How the coronavirus is creating a political opportunity to overturn one of the worst practices of the kleptocracy era
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?!
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.
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.
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.
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.
A new subscriber so I'm too late on this one but this is your worst article so far. As MA says below I just don't think you understand the mechanics of buybacks, and you blur the issue by combining it with the bailout. No matter what airlines did, buy new planes, pay dividends, give raises to employees etc, when everyone stopped flying they were going to be in trouble. The only solution would have been to hoard cash, and there's a good case to be made that they should have had more cash, but making companies hoard enough cash to withstand a total economic shutdown is going to be a huge drag on the economy. Buybacks are in every way identical to dividends, it's cash going out to shareholders. The only difference is that buybacks avoid the double taxation that's inherent in dividends. But the end result is the same. In theory, once companies have paid their bills and made whatever capital expenditures are needed, they need to figure out what to do with the remaining cash. That will either go to creditors, by paying down debt, or stockholders, through dividends or buybacks. Or it stays on the balance sheet. For an airline there's an excellent case that they should keep cash lying around like auto companies typically do. But for a company like Apple or Facebook it would be crazy and counterproductive.
Now, I get why you resent bailing out the airlines, although as I said above they'd need it regardless of buybacks. But again the bailout is supposed to help employees keep their jobs, and of course the country needs a functioning aviation system post pandemic. And both those goals are served through the bailout. If you want to punish the airline management for being reckless, that can be a separate matter and done by canceling their stock options or requiring them to resign as a condition of the bailout, or in a sort of French solution, the government could become shareholders.
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.
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.