End Stock Buybacks, Save the Economy?
nytimes.com
nytimes.com
To be honest, I wouldn't be surprised if Apple also compensated some high-value non-engineers in stock. To find the actual number of people who benefit, you would have to include them, plus you would have to add in all the people who don't work at Apple but own Apple stock directly or indirectly (for example, while I don't work at Apple, I probably own some stock because of my participation in a mutual fund).
I'm pretty certain that there are tens of thousands of people who see an increase in earnings because of Apple buybacks. The majority of them might be well-off since they are engineers or have the luxury of purchasing mutual funds, but I am hardly a millionaire or billionaire.
EDIT: Did more Googling; Apple's stock jumped around 12% after announcing their buyback, so the bonus is around 3%. I would love a $6000 bonus/year for the next few years. [0]
https://www.forbes.com/sites/chuckjones/2018/05/12/what-impa... [0]
General consensus I've seen on Blind is that FANG engineers take in about half their wages in stocks, but that includes multiple years of RSU refreshers and appreciation.
But there's another way to think about it: buyback money isn't that much different than a dividend where people self-sort into who wants the money now versus later. Apple approved a 100B buyback program in May, and 4,915,138,000 shares outstanding. 20 bucks a share. Most offers I've seen on blind are around $100k of shares, so for AAPL at today's market close price that'd be $9300 dollars returned. Probably a bit more given they're at an all time high and the announcement was a few months prior.
So the 12 percent figure kinda makes sense: 10 percent or so of the shares announced to be retired via, and a 2 percent jump is explainable via typical earnings.
I doubt you'd find an engineer paid in RSUs who wanted to end buyback programs, but maybe one will pop up on HN and enlighten us.
http://www.wolframalpha.com/input/?i=0.0785%25+*+1+trillion+...
These one time increases and whatever other bread crumbs that get handed out are sculpted to feel good at that moment, but pale in comparison to the truck that's going to hit them down the road when the completely unnecessary government budget deficit as a result of tax relief for the rich starts eating away bit by bit at the government and country. This isn't hyperbole. This is history repeating itself.
Apple has an Employee Stock Purchase Program, where you can automatically invest some percentage of your salary (I forget what) into Apple stock, which gets purchased on your behalf every few months at a discounted price. It's a pretty nice program and it means anyone who takes advantage of it (which really should be every employee who isn't living paycheck-to-paycheck) will benefit from an increase in the stock price.
Why is this undesirable? Simple. Lower and middle class workers drive the economy with their consumption. If they don't have stability, they don't spend. If they don't spend, the velocity of money through the economy decreases. You want workers to feel comfortable spending, and the only way to do that is by giving them stability along with a fair wage.
It's possible it would be if it was more tax advantageous to pay workers then to pay out profits as buybacks through the most recent tax cuts. Clearly, taxes matter in corporate decision making, as large multinationals were keeping their cash offshore as long as possible, waiting for a tax holiday.
Social security, workplace safety, overtime ... all just magically appeared, correct?
Because maybe, again, just maybe, I'm being dense, but I don't think "skillsets" were ever a limiting factor for those who spearheaded unionization. "skillsets" are a facet of the bourgeoisie labor market, which I say as a firm capitalist. It's always been those at the bottom who have fought for worker's rights.
No. It took capitalism—more precisely, the resulting accumulation of human wealth and technology—for child labor to disappear. It disappeared when it became economically unnecessary for children to work:
http://atlanticsentinel.com/2011/01/did-government-end-child...
I am continually surprised by the number of people who seem to be under the impression that the default state of nature is one of abundance rather than scarcity. Why do you think children had to work in the first place?
The rate workers are paid depends on the market for their skills and what retention the company wants. Worker pay will increase as the economy heats up and causes the labor pool to tighten.
The idealized enterprise value of a firm changes not one whit whether capital is returned to investors via a dividend or a stock buy back. There could conceivably be small differences in transaction costs between the two, but in practice, they’re very similar.
Generally, the enterprise value of large amounts of cash for most firms is less-than-par, because investors fear management making vanity purchases that destroy value. So long term investors are much happier if capital is returned, and much happier if the method of return is via stock buy back.
If you've got mountains of free cash, there are a lot more exciting opportunities out there. You can afford to make higher-risk/higher-reward investments. You can buffer yourself from that next surprise recall/product failure/fulfillment problem. You can make sure you have a stake in anything that looks like it could someday be an existential threat.
There’s a reason (many) successful companies don’t just go off and become massive conglomerates attempting to pursue every idea any executive has.
Areas where the board feels it has a competitive advantage, an investment opportunity, and enough management capacity to oversee the new investment are not, in fact, dime a dozen.
The principal agent problem is real and relevant for every organization of any size.
Anyone targeting a specific PE for a company will sell the stock to counter the increase as the cash balance (and PE) decreases.
> Lazonick’s research has focused on the role of the innovative business enterprise in generating productivity and sharing these gains with employees as the foundation for stable and equitable economic growth.
For example, a sentiment like:
"A history of buybacks has a positive long-term effect on stock prices, because investors like buybacks."
becomes
"A history of dividends has a positive long-term effect on stock prices, because investors like dividends."
At that point, you're left with the somewhat valid 10% of the argument: trading in the open market causes short term price moves. Is there is any evidence that the SEC is insufficiently vigilant against, say, any executives who exercise options around the buybacks? If so, that does constitute manipulation by the executives and negligence by the regulators! If not, the SEC is doing its job. The opinion piece makes Rule 10b-18 out to be some kind of backroom deal, whereas this is the SEC doing its job: clarifying the law with enough precision that everyone is playing by the same rules. The SEC is charged with making & reassessing these rules. For example, if they thought that 25% of ADV makes too much noise and is bad for the market, they can tweak the parameters.
Some reactions to other sentiments on this thread:
> I wish more big stocks... paid regular dividends instead of buybacks
Money is money. It doesn't matter whether you feel paid; it matters that a buyback does in fact pay you a dividend.
> This is orthogonal to worker pay
Bingo. This discussion is orthogonal to important questions of unequal opportunities or outcomes, or of redistribution, or the growth of intra-national inequality (while incidentally, things have become more equal inter-nation).
The difference is a buyback only turns into money if you sell.
That said, I actually think his theory is a reasonable one and I'm more confused by comments on HN like this one. It sounds like you're saying essentially (1) your buddies disagree and they know better, and (2) buybacks may help the economy overall because they move cash from less efficient businesses into more efficient ones.
Are you saying that the company buying its own shares is doing so because it's not very efficient? Shouldn't efficiency be reflected in the price of a business due to market forces? If the only place a company can find to put extra cash is buying out its own shares then that doesn't sound like a valuable business to me, and in a healthy market I would expect the price to go down, not up.
Now, I am happy to change my point of view when I am unable or haven't the time to learn a topic more on depth even if I don't fully understand the details or resolutions of apparent superficial paradoxes. But when even basic explanations from an author defy logical sense - not a lack of domain knowledge - it raises a red flag for me. I'm not going to suspend critical thinking to entertain the fallacy of authority. I only cite the counterarguments I cite because even in their simplicity they demonstrate gaps in the case the author is making. I am more than happy to have someone better versed give a better account for why buybacks are worse than, say, sitting on cash or dividends.
By the way, I managed to find a really good piece on Bloomberg that lays out both sides in a pretty objective way: https://www.bloomberg.com/view/articles/2018-05-08/apple-s-s...
I'm no expert, but I feel like sitting on cash isn't as terrible a thing as people pretend. Cash encourages risk taking and innovation. The more cash you have, the bigger risks you can take. Nintendo keeps a lot of cash around and they're one of the most consistently innovative game companies. Sometimes their products flop (Wii U), but sometimes they're wild successes (Switch).
It's like Congress agreeing to raise their own pay. Is it rational? Not really, but who among them, the people making the decision on government spending, would disagree with this move? Maybe one or two with principals, but not many.
EDIT: Is it rational for the sake of the overall system I mean. It's obviously rational from the perspective of those increasing their own wealth.
The remarks about efficiency also seem to be an outcome, not a motivation. Cash in the hands of investors should always be more efficient than cash in the corporate treasury.
The market (i.e. the shareholders getting the cash) is a better mechanism at finding new investments than the executive leadership at the widget company. As a widget company investor I invest in their widget making skills, not their skills in essentially starting new businesses.
Going down from where to where? If I had a money printing machine that produces one million dollars each day, how is that not a valuable business? (Of course if I knew how to build a second machine for a few billion dollars the business would be even more valuable.)
The decision to perform stock buy-backs could be an indication of the general pessimism that corporations have about the economy. If consumer debt is at an all time hight, how can we find more people to buy the products we are making? We tried giving people more debt than they could handle (mortgages) and that ended in spectacular disaster in 2008. So maybe the only thing corporations can do to increase value is to rely on buying back stocks! Makes a lot of money for some people..
The stock market seems to have lost hold of its very basic premise:
1) Companies need money, so they sell equity in public markets
2) The people who buy the equity, if they are rational, value each share as some fraction of the net present value of all future cash flows
3) As the company moves forward and realizes those cash flows, they pay back cash not needed for reinvestment to the investors as dividends.
A rational market would be a better market, and more dividends would, in my opinion, increase rationality.
Apple does both. Not sure where that puts it....
They are also doing buybacks.
https://www.irs.gov/instructions/i1099div#idm140075526633184
Short term capital gain income is taxed as ordinary income. Long term capital gain income is taxed at a favorable rate called the "long-term capital gain (tax) rate."
You have the rates for qualified and ordinary dividends backwards. Qualified dividends the ones that get taxed at the same lower rate as capital gains income (i.e., they "qualify" for preferential tax treatment).
And I would argue that, in effect, the capital gains are taxed less because the tax is not taken out each year, and instead the capital is left to compound.
https://www.irs.gov/instructions/i1099div#idm140075526633184
"Capital gain dividend" does not mean the same thing as "qualified dividend."
Capital gains are, however, absolutely owed on qualified dividends.
In either case (with the added assumption that we're talking about securities held in a non-tax-advantaged account), your brokerage will send you an IRS form 1099-div.
https://www.investopedia.com/ask/answers/011215/if-i-reinves...
Look, for instance, at the proposal to reduce the deductible limits for retirement contributions.
Really? I thought qualified dividends were taxed at the same rate as long term capital gains. This is zero for very low-income taxpayers, but certainly not "wealthy" ones, like you describe. Or perhaps I'm missing something?
The trick is somehow the popular media has changed the word wealthy to mean high income instead of, you know, having wealth.
Also, this is equally true for LTCG, so in the context of this discussion (qualified dividends versus buybacks, which increase LTCG), it doesn't move the needle one way or the other.
The tax code makes a bright line out of the distinction between income and capital that is, economically speaking, quite fuzzy. Depending on your need for liquidity and your means of acquiring it, it might not be really there.
Not a particular trustworthy site, but whatever:
[0] https://www.thebalance.com/how-to-use-the-zero-percent-tax-r...
I am happy to make the normative statement that any tax code that creates such an incentive probably is badly designed, though.
If you were not actually arguing along these lines and were merely correcting his terminology without rebutting his main point, I would have expected you to preface your comment to this effect, e.g., "Not disputing your point, but technically this doesn't qualify as 'double taxation' because...".
Apologies if I've misinterpreted.
That distinction exists for a reason.
Since, as you say, the corporation is legally distinct, whether I own the whole corporation or just part of it is neither here nor there. My objection is the same, which is that there are two tollgates between me and what I see as my share of the income.
Australia's corporate tax system allows for "franking credits". Shareholders receive these from companies based on their proportional ownership. The income tax paid by the corporation may be offset against the income tax owed by shareholders.
Unsurprisingly, Australian companies are much more likely to pay dividends.
Given that many long term investors believe in dollar-cost averaging and explicitly refuse to try to forecast if the price will rise or fall over the short run, both groups can be right at the same time and aren't directly opposed viewpoints.
Ackman’s short of Herbalife wasn't a long term short so much as a long series of short term shorts (also this is not a very common occurrence or he wouldn't be so famous for doing it). The most common means of shorting a stock is to buy put option contracts. Those contracts have an expiration date by which you must cover the put. That date is seldom more than a few weeks in the future. Therefore, because of these short term contracts, most short interest is short term and assumes that a correction is imminent.
At the same time that someone is speculating that a stock will go down soon, other people are investing long based on a thesis that over a long time frame the stock will go up. These long interests are often regularly investing smaller amounts into a stock as opposed to one large investment all at once. This practice, called dollar cost averaging, is frequently undertaken to avoid trying to short term time the market (under the belief that short term price predictions are often wrong).
Taking these two strategies together, you can simultaneously have someone short a stock they expect to go down soon and someone else long a stock they expect to go up over 5-10+ years. Both can be right at the same time. You can then derive from this point that short interest is of limited to no concern to a long investor, which was my original point.
Herbalife is an excellent example of the market providing the right incentives and those incentives working out in the way we want them to. If Ackman had exited his position after the original corrections were made by Herbalife everyone would've won: he would've made money, long investors would have a stronger company, and Herbalife would be a real business. Instead he doubled down and so he lost, but everyone else still won.
This sounds like a really high functioning market to me. If you think TSLA is bound for 0 there are ways you can make that bet today. The fact is no one thinks that, and so no one is trying to make that bet. Same with Twitter.
> Taking these two strategies together, you can simultaneously have someone short a stock they expect to go down soon and someone else long a stock they expect to go up over 5-10+ years. Both can be right at the same time. You can then derive from this point that short interest is of limited to no concern to a long investor, which was my original point.
Right, but this doesn't mean that the incentive to devalue companies that need devaluing doesn't exist.
So as I said, I'm still not sure what you're arguing. Shorts seem to be doing what we want them to do. The market does not seem broken.
That's exactly the reason that some companies don't pay dividends. It leads to irrevocable gain, which means it adds to your tax liability.
Whereas, if a stock rose in value, there's no immediate tax implications for the investor. A lot of investors prefer that. In fact if the stock is donated instead of cash, there's never a tax implication.
Stocks likes TLSA and TWTR have high multiples because they stand a decent chance of having a lot of growth in the future, they have a lot of volatility because that growth is uncertain. These are fundamental facts about their business that wouldn't go away if they squeezed out some sort of token dividend.
twitter, surprisingly, is actually showing a positive EPS (is that new?) although the P/E is > 100 so, again, a dividend would be pretty small.
at least apple is paying out these days.
Why don't you just sell a bit of your holdings each year, and get this irrevocable return yourself?
And if others don't want to sell and be taxed each year, they can just hold onto their shares (and continue to be subject to market risk).
The difference is that if the company pays dividends then the stock price will drop because it represents a claim on a smaller amount of assets. So you can achieve exactly the same effect yourself by periodically selling a small percentage of your holdings. It's like having a big piece of a small cake versus a small piece of a big cake: if you get the same amount of cake in the end then who cares how it's shaped.
I feel like people have been conditioned to get an irrational hatred when they hear the word "buyback" as if it were some evil trick pulled by those evil banksters over in wallstreet. "buybacks are killing capitalism" blah blah. Its pure FUD that comes from finance being complex and the average person not being nearly informed enough about it to parse it correctly.
Buybacks and dividends both are ways of returning capital to shareholders. Dividends do it directly, buybacks do it by raising the share price.
Example: Company makes 100$ profit and is worth 1000$ @ 1$/unit. You own 100 units of stock. Lets say it pays out everything to shareholders every year, once a year, at the end. It can pay this as a dividend, so you would get 10$ at the end of the year, for a total of 110$.
Or it can do buybacks, and buys 100$ worth of units, effectively removing them for existence, and lowering the total number of units to 900. The company still makes 100$ though, and to keep the same ratio of price to earnings, 10 (=1$*1000units/100$), the price of each unit needs to rise to 1.111$, making your shares worth 111$.
As you can see, they are pretty much identical, both giving 10% returns, except dividends are taxed much harder so buybacks win. The buyback shares are worth 1$ more, because this is a simplified example and I don't account for compounding, and you would have to continuously collect dividends and reinvest them continuously to get the same result(111$), which more closely approximates what happens in reality.
Dividends are just traditional, buybacks are just another way to do the same thing. Your "dividend" is the share price increasing over the course of the year.
Say a company is worth $1000, and has 100 shares outstanding, for a share price of $10.
They can pay a dividend of $100, reducing their value to $900 (share price of $9) and paying out $1 per share to shareholders. In the end, the shareholders still have $10 of value per share, but some was forcibly liquidated!
Alternatively, the company can do a stock buyback of 10% of their shares. They spend $100 destroying 10 shares. The company is now worth $900 and there are 90 shares outstanding - investors still have $10 worth of value, whether they sold their shares or not.
In the end, no value is created in either scenario - capital is just returned to shareholders.
This is still a simplification because: 1. Stock prices often rise on the announcement of new dividends/share repurchases for similar reasons. It's a positive signal to investors that either of these things will happen, and affects their valuation of the firm. 2. Investors like capital-efficient businesses, and either of these methods of returning capital can actually create value for investors.
Perhaps the capital gains rate should be raised to make buybacks equally attractive, tax-wise, to dividends. Perhaps it would spur investment over paydays.
I'd prefer to target whichever factor correlates best with how much the person can afford to pay. A capital gains tax is bad by this analysis, because it also hits the retirement accounts of poorer folk. An income tax increase for high incomes would only affect the rich.
The main reason I would increase the capital gains rate is the very richest, like Warren Buffet (as he himself pointed out), pay a lower rate than much less wealthy/lower income people due to the favorable capital gains rate. This sort of inversion shouldn't exist in a progressive tax system. Personally I view one of the several valid goals of a tax system to be keeping income/wealth inequality within reasonable limits and I think this would help with that.
Given that interest rates were so low from 2009-2017, many companies actually issued debt not because they needed the money but in order to do stock buybacks. Some companies such as McDonalds have definitely overdipped as their revenues declined significantly, but other companies like Apple and Microsoft were smart to do it while maintaining growth.
Apple had $0 long term debt in 2013. At the end of June 2018 they held $97B!!!
The average debt interest for AAPL and MSFT is somewhere between 2-2.5% interest, and prior to the 2017 Jobs act the interest payments were 100% tax deductible. I think that's a key part of why companies did this, they viewed the debt as basically free money after inflation and the tax deduction. Unfortunately this is less tax revenue for the US government and its citizens, so in effect its us the taxpayers that are funding the debt for the buybacks. The NY Times opinion piece fails to mention this aspect. It would be amazing to hear from a CFO on the topic.
Since the 2017 Jobs act companies are now restricted to 30% of their pretax income being deductible to interest. For fiscally responsible companies like AAPL, MSFT, they're nowhere near to 30%, so the intent of this change is largely moot.
Now for a real financial hacker -- i'd like to ask about a wild idea, what happens 2 years out from now supposing that interest rates remain high. All companies looking to raise debt will have to raise at 4%+ interest, and CECL and the fed reserve rate increases will see banks requiring much larger deposits than toda. The bond holders for MCD, MSFT, AAPL, etc, could look to sell to increase their reserves and also get better returning assets. Will megacorps be able to buy back their own debt above fair market value, but above below their principle amount, in effect having earned money on the debt they issued?
> Apple had $0 long term debt in 2013. At the end of June 2018 they held $97B!!!
They also have much more than that in cash (and cash-equivalents). If you want to make a point about companies giving to shareholders money that they don’t really have Apple or Microsoft are not the best examples.
lol...maximizing shareholder value is a cause of sagging productivity? Do these people even read their own words before they publish them?
This whole 'stock buybacks are evil' meme is beyond silly. The only difference between dividends and stock buybacks is tax efficiency. So yes, corporations are avoiding some tax burden by doing this, and that may be a bad thing - so change the tax policy. But there's no reason to expect stock buybacks are the cause of anything other than a slightly lower tax bill, and, predictably, this article doesn't even bother to try to make the actual case otherwise. It just makes a bunch of blanket, baseless and unsupported assertions.
It's seriously irritating the absolute garbage that gets published in places like the NYT these days. This article doesn't even try to make its case. It just pushes a narrative with innuendo and bald assertions. How can something like this possibly get past their editors?
I’m not saying the article is faultless, but I don’t agree with the reaction to the quote you selected. It seems very reasonable to me.
It’s exceptional to me to say that companies pursue maximizing shareholder value in a way that generally accomplishes that goal, or to disagree with the conclusion that companies are mostly stagnant in terms of actual productivity measures and have been for a while (something that highlights the current extreme incongruity between aggregate financial metrics and societal productivity metrics). Those positions require extreme, special evidence since they are so at odds with reality.
No, I did not suggest that.
> “People make multi-decade investments all the time.“
No, that’s a bonkers and ridiculous claim. Some extremely small group of people might make such long-term investments, usually real estate consortiums and mining rights consortiums, but it is an extreme minority of all investment activity, and even more extreme if weighted by dollar value. And even after all that, such investments are still usually made based on net present value calculations with short time horizons, combined with forecasts on the liquidity of the asset (e.g. secondary markets for long-term debt instruments or options or futures for rights-based initiatives).
> “The idea that business people are out there systematically avoiding any and all long term investments is patently false and completely unsupported by any evidence i'm aware of.”
This seems like a statement about what you’re aware of, and not a statement about long-term investing, which it seems by your own admission, you’re not aware of.
The author makes the point that, when companies spend so much on stock buybacks they don't have reserves to keep things running in economic downturns, thus leaving them in grave danger should recession come around, and leaves their employees more exposed than they need to be. I think this is a point worth talking about, especially if you feel it's not true, because by calling it a meme and not countering it, you've given no chance to bat for your own opinion and offering counterpoints.
On the subject of the first quote, I'm no economist, but it seems perfectly feasible that optimizing for shareholder value does not perfectly correlate to optimized productivity. For example, Musk wants to take Tesla private because he feels the quarterly stock review cycle restricts his ability to innovate and think long term. Musk is quite the capitalist, so I think the idea that optimizing for share price being bad for productivity is certainly worth presenting at the table.
If you read my comment, i'm applying Hitchen's razor: That which can be asserted without evidence, can be dismissed without evidence. They didn't make an argument.
> I see this a lot on the internet lately and I'm not sure why people think that different opinions can just be shrugged off and called "memes". That's not even what a meme is!
First of all, yes, it is exactly what a meme is. A meme is a socially transmitted idea with virality. That is precisely what I am asserting this "buybacks are evil" idea is.
> The author makes the point that, when companies spend so much on stock buybacks they don't have reserves to keep things running in economic downturns, thus leaving them in grave danger should recession come around, and leaves their employees more exposed than they need to be.
The author does try to make that throwaway point, though of course, provides no evidence that it was in any way related to buybacks. Just think through the idea you're asserting here: In the interest of maximizing shareholder value the company is going to make itself more likely to go bankrupt in the future? How does that maximize shareholder value?
Secondly, even if they were doing that, which there is no evidence that they are: if you ban buybacks, they'll just switch to dividends. If you ban dividends, you've now banned all mechanisms by which investors may be remunerated for their capital investment, and thereby effectively banned the stock market.
I think that's an interesting idea, I don't know if it's right or not, but since you just keep saying the argument makes no points while making no points of your own, I have no way knowing why you feel this position is inaccurate. Could you argue against that point instead of dismissing it? I'd like to hear what you think.
Can you point me to where they make that argument? I don't see it. They do sort of hint at it, here:
> To understand the magnitude of this shift, we analyzed financial data from 232 companies in the S.&P. 500 Index that were publicly listed in 1981, before the rule, and were still public through 2016. We found that from 1981 to 1983, these companies spent 4.3 percent of profits on buybacks. In comparison, from 2014 to 2016, these same companies spent 59 percent of their profits buying back their own stock. Dividends absorbed just under half of profits in both periods.
This data looks like it's trying to make you believe that these companies are allocating more capital to shareholder remuneration than they otherwise would. But it's not actually saying that. Dividends and buybacks are what you do with profits. If you re-invest your profits, they're not profits anymore, they're costs, so they aren't accounted as profit.
The point that you are making (that afaik, the article doesn't explicitly make) is a good one (if true): That buybacks shift the capital preference curve towards returning money to shareholders. If you wanted to prove that, you wouldn't look at the share of profits that go to buybacks, because all that would show you is that companies are preferring buybacks over dividends. Not that they are preferring buybacks over re-investment. Thinking briefly about it, you'd probably want to look at changes in revenue / capex, or changes in net-income to capex over time and correlate them with share of profits devoted to buybacks. AFAIK, the authors have not done this, and certainly haven't done it in this article.
EDIT: In a paper written by the authors, they do sort of do this, and it doesn't really show much:
> By decade, for 1984-1993, 1994-2003, and 2004-2013, total distributions to shareholders of these 248 companies were 79 percent, 79 percent, and 84 percent respectively, with the proportion of net income devoted to buybacks rising from 25 percent to 37 percent to 47 percent. High total payout ratios among major U.S corporations, therefore, are not new, but over the past decade buybacks have predominated in distributions to shareholders.
Note: previously in the article they establish that preference for buybacks is very low in 1984, and goes up dramatically through to present (2013). So, 1984 is representative of a 'low buyback' time.
So, the payout ratio from net income went from 79 to 84 percent. That's not totally trivial, but it certainly isn't "save the economy" levels of relevant. They basically acknowledge this: "High total payout ratios among major U.S corporations, therefore, are not new, but over the past decade buybacks have predominated in distributions to shareholders.". But make no real attempt to reconcile this with their point. And notably, they make no attempt to control for other factors here. That 5 percent bump may be caused by higher margins (e.g. in tech) or any number of other economic factors. Being extremely generous, the data is suggestive of a slight preference shift for returning capital to shareholders over re-investment in the business. However, to actually conclude that you'd need to do something much more rigorous than this. And to further conclude that this preference shift has negative effects on the economy, you'd need to do a lot more than this.
Paper: https://www.brookings.edu/wp-content/uploads/2016/06/lazonic...
> Dividends and buybacks are what you do with profits.
Retained earnings are a thing, and they are not automatically accounted for as investments.
In practice, growing a cash hoard might conceivably be better for an individual firm, allowing it to make new types of investments or add stability across the business cycle.
In practice, I think most of the capital returns people get all upset about are coming from companies that have gargantuan cash hoards. Wishing those companies would expand their investment and hiring is nice and all, but that’s all it is. A wish.
I don't know what that system would be, and I'm not going to come here and say it's time for a socialist revolution, but perhaps we could make a better free market and we'd all be better off without speculated stock prices being our primary source of motivation.
Speculation drives stock prices to where they ought to be. The whole point is to look for overvalued and undervalued stocks.
OK, let's address that argument.
The alternative to stock buybacks is stock dividends. Both of those mechanisms deplete corporate cash reserves, but stock buybacks do them in a way that causes the stock value to appreciate, which has tax benefits for shareholders that outright dividends do not. If there's no potential for corporations to distribute their cash reserves to their shareholders at all, then there is no point in having a stock market in the first place.
> For example, Musk wants to take Tesla private because he feels the quarterly stock review cycle restricts his ability to innovate and think long term. Musk is quite the capitalist, so I think the idea that optimizing for share price being bad for productivity is certainly worth presenting at the table.
There are countless businesses, including some of the most valuable public businesses in the world, for whom the quarterly review cycle is not an impediment to innovation and success. Musk is probably humiliated that Tesla is running out of money and has not been doing a good job of handling the transparency involved in having a publicly owned company.
For example, a cap implies that polluting X amount is bad, polluting X-epsilon is good, and then sets a market around that. But taxing pollution means the less one pollutes, the less one pays, with the idea that less is better.
The other advantage of taxing pollution is it provides revenue to the government, while regulations and caps do not.
This isn't an argument against taxing pollution of course, but it is an argument against removing taxes on "productive behavior" in favor of taxes on bad behavior. Taxing pollution (or other bad behavior) should be done with the hope that this revenue falls to zero over time, and therefore it should exist primarily to discourage the behavior rather than to act as a significant revenue stream for the government.
Here's the longer paper the author wrote a couple years ago that explains his reasoning. You may disagree with his argument, but to dismiss it outright as having no merit says more about you than it does about the author or the NYT.
https://www.brookings.edu/wp-content/uploads/2016/06/lazonic...
>Once the problems of strategic control have been addressed, the process of taking back the corporation can turn to the critical role of organizational integration. Productivity in an advanced economy depends on the extent to which members of the labor force have the opportunity to engage in collective and cumulative learning over the course of careers that may span 40 years or more. Under the Old Economy business model, major corporations supported this social condition through the norm of a career with one company, albeit almost exclusively for white males. It is unrealistic to assume that in a world of open-systems technologies and intense global competition the norm of a career with one company could, or should, be restored. That does not, however, lessen the need for collective and cumulative careers as the employment foundation of a highly productive economy. It is reasonable to believe that in the provision of lifelong learning through on-the-job experience, government agencies and civil society organizations, including universities, will have to continue to play important, and perhaps even growing, roles. The business corporation, however, will have to anchor a national system of career employment through a retain-and-reinvest resource-allocation regime. Jettison the downsize-and-distribute ideology of MSV, and U.S. business corporations can focus on becoming learning organizations once again.
>If hundreds of billions of dollars annually stop flowing out of the nation’s major corporations to do buybacks, then vast amounts of resources will become available to provide the financial commitment that innovation requires.84 Ban buybacks, and companies will be able to use these funds not only, or even primarily, to finance capital expenditures but more importantly to attract, train, retain, and motivate their career employees. In high-tech companies a significant proportion of these employees will be engaged in R&D, but the innovative enterprise needs experienced and motivated employees in a range of other functions as well. And some of the funds made available by a buyback ban can flow to the government as tax revenues to enable it to invest in physical infrastructure and human knowledge that can underpin the next generation of innovation.
I criticized him for not making an argument in the article. He didn't, nor did he link to this paper.
But sure, let's address this argument:
> >If hundreds of billions of dollars annually stop flowing out of the nation’s major corporations to do buybacks, then vast amounts of resources will become available to provide the financial commitment that innovation requires.84 Ban buybacks, and companies will be able to use these funds not only, or even primarily, to finance capital expenditures but more importantly to attract, train, retain, and motivate their career employees. In high-tech companies a significant proportion of these employees will be engaged in R&D, but the innovative enterprise needs experienced and motivated employees in a range of other functions as well. And some of the funds made available by a buyback ban can flow to the government as tax revenues to enable it to invest in physical infrastructure and human knowledge that can underpin the next generation of innovation.
If the problem with buybacks is that they return capital to shareholders then you're going to have to do a lot more than ban buybacks to stop it. If you want to argue against buybacks, you need to argue that they are worse than other methods of returning cash to shareholders. Arguments that they are bad because they return capital to the people who invested the capital are arguments against capitalism itself. And by all means, if you want to make an argument against capitalism, go for it. But don't pretend it's got something to do with buybacks.
But he did make that argument in the article. It's a short-oped so he didn't make it in the same amount of detail, but it is in the article. Did you read the entire article?
>A company’s profits are, however, the financial foundation for investments in productive capabilities, first and foremost in employees. Investment in training and retaining employees is the key to productivity growth and innovation, for individual companies and for the economy.
I'm not saying the argument is right or not. I'm saying your outright dismissal of the entire premise as garbage and a meme not worth considering is wrong.
No, he actually didn't. He did not articulate the idea that buybacks cause an increase in overall shareholder remuneration. You read that into what he said, but he didn't actually say it.
> I'm not saying the argument is right or not. I'm saying your outright dismissal of the entire premise as garbage and a meme not worth considering is wrong.
I stand by it. The argument is terrible and financially illiterate, even if you grant him the implied argument you make for him.
>A company’s profits are, however, the financial foundation for investments in productive capabilities, first and foremost in employees. Investment in training and retaining employees is the key to productivity growth and innovation, for individual companies and for the economy.
He does make that argument. He argues that buybacks incentives cause a higher % of net income to be spent on buybacks than dividends.
>We found that from 1981 to 1983, these companies spent 4.3 percent of profits on buybacks. In comparison, from 2014 to 2016, these same companies spent 59 percent of their profits buying back their own stock. Dividends absorbed just under half of profits in both periods.
You mean like, giving the value created by the corporation back to those to whom its original assets belonged before its success, as a reward for prudent thinking? That sounds it will incentivize valuable investments! Does he have a proposed mechanism? /s
> Productivity in an advanced economy depends on the extent to which members of the labor force have the opportunity to engage in collective and cumulative learning over the course of careers that may span 40 years or more [and this is decreasingly the case].
An important trend to consider, but the causes are totally orthogonal to buybacks/dividends. Technology is moving faster, and skills emerge and obsolesce in different ways than in the halcyon Old Economy.
> It is unrealistic to assume that in a world of open-systems technologies and intense global competition the norm of a career with one company could, or should, be restored.
Hey, he said a correct sentence! Good job!
> And some of the funds made available by a buyback ban can flow to the government as tax revenues to enable it to invest in physical infrastructure and human knowledge that can underpin the next generation of innovation.
Ooh, ooh, here's an idea...let's pass the money back to the investors who will pass it on not to a company that's saying "we don't know what to do with this much money", but rather one that says something promising like, oh I don't know, "we're gonna invest in physical infrastructure and human knowledge that can underpin the next generation of innovation". (And let's tax some agreed-upon amount of economic activity and use it to fund things that are genuinely better undertaken by a government)
It's part of the reason why the press has gotten so focused Silicon Valley and "tech bros".
The media has a narrative and will promote anything that confirms that narrative, and will ignore anything that doesn't.
So I'd say an obsession on the middle class getting screwed is not exactly misplaced.
https://www.cnbc.com/2014/01/29/-wage-stagnationcommentary.h...
But I wasn't surprised when I got to the bottom and found it was written by someone from the Johnson Center at Troy University, which is backed by the far right-wing Koch Foundation, so much that two years after this CNBC article was written, Troy University put out a statement saying they were going to stop getting involved in politics: https://www.al.com/news/index.ssf/2016/07/troys_johnson_cent...
This CNBC article is a submarine from the very people who created this economic model. Of course they're going to try to put a positive spin on it... because washing machines are cheaper now than they were in 1959! Proof that the average American worker is doing just fine.
Of course it's valid in the context of comparing how workers are doing today vs 60 years ago. The salaries today are buying the same perks.
What really matters isn't "how much does a washing machine cost", it's "does your salary keep up with inflation" and the answer is no: https://www.glassdoor.com/research/are-wages-keeping-up-with...
If companies were prevented from buying back stock, then executives would ask for their compensation packages and targets to be restructured to take this into account. So at the end of the day, executives would get the same amount of benefit, more or less.
Ordinary buy-and-hold shareholders wouldn't be able to rejigger their affairs in the same way, so they'd be somewhat worse off. It's not clear to me that this solves any big problems though...
That means 2/3rds if adults do, which is pretty good!
You can call this a wealth transfer, but only if you're willing to accept that every decision in the tax code is a wealth transfer. Graduated rates? Wealth transfer to the poor. Lower rates for long-term capital gains? Wealth transfer to the rich. Refundable tax credits? Wealth transfer to the poor.
Unfortunately, going down this road isn't terribly productive from a tax policy perspective since it doesn't actually tell us what the right choices to make are. Where should LTCG rates be, compared to OI rates? Should they be subject to FICA/Med withholding? How do we weigh this against the desire to incentivize people to save? It's not as simple as labeling everything as a wealth transfer in one direction or the other.
In buyback the money comes to shareholder in the form of increased stock price (and the investor can choose if he wants to get the value by selling). In the case of dividends, all investors must buy more of the stock. That should be just technical difference, not a substantial issue.
For example, if buybacks are forbidden because CEO pay is a problem, obviously the compensations will change to reflect the change. In the end total compensation will stay the same.
As a investor look at the total return of stocks (price + dividends reinvested) and it has little effect on my decisions if buybacks change into dividends.
The only fundamental difference between stocks and dividends from an investor perspective that I'm aware of is tax treatment.
So in practice, legally, companies have a ceiling on how much they can technically purchase in a given quarter.
But most companies aren’t in the lucky position of wanting to do buybacks larger than their normal daily stock flow.
Lower share count also means higher price in the long term, relative to the alternative scenario of paying dividends. This is relevant for employees with stock-linked compensation. The dividend alternative may require higher cash compensation for employees and create retention issues (not that stock compensation is free, mind you).
And of course lower share count means higher earnings per share, making it easier for management to attain targets and beat forecasts.
One aspect that can hurt long-term investors is that the company will overpay for its shares when the stock is overvalued.
What say we split the profits, 50/50? Doesn't sound fair, huh... well, what number would you consider fair?
For example, let's say a private owner starts a company, hired employees, pays them the agreed wage, and makes a profit. The owner should get the profit, right? They didn't do all the work, but they directed things, and took the risk that their capital would be lost.
Now, suppose you had the same situation, except the owner sold to a private shareholder. This private shareholder wouldn't seem to be in a different position. They risked their capital that the enterprise might succeed.
What about a public IPO? Well, the investors are putting their capital at risk to sustain the enterprise. Still seems fair.
The objection is that subsequent shareholders have done nothing. They haven't worked on the business, and they haven't injected capital. Instead the stock merely changed hands from the original owners.
So, the idea is we don't pay these people, or we don't pay them very much. What are the options:
1. We pay out less to shareholders. But then, this would affect ALL shareholders, including the original owner who put capital in.
2. We reduce payments to shareholders who didn't put capital in. All very good, except this means that those who did put capital in can never sell at the real price. The share is worth more to a capital injector than to subsequent purchaser. So, these people would be more reluctant to invest capital in the first place, knowing the shares could not be adequately resold.
3. Cut payouts for everyone except employees. In this scenario, the business simply doesn't get created. There is no reward for the capital at risk.
There's no way I can see to get the outcome you want without wrecking the whole system that creates the wealth in the first place.
This really sums up the economic conversation in America these days (and FWIW I agree!).
What error? He isn't indicating that the mechanics of capital equity valuation are wrong, but that the sheer size of the value extraction from employees which occurs in de-risked large entities far exceeds what most people would expect.
You can have all of the conditions leading to wealth creation as in your post in a system where labour has far better leverage to capture a larger portion of their own value creation.
The interesting knock-on effect is that reviews of inequality indicate that firm formation is actually amplified in situations where labour has that leverage, as workers are able to get more self-generated capital through labour to finance their own bootstrapped projects/businesses.
It is incorrect to assert that the employees are creating all the value created by a company. Companies are not just people but also a lot of other things:
Easy to see and measure things like equipment, facilities and bank account balances.
Somewhat harder to quantify but still important things like business relationships, contracts, brands and reputation.
Even more effervescent but still important things like corporate culture & values; the so called "DNA" of a company.
All of this stuff matters a lot and exists mostly independent of the employees. It is owned (quite literally) by the stockholders so the value accrues to them.
They failed miserably.
Never underestimate the value of the backing, resources and organization of BigCorp to one's success.
This wasn't asserted, so it isn't really worthwhile to argue against it. Obviously other stakeholders can participant in value generation, including by providing influxes of capital.
Obviously employees are going to generate more value than they capture on the whole; if they didn't, the firm would crater over time.
The key here is the proportion.
I agree that the key is the proportion. One way to think about this is to imagine if one of the employees in question quit and started operating independently. How much $ could they make? If it's more than they made while working for the company then the proportion taken by shareholders might indeed be too high. But if it is not more, then you've got a hard hill to climb when making your argument that the proportion is significantly off.
If I start a business and purchase a $1M machine and pay someone $30K to run it and make $100K in profit, how much value extraction from the employee am I doing?
Then join or start a partnership. In a partnership, all the capital works for the firm. When you make partner, you buy in. (If you can't afford it, you get a loan or don't make partner.) When you retire or die, the stock is bought back. Coöperatives are another example.
Corporations aren't the only ownership structure. For private organizations that scale, however, they tend to win against partnerships and co-operatives.
Are you sure?
you realize this won't garner much sympathy on the Silicon Valley town crier since employees also have a significant $ value of shareholdings
yes this is an outlier in every other industry that employs people for wages
lets talk about stock grants, yes, stock grants are dollar denominated and vest. If you get a $100K stock grant that vests over 4 years for a stock currently worth $10, then you have 10,000 shares. The stock goes up to $70 and you still have 10,000 shares, and some of that growth was from buy backs, then your $700,000 isn't negligible at all.
I just described Square.
Industrial Bank is #20 at $144k. That means that unless you work at one of the 20 companies on that list, your company is making less than $144k in earnings per employee. That profit is then taxed, and only a fraction of that is returned to shareholders, with the rest re-invested in the business.
So there's no way it's often hundreds of thousands.
https://www.wsj.com/articles/buyback-derangement-syndrome-15...
Companies choose how much equity capital to put to work based on
- the investment opportunities they have;
- the availability and cost of equity capital;
- the availability and cost of alternative capital (i.e. debt which is generally cheaper for well-established firms that generate cash flow);
- the leverage or financial risk profile that makes sense, (companies with more stable cash flow may use more debt v. equity)
When companies have large growth opportunities, have negative cash flow, and the stock price is high/equity cost of capital is low, they increase equity capital. (e.g. Tesla selling stock)
When cash flow turns positive, reinvestment opportunities diminish, the stock price is low, they return equity capital. (e.g. Apple paying a dividend and buying back stock)
How you return the capital is an accounting/tax decision. There's nothing very special or evil about doing it by buying back stock. Aside from tax issues, no difference vs. paying a dividend.
If the tax on capital gains is the same as on dividends, dividend forces the shareholders to have a taxable event, whereas the buyback lets shareholders choose whether to sell back to the company at a given time/price.
“The theory here is essentially that if Apple had 220 billion more dollars—roughly the amount of buybacks it has done in the last six years—then it would be worth less money. It doesn’t sound especially plausible. Presumably Apple plus $220 billion would be worth at least, like, a dollar more than Apple alone? And if the buybacks work so well, why not do more? Why not sell off all of Apple’s businesses, use the money to buy back stock, and leave Apple as an empty shell with a reduced share count and a $2 trillion valuation?”
However, you can defer the capital gains tax (by not selling), thus allowing that money to compound and work for you.
Wikipedia: https://en.wikipedia.org/wiki/Qualified_dividend (perhaps not a "legitimate" source, but at least a jumping off point for more information).
I think the tax efficiency is more about avoiding the immediate taxation on a reinvested dividend vs. no taxable event when I don’t sell into a stock buyback.
If you model this as one event, with the same terminal state (sell all stock), the tax rates are the same. But if you model it as many capital return events, and in the end I make one sale of all my stock, the government gets less money.
The government gets even less money if my heirs get a step-up in basis when I die (which they generally do).
When buybacks happen, each share owns more of the company.
When you buy stock, to make money, one of two things must happen:
* The company pays a dividend regularly
* The company's share price increases, then you sell
A dividend is just like a salary. A buyback is just like a bonus. Everyone understands salaries and bonuses, there's no reason to lose your mind over thinking buybacks are nefarious unless you thinking giving employees a bonus is nefarious.
Then, there are two key plusses to buybacks:
* You choose the year in which you sell. This has favorable tax advantages, just like if you could choose the year in which you book a bonus.
* Investors punish companies, sometimes heavily, when they decrease dividends. If you cannot guarantee a dividend indefinitely, you probably shouldn't give it out. Instead you should do a buyback. "Things are good right now, so here's a bonus." This is identical to how people think about salaries, so it should come as no surprise. Lowering a dividend later is like giving someone a pay cut, but people don't balk so much if you tell them you're giving them a one time bonus.
Actually, the dividend is more like a bonus.
Actually, I don't really see any merit to the analogy at all.
A dividend "lowers the lid" of the fish tank. Some amount of air (cash) ends up outside the company, and is returned to each shareholder.
A buyback is the same thing, but first you tip the tank on its side before letting some air out. When the tank is on its side, some shares are "all cash" and the others are "all non-cash". Then you shrink the box by taking out some all-cash shares. Then you right the fishtank.
Stock buybacks are better than dividends (shareholders get to choose when they liquidate), and I can see no actual downside. They only goose the per share price because suddenly there are fewer shares to represent the same company.
More and more, politicians seem to focus on issues with little actual merit, instead of super important issues like healthcare costs, because no donors can get upset. For example, if buybacks are outlawed, it’s not really a big deal and there won’t be pushback. They can claim a victory without actually changing anything, for better or worse, for anyone.
https://www.bloomberg.com/news/articles/2018-04-02/stocks-lo...
These aren't two separate effects. The interaction between the buyback and the order-book is the mechanism through which the stock price is adjusted to take into account the smaller number of shares.
But there's also a second-order effect of the buyback on the share price. If the buyback is a wise thing to do (the shareholders can make better use of the cash than the business) then the shares should be more valuable after than before. I think it's this rise in the price that corresponds to the effect of buying the shares on the order book.
In the case of dividends, the price goes down. If the company distributes 10% of its market-cap as dividends, the price will go down 10% (actually less because a 10% dividend represents less that that to the recipients after taxes). And as time goes by the price will recover. If the net income (and therefore the EPS) remains constant, the stock price will get back to the original price when they accumulate again the cash they just distributed (at constant PE ratio).
Still, my point was that the long-term effect of the capital allocation choice (which cannot be anticipated by the market until they know that it has been made, or at least that it is going to be made, but in any case the information is not being incorporated into prices at the precise time of the actual transactions) is not the same as the short-term market effect. The capital allocation is usually implemented through a market operation but it doesn't even have to be the case (they could get the shares in an off-market operation, a real example is company A buying another company B which has a stake in A, they can then eliminate those shares). And even if it is done in the market, the effect on the price would be the same if any other party (let's say the Saudi Arabia sovereign fund) decides to buy a large position in the stock.
If the buyback is a wise thing to do, you say, the price of the stock should be higher and the price is adjusted through the open-market repurchasing of shares. The problem is that if the buyback is not a wise thing to do, the market effect of the buyback is still to push prices up!
Here’s an example. Board members invest in a startup and then use the cash to purchase it at a much higher valuation. In a cash deal, nothing gets reported. If the company uses stock for the transaction, they would have to report it to the SEC as a distribution to an insider. Other than this, there is basically no good reason to use cash for acquisition versus stock equivalent.
That’s just one example, but a very common one.
Whether or not stock buybacks should be prohibited, they should not be encouraged by tax policy.
I guess if you’re an electric utility that’s fine. If you’re supposed to be an innovative tech company, and you don’t know what to do with your cash???
https://i.kym-cdn.com/photos/images/newsfeed/001/275/986/c57...
;-)
Let's assume the company has an infinite fountain of moneymaking ideas, as you posit.
Why would there need to be any earnings at all to fund those ideas? Why not just take on debt to fund those ideas? Presumably companies are already taking debt to fund all of their good ideas, and any ideas that are left are "not that good".
The appearance of earnings should have no effect on the number of good ideas available. Why would it?
Companies need capital. There are generally two ways to raise capital: debt and equity.
How do companies choose between these two options? It turns out that there are a pretty large number of factors and it's a complex and interesting topic.
I am annoyed that some of my secondary market purchase attempts are thwarted by right of first refusal exercised by the company.
On the other hand, I think dividends reduce volatility, make option pricing a little more complicated and trading less fun.
When is this "rising tide" horse shit argument going to wear out. It's used to justify almost anything now.
Troy Segal, "Why would a company buy back its own shares?", Investopedia, 20 Jun 2018.
Annie Lowry, "Are Stock Buybacks Starving the Economy?", The Atlantic, 31 Jul 2018
Katy Milani, Irene Tung, "Curbing Stock Buybacks: A Crucial Step to Raising Worker Pay and Reducing Inequality", Roosevelt Institute, 31 Jul 2018
I'm new to this, so let me share my thinking here and see if I've got it right.
The argument is that money that could be going towards investment in growing the company and/or rewarding the employees is instead going towards buybacks. Buybacks have the benefit of increasing the stock price and consolidating ownership, which generally benefit both stockholders and executives, but exclude many classes of workers who don't own shares.
Dividends would be a similar thing to plow a company's dollars into. Again: benefiting stockholders, but excluding workers who don't own shares.
Companies these days who are involved in feeding money back to investors like to balance between issuing dividends and buying back stock--in many cases, biasing strongly in favor of buybacks. There are a few reasons for this, including investors wigging out far less if you have to cut back on buybacks vs dividends during a recession.
Nevertheless, there seems to be an expectation that shareholders will continue to increase their profits--specifically, that dividends will increase if the company is issuing dividends. Indeed, it seems to me that a company runs a risk of activist shareholders taking them over if they don't do a good enough job of satisfying them. So if a company shifts those dollars away from shareholders and into wages, and the shareholders revolt as a result, does that necessarily make those companies or their employees any better off?
I can see a problem for sure, since the increase in income inequality in the US is an undeniable problem, a lot of workers are not getting any better off from either stock buybacks or dividends, and the Roosevelt Institute makes some compelling arguments for why stock buybacks are not great for long-term strategy and profitability even among shareholders--including the startling fact that some companies, particularly in the restaurant business, are actually putting themselves significantly into the red to buy back shares! I'm not sure that it's a problem that regulators are obligated to fix by going directly after stock buybacks, though.