which shouldn't change then just add the cash per share to your valuation but now we're nerding out
Tried to make sense of rental property example. Here is my interpretation. And not that Boeing will receive any epidemic related funding, I would be upset if they receive funding, knowing that they recently participated in stock buyback(s), thereby having non-shareholders subsiding wealth distribution to shareholders.
Boeing doing business as Boeing Defense Space and Security, St. Louis, provides for the extension of the contract for an additional five years, and increases the contract ceiling by $6,534,283,787. Work will be performed in St. Louis, Missouri, and is expected to be complete by Feb. 28, 2025. (One of many DoD contracts).
Yeah, after a rocky start, I thought he may be picking up a tiny bit of momentum before the rental property blurb. At that point, it was clear I had just wasted my time. lol
Yeah, instead of buying back back their own stock they could have spent a few bucks ironing out the new autopilot glitches and printing the manual in different languages. Claw back the buybacks!!!
Why don’t they just give out dividends instead?
Spoken like a true capitalist. It's all about the money boys!
Hey, M A, what company are you CEO of?
Mr. Taibbi didn't say that stock buybacks alone raise stock prices but that the retiring of those stocks purchased raises the prices. He said that the corps have purchased their own stocks, retired them, and their stock prices rose. It's akin to what happens when the fed purchases T bills on the open market -- it makes them scarcer, so their prices rise. Here, a corporation uses its corporate $ to purchase their stocks, then retire them, so that individuals, like board members, who hold said corporate stocks get wealthier. So that's one problem. The other is that the company could have used those corporate funds to further Research and Development, pay their workers better, or keep the $ for a rainy day. But no need, as the federal government will save them when that day comes, which it always does.
Joseph in Missoula
What a load of horse manure. But no doubt it convinces all the MBAs you hang with.
I think this was the best response I've gotten -- truly enlightening
Yeah, that's not a good analogy.
Wrong analogy. It would be like taking the rent money and never doing any repairs or up keep to the apartment until no one will pay to live there.
What company or business doesn't do upkeep that makes no sense - the underlying argument is they should have had a bigger cash buffer for the unexpected. I'm not sure that has anything to do with buybacks. It may say that boards and management overly discounted the frequency of crises
"What company or business doesn't do upkeep that makes no sense" Did you even understand the article? A mob bust-out outfit, that kind of company. A company that is too big to fail, and wants to cash in an implied bailout. That kind. A company that leverages its reputation to sell inferior product at a premium. GE come to mind? Why do upkeep if your bonus options just got unlocked? How was the upkeep on the 737 max? Survivorship bias, indeed...
Jeebus what a steaming pile...
I personally think the removal of the stupid incentive to keep capital outside the US (trapped cash) combined with the horrible flaws in our supply chain (ie its all in china) that this COVID outbreak has cause will prompt a return of manufacturing. That's an opinion -- we shall see if I'm right. Hopefully you can agree that a law that taxes a multi-national's earnings outside the US at 0% if you leave it outside but applies the tax if you bring it back (as the old law did) only incentivizes corporations to not bring it back here. The new law now taxes foreign earnings regardless of whether you do or don't "bring them back" meaning the decision is no longer skewed against the US which is much better. Second I don't know where I implied there's some 3d chess game going on. I really don't care about buybacks - I think they're fine but if the majority of people decide they're bad go for it at and ban it I don't think it does anything to ban it. If I was a corp and you ban buybacks I'd just shrug and distribute via dividends -- I'd view it as a silly law that doesn't do much of anything. My point is that this article attributes a lot to a very mundane topic in my opinion. I don't think having buybacks or not having them does anything. I actually think if you apply occam's razor my explanation is the simpler of the two (i.e., I'm saying they're just a distribution mechanism like dividends that are slightly tax advantaged because dividends are taxed to all the shareholders now whereas buybacks are taxed to only those who want the proceeds now and the rest later, whereas the various counter arguments that buybacks are some nefarious tool to manipulate things and are jumping around to find all sorts what-aboutisms to counter my assertion based on experience that they're not that complicated). Again I really don't care about buybacks -- ban them they don't matter my only objection is I think the article did a weak job of presenting the facts not what conclusion he or anyone else here wants to come to. At least I'm being consistent.
I agree there are multiple conversations going on here. I'm trying to stick to my original point which is that a distribution is a distribution whether its a dividend or a buyback and that i just don't really think buybacks in and of themselves really do anything overly positive or negative they just get money to the owners. There's a corporate policy question which is: if I give this money back can I get new money if I need to grow or do cover a cost or hit a speed bump? Frankly that question applies to any other use of capital too -- if I spend it on R&D will it be good R&D? If I spend on a new plant will it be a good investment? If I acquire another company will I pay too much, etc. Those are all ways you could use the capital and would lead to the same disastrous outcome if you make what turns out to be a wrong choice at the wrong time. Ultimately those questions are about prudence, judgement and luck and there's no rule or formula that will give you a fool proof answer. There's also the whole public policy issue which I wasn't really dealing with before with my original post but I keep getting dragged into. I think if your point is that Matt was saying "hey with the benefit of hindsight these guys stripped the company of resources leaving it barren and unable to cope and that seems dumb" then yes that's a valid point and I agree its part of his article and one that I didn't object to. My point is he attributed it all to buybacks which I believe is just a mechanism by which the bad decision was implemented -- the problem was the decision not the mechanism as there are other mechanisms that could have been used if this one was not available. Second there's no discussion of a way to apply breaks so that companies don't over do it (frankly because I'm not sure there is one because you only know you've over done it if the proverbial sh*t hits the fan ... I truly doubt any of these companies made these decisions knowing it would wreck the companies and the reputations of the management teams). I sort of get lost in the second part of your response but I think what you're positing is that "individual self benefit may often lead to collective disaster" ... yup I agree someone else here referenced the tragedy of the commons as an example from classic game theory. I definitely agree there's an element of that in our economy and any smart solutions to put boundaries around things so as to direct the natural desires of individuals to benefit themselves in a way that creates positive outcomes collectively (or at the very least avoids negative collective outcomes) I am supportive of. What I'm not supportive of is actions or laws that require you to suspend belief that individuals will act in a narcissistic selfish way (at least on average across large numbers) because I don't believe that will happen. Just to go back to my original point banning buybacks does nothing to help any of these bigger issues and is irrelevant either way -- that's the weakness of Matt's article (in my opinion).
yes but I'm saying he stuck to the wrong thesis if the thesis is eliminating buybacks would solve the problem then that thesis isn't correct because there are 15 ways to do the same thing so you'd have to limit all 15 and if you limit all 15 no one would invest. I guess if you did that then no one would invest and there would be no companies to fail so sort of problem solved?
Also I personally believe that when presented with two scenarios of explanations: 1) nefarious scheming evil mastermind(s) who has somehow made a rube-goldberg-like sequence of events happen in order to profiteer; or 2) stupidity, laziness and general shortsightedness. I typically opt for #2 as the more likely explanation. No one is as smart as #1 would require
Dude (or dudette?) read my other posts -- you're right currently corporations have one duty (to their shareholders) I say elsewhere I think a more expansive duty set is required. It also exists already in other countries (e.g. Germany if I'm not mistaken). There the board has a duty to the various constituencies including employees, community etc. So the question is not only "what is best for my shareholders" but rather "what is best for my constituents broadly." I personally like the construct. You argue that the foundation of my belief is self interest -- I don't really have a very strong self interest tied to buybacks frankly limiting them and other distributions would probably be better for my own self interest. I'm partial to software engineers -- the ability to think algorithmically is a huge asset.
"You are dinging Matt for not understanding the corporate foundation is purely self-interest." I thought you were saying I'm defending buybacks out of personal interest. I was saying eliminating buybacks would serve my personal interest because I'm in a business that competes for capital with buybacks.
This entire response makes no sense -- I have multiple decades of experience advising companies and boards on mergers and acquisitions and capital markets so your "they hoard cash to buy companies" statement is simplistic. I can finance a deal many ways beyond cash (e.g. I can just issue shares of the acquirer as consideration for the target I can go out and do a follow on offering of equity to get cash if they want a cash deal, I can raise debt in the debt markets -- I don't need cash on my balance sheet. Your argument that the business and shareholders are not the same is obvious. Stewardship of capital means I am the shareholder (ie owner) I hire the management (through my ability to vote for the board of directors) and if they're wasting money buying corporate jets to feel special I'm going to vote the board out and replace them with a board that fires that team. If they blow the capital on crappy R&D projects that never generate a return same thing. You're going to say the individual shareholder doesn't have power to do this which is true -- BUT there is an entire industry of activist hedge funds that make a career out of chasing down companies that are not shareholder friendly and don't act in the interest of shareholders so that's been handled. Anyway on the share price math ... If I have an enterprise that is worth $1,000 and it has $500 of debt and $300 of cash the equity (shares) is worth 1000-500+300 = 800. If there are 20 shares then each share is worth $800/20 = $40.00 .... If I take all that 300 and buy back shares then I retire 300/40.00 = 7.5 so now I have 20-7.5 = 12.5 shares. Following? So what's the equity worth after doing this? The "enterprise" is still worth 1000 because it's still the same company so it's 1000-500+0 = 500 of equity. The new stock price is 500/12.5 = $40.00 ... if you're wondering why the equity changed value just think about a house worth 1000 with 500 mortgage -- you've got 500 of equity ... If I leave $300 i the table when I sell it to you you'd have the 500 equity + 300 = 800. The reason you could argue price moves a bit is because the trading day to day depends on the supply and demand of shares to a degree but it really should be anchored to what people think the company is worth not supply demand. Anyway my underlying point is I have no real issue with arguing against buybacks if that's someone's opinion but I'd prefer that the factual basis be at least informed because otherwise the whole rest of the argument falls apart.
Do you have any clue as to the spectacular irony of your trying to support a logical argument with "I have multiple decades of experience advising [on high finance]...? Hilarious. And it's a math problem, to boot. Let me give you a little unpaid advice: your ad hominem revealing that 'your job depends on your believing it' is unlikely to score you any points from readers of this article- quite the opposite. Your assumption that the buyer of the insider's shares is tracking every dollar of "true underlying valuation"- and not some sucker-a-minute (or shill)- is right out of textbook Econ 101. 'Assume you have a can opener!'
Because I'm a cynic I'll give you credit for pointing that out and a tip of the hat. Though actually barring buybacks would be great for me as I do M&A so it would probably be good for business. My point is i'm not talking my book I just understand the mechanics which is a statement of fact. My job doesn't depend at all on buybacks but as a shareholder (i like many own diversified stocks) think its good policy. If you or anyone else wants to argue its bad policy that's totally fine and I'm willing to listen but as a starting point you should get the facts right.
" I just understand the mechanics which is a statement of fact. "
Once again, your conclusory posit of hard science terms ("mechanics"; "fact") in a policy context is a huge tell. The mechanics of this financial scam are not at issue. Neither is your personal understanding. ( I'm going to guess that you are skeptical about whether insider trading should even be policed.)
Well, public companies- even big boys like Chrysler- are FREE to delist and tell the SEC to go fuck itself. But then they shouldn't get to score the bailout in the lean years like GM. That's just kar-ma. The SEC's JOB is to assure the mom and pop 401k suckers that they might get an even break. "Don't quit your day job, we'll keep an eye on the pro sharks..."
I don’t see how you would infer I don’t think insider trading should be policed. I think protecting the individual investor is sacrosanct and an amazing feature of our capital markets. I don’t see how buybacks don’t protect the mom and pop investor. When I said I was a shareholder before which you mocked me for I was making the point that I’m a small individual investor (mom and pop) I hold companies in mutual funds that do buybacks I’m sure. I don’t think I’m being harmed by them as a matter of policy. Are you suggesting someone is? How? I’m sure I’m these diversified mutual funds there’s probably some of these companies that did too much and I’ll probably lose money on those but that’s why you diversify. That’s also why you should fire management that takes undue risk.
The best ponzi schemes are of course the ones where the players actually believe in the artificial valuation. (Even Ponzi himself had a good arbitrage going, until large number law kicked in). I tip my hat to you for admitting to your special interest as a shareholder.
My U. Sinclair reference was broader, not literal. Of course you can prove on paper that "greed is good". Creative destruction by busting a monopsonist labor union is "efficient""enterprise". Taibbi does not suggest "banning buybacks". You have erected a straw man. He is talking about welfare handouts to corporations that buy back stock. Different calculation, no?
"barring", not "banning". Same diff.
Anyway you're right market valuation is a bit of a squishy concept but you can't argue a business that generates profits has no value (though a business that generates no profits is a different question to your point about the .com bubble). To use my example of a house with $300 in it and $500 mortgage ... is that worth -200??? You're confusing the rationality of the value with whether it exists as a concept. Doesn't matter, whatever the enterprise is worth the math always comes out the same -- buybacks shouldn't alter value (as long as you're not in the "extreme" ... so if I leverage the business to 99% and they have zero wiggle room the value should be lower as someone else said due to going concern value ... ie I'm probably going to go bust at that level .. what about 90%? 80%? 50%? 10%? there's some point where it doesn't pose undue risk)
MA, don't bother trying to educate these people. Unfortunately finance and economics are poorly understood by the masses and it takes years of study and experience to understand these topics. Most of these people (including Matt) lean left and so they are generally statists who don't understand the difference between capitalism and crony capitalism. I'm getting to the point where it's not worth the time to try to educate people over social media. All of our points are out there already. None of this is original. These people just don't want to do the work like we did and figure it out.
MA is 100% right in his/her analysis. I also advise companies in raising capital and M&A. Matt's article is not accurate.
If a company can sell stock to raise cash to grow (because it determines it's equity cost of capital is reasonable for the project they are investing in), then they have every right to do so and no one complains. If the company determines that they have excess cash and don't have investments that will return the cost of capital or more (in a mature industry for example), then they can dividend the cash out or buyback stock. IT'S A VOLUNTARY TRADE EITHER WAY, and it allows the free market to allocate capital efficiently. Those who sold stock back to the company can invest it elsewhere. The buyback may also keep the price up for other shareholders who choose not to sell their stock back. The reason we have more buybacks over the last five to ten years is because the Fed (which is government sponsored monopoly) interferes in the market with money printing (they call in QE) and keeps rates low. The Fed protects the banks and bails them out. They create a moral hazard. So they have artificially lowered the cost of debt capital (which is an inflation tax). This is a signal to companies they should borrow more. This creates distortions and mal-investment. So currency holders (who get diluted in money printing and lose purchasing power) are subsidizing borrowers. So companies see the lower rates and borrow more and/or they buy back stock. Then they get over-leveraged which leads to restructurings and recessions. The buybacks are a symptom (a reaction) to a core problem - the Fed's market interference with the free markets. Rates would be much higher right now with no Fed interference. Matt fail to understand this important dynamic.
Matt should read this article: https://www.aier.org/article/in-defense-of-share-buybacks/.
And this Harvard Business Review article gets it right:
https://hbr.org/2017/09/the-case-for-stock-buybacks
Finally, regulation doesn't work. Matt should compare the tech market to education and healthcare (note regulation makes things more expensive and less efficient by keeping out competition). Banning stock buybacks won't solve anything. Voluntary trade is never a problem. Look for the artificial inputs like the Fed's money printing fraud that signals to the markets to go borrow too much. Seriously, a small group of people know what the interest rate for money should be but virtually everything else is priced through voluntary trade?
Matt's article just doesn't hold up. More on this topic that supports my logic:
http://www.wealthywithoutwallstreet.com/rigged-stock-market-fed-debt-buybacks-part-1/
"I also advise companies in raising capital and M&A. Matt's article is not accurate."
That makes a you a super stable genius. But most decidedly unwashed. At least MA has a social conscience.
What? I have a business that throws of cash flow and it's worth -200? Goodwill? Are you an accountant? What if that business throws off 300 a year post tax / interest? is it worth -200? Sorry I don't want to be dismissive but that makes no sense.
this isn't going anywhere -- would love to buy a business off you though! I'm using worth generically -- yes valuation. Where do you think that comes from? The reason a cash flow business has any valuation is because it generates the expectation of positive cash flows to the shareholders. You do a discounted cash flow analysis with your cost of capital and arrive at a value -- everyone will have different views which is the "market" you speak of but ultimately if they're doing multiples or DCFs or asking a ouija board its to get at an assessment of what that profitability is "worth"
Re: Matt Taibbi
Matt, thank you so much! This is one of the most timely and informative pieces of writing I have ever encountered, and it will require much more than one reading.
Good luck on your newly enhanced independence and association. Of course, it is good to know that you will continue to contribute to Rolling Stone.
By the way, I have attempted to subscribe online using a valid prepaid VISA "Gift" debit card. This method of payment was refused with no explanation, or suggestion of a secure alternative. Please advise at your convenience.
As Usual,
Thom
On the whole, this is an excellent article (putting aside the temptation to quibble). One point that it overlooks: buybacks are an alternative to dividends. Buybacks favor management and short-term investors for all the reasons recited. But their benefits of higher stock prices are ephemeral and essentially irrelevant for long-term stockholders. They, however, actually benefit from money in their pockets when dividends are paid, and this is the most transparent and measurable way of returning capital that the company can't use to stockholders, if that's the real (as opposed to BS) reason for a given company's buybacks. Moreover, dividends are typically set at predictable levels (often to attract long-term stockholders), which, on the one hand, is beneficial to pension funds and other institutions and, on the other, creates fixed expectations for management's performance. Dividends are, and have traditionally been, the best and most transparent way to share the actual, sustainable returns on investments in corporations which, at the end of the day, is the only legitimate reason for investing in them.
Excellent piece. Curious if you follow Ben Hunt and his crew at Epsilon Theory. He's also a wellspring of righteous indignation on all things finance.
I am also a little disappointed by this article, as somebody who usually loves Matt's reporting. Clearly, stock buybacks are just another way of returning capital that, for various reasons, has simply become more fashionable than dividends. Companies could have been stripped the same amount of capital through massive dividend payments, which would be reprehensible to the same degree. Apparently that is just "not done" because people love their stable dividend payments, which seems more like a cultural quirk than anything else.
The underlying issues remain though. If you are bailed out, your equity should be wiped out. If you can take the gains, you should also take the losses. If you don't like that, maybe build up a cushion.
One step further would be to argue about the concept of limited liability itself, which helps with much of the "socialisation of the losses". There are great reasons in favour of it of course, but maybe that is something that could actually benefit of review in the age of the MegaCorp?
There's nothing wrong with stock buybacks - except when they're poorly executed.
The problem is not stock buybacks, it is with crony capitalism. The airlines, for example, were irresponsible in using funds to buy stocks, but also in many other ways.
The solution is not to bail the airlines (or any other company) out. What happened to the "creative destructive" of true capitalism? Let them go bankrupt and you'll see that the companies that follow them are suddenly more prudent in their allocation of funds.
"There's nothing wrong with stock buybacks - except when they're poorly executed."
And there is nothing wrong with assault rifles. "Poorly executed" from whose perspecive? If they enrich the insider executives, that sounds well-executed.
When I say there's nothing inherently wrong with it, I'm simply claiming it can be valid use of the company's funds under certain circumstances. If you're running a business and you see shares of that business floating around for below their value, it might be a prudent decision to buy some of these shares (depends on alternative uses for money, of course).
You cannot solve executive irresponsibility and lack of future-focus by forbidding buybacks, because then those managers will simply spend the money on dividends (and maybe even bigger bonuses for themselves). Stock buybacks are simply not the right point in the system to stop this. Irresponsible executives will keep being irresponsible. It's akin to blocking a downstream creek when the problem is a dam breaking down much further upstream.
"When I say there's nothing inherently wrong with it, I'm simply claiming it can be valid use of the company's funds under certain circumstances. "
And if there is a gang of hungry vicious thieves outside my house, and the police and National Guard all have coronavirus, I would like to have an assault rifle- for "valid use".
Do you think a company, like an airline, that bought back billions in stock recently, instead of putting away cash for a rainy 3 months, should get a taxpayer bailout or be allowed to get bankruptcy protection (or neither)?
As mentioned in my original post above, I don't think the airlines should be bailed out. The bankruptcy process would work fine.
Bankruptcy protection- especially corporate (added in 1867) is itself a form of bailout, welfare, etc., via government intervention.
So at least we appear to have a consensus that any company taking bailout money should not be allowed to buy back stock with it. Some of us would gladly add dividends and executive bonuses to the package. Some of us would like to look at the last 10 years of cash management before dumping taxpayer cash in. Some of us would demand an overhaul of management- almost as a condition. But what if Congress prohibits buybacks and the Fed does "whatever it takes"?
"You cannot solve executive (greed) by forbidding buybacks". Lolz. Never heard a more honest endorsement for co-op owned businesses and the elimination of the current hierarchical corporate executive structure. No, you can't eliminate greed, and since capitalism doesn't even try to mitigate it, it's time for something else.
isn't a coop just equity owned by the employees? i think that's great but it's the same thing. who manages it? you have the same issues it's just the employees holding the bag if there's corrupt management rather than 3rd party shareholders. the only way to combat corrupt crony capitalism is transparency, information, educated equity holders, etc. ultimately the owners have to be equipped to monitor the board and board needs to be equipped to monitor the management.
Lets not get to the gun debate -- I'm sure we'd land on opposite ends as well. There's nothing wrong with hammers unless they are used to crack your skull open. Statement of fact.
But I'm reminded of the arguments supporting the MBS and CDO squared ponzi scams. According to the smartest guys at MIT in finance, there was nothing wrong with splitting mortgages into a milllion tranches in the name of liquidity. In perfect world theory, it "works". In practice, they are selling bits of the Brooklyn Bridge over and over.
I don’t think there is anything inherently wrong with splitting them up into tranches. Again it’s a matter of degree and frankly your oft cited tragedy of commons is most relevant to securitization. There’s a limited quantity of “credit worthiness” in the system. You can split up the risks to offer some diversification and get closer to that capacity but the problem with how that system was designed was that there were no breaks. Everyone socialized the risks and individualized the benefits and the result was it dragged us all down. It’s not lost in me that that last statement is exactly what you’re citing as the problem with the current system and I think I agree with that though I’m not sure that buybacks are the culprit to that artifact. I honestly don’t know what is or how to fix that piece. All the suggestions I’ve ever heard to date to fix it I think don’t really address that problem and frankly dampen the good features of the system. I suppose if it were easy someone would have done it already.
The "nothing inherently wrong..." standard is part of the problem. There is nothing inherently wrong with bacteria on your person (in fact, you need some to live). There is nothing inherently addictive about heroin. Etc....
In the law we refer to "cui bono"- "who benefits?". Deregulation as an ideology has been radically oversold. Of course my Congresswoman doesn't understand the intricacies of high finace. She is a young woman who worked her way up. But she understands haves and have-nots. And she knows who will be saved if ventilators go to the highest bidder.
you made my point with the bacteria comment -- overdoing antibiotics to kill it all off kills to the good bacteria and the bad and creates antibiotic resistant death bugs. A little securitization is good, creates more access to capital and lowers its cost. Too much is terrible. The problem is where's the line and how do you create a break system. I have no problem with regulation as a concept but its often implemented as some ill-informed under motivated bureaucrat who doesn't really do much of anything other than complicate things. Smart regulation would be great.
[To be continued] A pleasure debating, M A, don't take the rhetoric personally...
Without the assault rifle, outnumbered armies would have no defense. This may be good or bad, historically, but what you probably mean is 'assault rifles in the hands of civilians exist solely to murder people'. Which is my point.
Listen, try to follow: I agree that assault rifles exist solely to murder people. You must posit the most extreme example to argue they should not be banned: such as, a neighboring country has roving gangs of thugs who have these assault rifles, and our border patrol needs their own stock to deter them; or, there are similar gangs in our country they who like to surround a remote farmhouse and terrorize the outgunned inhabitants and their local sherriff
Nvertheless, otherwise sane people still say, "Guns don't kill people..." My point is that all but the most extreme gun nuts would agree that assault rifles should be regulated- maybe heavily, almost to the point of extinction- even though there might be a justifiable use. The distinction with a hammer is merely one of degree. You might reasonably ban hammers at a protest rally. You might not let violent prisoners keep one in jail, or allow them in a public sandbox.
Nuclear weapons may be wrong in anyone's hands. Who shall unilaterally disarm first? How about nuclear power plants? I fear them, but I rely on electric power to live in comfort, and can afford it. If banning them effectively denies others refrigeration, air conditioning, ventilator when they have pneumonia?
The point is even the use of hammers requires some regulation; and the use of assault rifles may be so heavily weighted toward the offensive over the defensive (or deterrent) as to require an outright ban. So it is with stock buybacks. If the risk of systemic abuse is too extreme, consider a ban. If the instances of "prudent" or "reasonable" use as a mechanism to return cash to investors (superior to a dividend) are many, consider limited regulation.
But you can't look at individual instances in a vacuum. You must examine the social effects. Because if my reckless violent cellmate has a hammer, to be prudent I want a gun.
Thanks for writing and publishing. I've seen some good charts showing another aspect of this story: that almost all the "gains" the Dow has made since the GFC, perhaps since earlier, were attributable to stock buybacks, rather than actual gains in productivity or profitability. If you strip out the buybacks, financial trendlines have been flatlining or declining for a very long time. Can't remember exactly which analysts have put these charts together, but they turn up at Zerohedge, Epsilon Theory (mentioned by commenter below), Wolf Street and other non-mainstream financial websites. The point being, that political leaders had a stake in allowing the corporations to goose their own stock prices, because it would allow the political leaders to take credit for an overall booming stock market that was, in fact, an illusion. But maintaining the illusion kept the pitchforks at bay for a time, and so the political leaders did their part to keep the grift going. The corporate-state nexus of power and corruption frequently the target of your excellent work.
Most gains are reinvested dividends. IIRC it's 70%.
Thieves on Both Sides of the Aisles.
I don't think it's fair to lay the shareholder value theory at the feet of Milton Friedman. His point was that companies should eschew "social" spending and focus on making as much PROFIT as possible, so long as they didn't run foul of social norms or the law and were not engaged in deception or fraud. That's a pretty reasonable position. I'm 100% certain that Friedman would NOT have agreed with the notion that juicing the stock price is good, desirable, or even a smart idea. In his article in the NYT and other talks he gave on the subject, it was clear he was talking about focusing on competition and making as much money as possible through competition, and that he was not talking about things like massive lobbying or attempts to monopolize a market through legislation. He was NOT a fan of getting the government involved in the free market.
I am a fan... however. I started and ran a company that ultimately went public. We consistently generated more in earnings than we could put to work sensibly in our business. My choices were to sit on this capital, pay large dividends or repurchase shares. As our stock typically traded at 6-7X earnings (low but not atypical for a capital intensive business), it was frequently more attractive to shareholders to repurchase stock than to pay dividends. Over a decade we repurchased several billions of dollars in stock. We never borrowed money to do it, we rigorously sized the amount of risk we would take to our ongoing capital, we never fired anyone (in fact we created several thousand jobs), and we sailed through the financial crisis without even a momentary blip in our business, despite carrying billions in investments (AA+ government securities).
I struggle to see any wrong in this action. We were a good citizen, but always worked under the premise that our capital belonged to our owners (shareholders). What we did was to buy stock from those who wanted to sell, leaving our remaining shareholders with a larger share of the future profits of the business. No different than one partner buying out another in a professional practice. I can point to at least two dozen competitors who behaved similarly. No mass layoffs, no government bailouts, no executives selling right after a buyback. In fact, very few of our executives were ever willing to sell their shares, until the business was ultimately acquired.
Another great piece by MT. Just subscribed today and encouraging all my social media connections to do the same.
A stock buyback is essentially the same thing as a dividend.
If it were ... it would be called a dividend. A buy back alters the amount of shares. Dividends don't. Major difference
Both are a return of capital to shareholders. The company can always retire treasury shares and issue new shares to replace the ones they repurchased. Focusing on the mechanics of compensating capital is silly.
The dividend is received, consistently, no matter the value of the share (provided the dividend is not cut/increased/eliminated for the duration of ownership of the share. Until you decide to sell the share. The buy back will increase the value of the stock, probably. But it is a manipulation of the stock price at best and the shareholder will only realize significant proceeds if they sell, at the higher price. If they continue to hold, the stock goes back to being valued on the many other factors of the company and the market (stock price can continue higher, but can drop to prior levels and further), but the effects of the buy back quickly fade. My main point is that there is a distinct difference between the two. And the argument that a lot of people make that companies should be using profits/stimulus/grants/loans to build a stronger company through more traditional proven company strengthening avenues like core competencies, financial solvency, employee retention, etc. and not stock price manipulations ... not silly ideas, at all.
No. It is not. Read the thread.
It is a return of capital to shareholders. With a dividend all shareholders receive capital, with a stock buyback only the shareholders who want capital receive it. As long as there are incentives in the tax code that tax dividends differently than capital gains, there will be stock buybacks. Nobody complains about dividends... why are stock buybacks drawing the ire of people?
Dividends draw plenty of ire also. This article focuses on buybacks. And it isn't "only the shareholders who want capital...". It's only the shareholders who sell their shares. From a very "macro-" perspective the result may be similar (can't ignore the tax code effects, however- someone has to pay if others don't). But there is a huge difference in who gets fat in the fat years.
If you don't want the capital, then don't sell your shares. Some tech companies sit on a mountain of cash for a reason...some investors do not want dividends and it can actually drive share price down. We have an economic system that is structured to loot the public treasury every decade and leaves out large swathes of the country, and world for that matter. I just don't get the focus on share buybacks. It is like shouting and stomping your feet about dirty forks on the Titanic. If you want proof how inconsequential this issue is... why would political leaders pay any attention to share buybacks if they were really a structural problem. Matt is generally better at focusing on core issue.
[see my comment above...] If I sell my shares, that lowers their price. So I get squeezed. Declaring a dividend, all else equal, makes a stock more attractive- unless the market sees it as looting the company of cash. Just because the dividend mechanism can be abused, doesn't make the buyback any more kosher.
I would dispute your first assumption. An individual selling his or her stock shouldn't impact the market capitalization. And declaring a dividend in all cases does not make the share price go up. In some cases, share prices go down between the declaration date and the ex-dividend date. Both a dividend and share buyback are methods of returning capital to shareholders and in and of themselves are not good or bad. As opposed to looting the public treasury which is bad...
Stock buybacks are the same as stock dividends.
I hope Taibbi hasn't gone to the dark side and is going to start writing click-bait articles.
There is no necessary relationship between dividends and/or stock buy backs and
1. executives being paid too much
2. firing employees as away to reduce OpEx
3. focusing on maximizing stockholder value
When someone suggests that dividends are not the same as a stock buy back, what they are actually not explaining is that there is not necessarily a relationship between the value of a business and the total market value of its stock - which is a completely different issue unrelated to stock buy backs. These individuals do not have a basic understanding of accounting and specifically retained earnings on a balance sheet.
dark side? His Rolling Stone articles were great. You only like writers when you agree with their viewpoint?
The article is very helpful. The discussion generated is excellent and is just as important as the article. I think that is an important role for journalism. One of the core arguments from the investment community is that management exhausts the supply of projects that generate positive returns. I have managed factories for 45 years and can tell you that no US factory ever exhausted its ability to generate new positive returns. Toyota is a great example they make millions of mini-investments that strengthen them long term while the Big Three automakers do not. These mini investments have little NPV but high returns and result in a company with more cash to invest. As a result the big three all leave the small sedan market and Toyota is investing in the Corolla in the US. Another example is the US coal fired electric generation business. They produce coal ash. There is a market for coal ash, it can be used a concrete additive. It has to be processed when it is produced. This requires an investment. The utilities do not make the investment they just pile the ash on site next to a river waiting to be cleaned up by the public later. The investment has positive cash flow but will have a lower NPV than the plant itself so it does not get done. We now import coal ash from China for our concrete plants creating a circle of stupid nonsense.
At the risk of getting dragged back into this debate after some further consideration I will give Matt many cudos for generating an insightful discussion with his article (my qualms on technical inaccuracies / over simplifications notwithstanding). On reflection I think it's also worth noting there are differences in the types of buyback -- there are two broad types 1) is a debt fueled one time "leveraged recapitalization" which is often favored by activists who want a "quick buck" and are often resisted by more conservative management teams and 2) is ongoing normal course "flow buybacks" which in my mind are very similar to dividends but more flexible to turn on and off as the company needs money for other purposes. I personally as a rule disfavor the first as I think a sudden leveraging like that is a pretty risky proposition and is basically a "public market leveraged buyout" and really doesn't generate any value per se (hence my point that buybacks don't really juice the price). There's also a valid argument that the "short termists" are extracting resources and running off in this type of "financial engineering". The irony here is theres are not 10b-5 buybacks they're "tender offers" (I'm not a lawyer but my understanding is they're governed under a different provision) so arguably this SEC rule should be less problematic as it allows more ordinary course "flow buybacks" like I outline in 2. As I've mentioned in other posts I see a lot of validity in an argument line that boils down to "you're taking too much risk at the expense of the public (ie you might need to get bailed out", your long term shareholders, and your employees who have built careers here all accruing to the advantage of short-term activists." I think the real issue boils down to an issue of scale/prudence vs a choice of mechanism to effect distributions and how you even define "excessive or imprudent risk." The reality is that question is often answered on the basis of "comparables" and "precedents", which in simple terms means you take a look at what others are doing and do something not too far off from that. To "Open source currency's" commentary elsewhere this does in some ways lead to a "tragedy of commons" as for every 9 cases that people don't push the envelope there's always 1 that does (made up numbers) and the effect there is if it goes well the "precedents" drift up o the risk curve this systemically means you'll have market participants (management, investors, etc) convince themselves whatever envelope they're pushing isn't too risky because it's not that much more aggressive than the last situation (which worked out) ... that keeps going until a bubble pops. Now how do you solve this? I truly have no idea!