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Comment by mdorazio | Hacker News Reader

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

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

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

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

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

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

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

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

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

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

http://blog.yardeni.com/2018/06/buyback-bonanza.html

I'd look at it more as:

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

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

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

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

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

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

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

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

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

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

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

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

Why haven't institutional investors fought back?

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

It is certainly one point of companies.

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

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

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

In practice companies don't act that way.

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

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

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

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

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

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

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

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

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

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

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

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

It is a tax efficiency thing, nothing more.

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

Actually the data suggests the reverse.

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