US corporations announced $437B of buybacks in Q2 2018, doubling previous record
money.cnn.com
money.cnn.com
Market cap and higher the stock values also can be used in so many different ways, like acquisitions and also as a tool to leverage as an equity against which money can be borrowed.
I loose respect for companies which go an extra mile to exploit loopholes. All companies do it. For example - Apple borrows money to pay dividend to stock owners even though they have unbelievable amount of money. But somehow the messed up US tax code this action sounds logical.
If Apple didn't do this they'd get sued. Activist shareholders would be all over them in an instant.
That puts them in a tough spot. I'm sure Apple would rather that loophole was closed, it's really absurd that they have to do all this just to make it work, but there's nothing they can do about it.
The problem here is that the US tax system is utterly bizarre.
https://www.marketwatch.com/story/apple-isnt-really-sitting-...
As per-worker productivity increases and wages continue to see only modest gains this trend is likely to continue. That's worrying for the vast majority of Americans who aren't executives or shareholders.
Further, organizations can be for profit, non profit, or not for profit each of those are distinct things. So what distinguishes companies from other organizations is simply the profit motive, otherwise they would be something else.
That said, they can have other motives on top of profit seeking and need not seek profit over all other goals.
particularly when we're cutting off a key historical component of those models: immigration. people are the drivers of growth; more people ==> more economic activity.
and whatever your politics, it was pretty obvious to anyone with a pulse that the tax holiday would go to shareholders, not to wage increases.
and without more people to sell things to, the ROI on capital investment is not so great.
so rather than into reinvestment or rewarding workers, money principally flows to capital holders.
It is a tax efficiency thing, nothing more.
You have to ask yourself, particularly as a shareholder but also a member of society, do you want the company to extend into other industries where they could not only be over-extending themselves beyond their core competency but also over-exposing themselves to macro-economics, geo-politics and anti-trust issues.
Do we want all companies to chase monopolies in multiple domains like Amazon? Should Verizon/Comcast/etc. use its monopoly profits from telecom to go after media, then cloud computing and then conquer consumer goods and healthcare or should it just return profits to share holders? If the money goes back to the shareholder, then the shareholder can go find the category leader in those other domains and invest it more wisely.
That said buybacks can definitely be manipulated by some management teams to game their compensation, which is a definitely bad thing.
But realistically we're in a situation where that is not the case, and it's dishonest to make arguments as if it is, or to have a hand-wavy "I guess it's possible it could be bad" throwaway line at the end to dismiss the pretty obvious reality that buybacks are not being used for the purpose you yourself advocate.
That said, this economist that some HN'er recommended seems to think earnings are strong and much of the buyback is funded by repatriated money if I understand him correctly.
The current power structure in the US believes tax cuts are always a good thing, since they put money back in the hands of individuals and companies, who will then allocate that money more efficiently than the government. They argue that with their tax breaks, companies will invest in capital improvements and raises for their workers, and individuals will spend more on consumer goods, indirectly benefiting the average worker by creating more demand for such goods.
The reality is companies that get tax breaks now use that money to do stock buybacks which pay off mostly already-wealthy investors, and the prime direct individual beneficiaries of tax cuts also are already-wealthy people, who then use their double windfall (lower tax rate + buyback profits) to throw even more money into playing the markets.
And somehow the promised benefits, of raises for workers, increased demand for the average worker's labor, etc. never actually materialize.
There are good charts floating around showing how corporate behavior has been pretty much entirely driven by the last few decades of tax policy, primarily the reduction of corporate and top individual rates, and how the changes in behavior have almost universally made economic inequality in the US much much worse than it previously was (see, for example, ballooning executive compensation while average workers' wages are stagnant or even lower than previously when adjusted for inflation, the complete decoupling of wages from productivity, etc. etc.).
However, at the macro level, the environmentalist in me worries, at the extreme end if wealth really was fully distributed and everyone was living like Richard Branson, Imelda Marcos, etc. with multiple houses in every city (each with a 4 bedroom layout, TVs and wet bar in every room and an SUV in every garage), a yacht, a private jet guzzles premium fuel and a private island, the environmental ramifications would be disastrous.
There are other options. Some countries use taxation policy to try to set a floor through which nobody is allowed to fall, and as a side effect also limit the ceiling of how high up someone can be on the wealth continuum. Why isn't the "environmentalist" in you familiar with this idea?
[1] http://www.businessinsider.com/congratulations-to-cisco-insi...
Goldman Sachs : "every percentage-point increase in labor-cost inflation will drag down earnings of companies in the S&P 500 by 0.8%"
https://www.wsj.com/articles/wage-gains-threaten-to-squeeze-...
https://www.reuters.com/investigates/special-report/usa-buyb...
Let’s recall those heady days of 2006 when home prices were rising 10, 15, even 20 percent a year, allowing millions of homeowners to refinance mortgages and collectively take out more than $300 billion in cash from the increased value of their properties. Some spent the money on furniture, appliances, cars and vacations, adding fuel to an already roaring economy. Others reinvested it in the already booming real estate and stock markets. When it finally occurred to everyone that those houses and those stocks weren’t really worth what the debt-fueled market said they were, markets crashed, banks flirted with insolvency, and the economy sank into a deep global recession.
Now, 12 years later, it’s happening again. This time, however, it’s not households using cheap debt to take cash out of their overvalued homes. Rather, it is giant corporations using cheap debt — and a one-time tax windfall — to take cash from their balance sheets and send it to shareholders in the form of increased dividends and, in particular, stock buybacks. As before, the cash-outs are helping to drive debt — corporate debt — to record levels. As before, they are adding a short-term sugar high to an already booming economy. And once again, they are diverting capital from productive long-term investment to further inflate a financial bubble — this one in corporate stocks and bonds — that, when it bursts, will send the economy into another recession.
Go read the whole piece. Whether you agree or not, it will make you think:
https://www.washingtonpost.com/business/economy/beware-the-m...
What would be the point of that? A stock buyback is not an investment, but rather a transfer of wealth that's not taxed very much.
1. The share price may go up
2. The dividends pay out
These have been the reasons for buying shares since shares of the Dutch East India company was chartered. If neither of these ever happened, there would be no shares purchased.
A buyback is just a bonus instead of a salary.
You could make the criticism that a company having nothing better to do with its money is bad, and I agree, but in the interim paying it out as a bonus is a great way to reward shareholders for holding. It's also better than a dividend in case next year the company does find something better to invest the money in, because investors really don't like when companies decrease dividends.
When the stock is tanking your company is usually in rough shape and has no money for such reserves for a buy-back, the cash will be necessary to survive or restructure. In those situations, when things get really dicey, they'll do share consolidation. That's often to avoid getting de-listed when their stock price dips too low.
What boggles my mind is how so many people vote "for jobs" promised by a particular party, get shafted, then go right back to the same party next election cycle and eat up the same rhetoric about job creation in exchange for votes.
Price < Value
This is very interesting and shows that there is an amazing amount of cheap cash available that is just piling up. Spending that cash on buybacks increases the value of the outstanding stock that existing shareholders have and then supply goes down, price goes up and the stock price goes up.
Dumb investors.
Buybacks increase the share price and that is why board of directors prefer them over dividends (since their bonuses may be tied to them) but this is simply an aligning of preferences. If I own a company I want it's value to go up.
If I could choose between my $100 stock going to $110 or my $100 going to $105 with a $5 dividend I'd choose the first since it is more tax efficient.
No buybacks provide a potential tax advantage for investors. Dividends have tax consequences in the year that they're received. Buybacks lift the price of the stock by an equivalent amount but do not force the investor to realize the gains so they can defer the taxes to a later date.
This assumes that the share price has maintained that elevated level at a later date.
Ideally, you want to cash out on some long-term positions right around the time of the buybacks. The buybacks have raised the share price, but you’re only paying long-term capital gains taxes, which used to be capped at (I think) 15% for all investors, regardless of income bracket.
Some employees get bonuses every year based on how the company is doing. Employees are OK with getting a lower bonus next year. Employees get very, very unhappy when their salary gets decreased in a bad year.
Investors are the same way. They punish a stock when a company decreases its dividend. If you aren't sure you can make a promise in perpetuity, don't increase your dividend, instead give shareholders a bonus, aka stock buyback. Then, if next year you need the cash to invest in the company, instead of another buyback, you do that. Investors stay happy because you didn't decrease your dividend.
Some companies, like Target (which has never decreased its dividend ever) might have a hard time competing with Amazon because Amazon can make almost no profits on paper (until recent years) while funneling all their revenue back into the company. Target does not have this luxury. They DEFINITELY cannot say to investors "okay we're cutting our dividend for 2 years to compete with amazon by funneling it into growth." They'd get crushed.
tl;dr, buybacks are wiser than dividends for any company that might want to spend the money on growth in following years, instead of doling it out to shareholders, as is done with dividends.
Another reply already explained the tax implication reason.
Three cheers for the Trump tax cuts that we were promised would boost wages. How much did we add to the deficit for this crap?
Sure, but the 'anyone' includes a large (though not majority) portion of the US voting population. Now what?
Until there's a way to disrupt that, to break up this tribe into smaller, less significant groups, this is how things are going to be.
It's not that they're relatively uneducated, but that they're negatively uneducated: viewers of Fox News know less about world events than people who don't watch any news at all.
Now you can exist in a bubble of Rush Libaugh, Alex Jones, Fox News and other extreme right-wing publications and find yourself utterly isolated from anything resembling objective truth or actual journalism. In that bubble you won't know up from down, you'll just cheer for your "team" to win.
There was also much more variety, but since then most of the newspapers and news networks have been bought up by a relatively small amount of companies. Clear Channel was allowed to own thousands of radio stations.
[0] http://www.businessinsider.com/these-6-corporations-control-...
Or one.