Dividends and Buybacks Now Larger Than Total Reported Earnings for Entire S&P500
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It does mean the end of a cycle, though, and not just a "stocks go up, stocks go down" cycle. It's rational for corporate management to retain earnings and invest in future growth opportunities when the expected returns from those growth opportunities are greater than the cost of capital. That they're returning capital to shareholders, even in an era of historically low capital costs, indicates that they can't find growth opportunities at any price.
This is a great way to put it! Thank you. Would it be fair to say that this suggests the market isn't really expanding and has essentially become zero-sum (or technically I guess it could mean that expansion is free, but that seems unlikely)?
Nature usually abhors a steady-state: when you think you've reached one, it often means that there's a competitor that's too small for you to see but growing exponentially.
Also, now that so many of the unicorns like Uber and Lyft are going public, I wonder how much of the market is currently still private. Not to mention, many of the unicorns are horribly unprofitable and potential a net negative for the market.
With low interest rates, high corporate profits, and low growth, I'd expect to see a lot of debt added to balance sheets; it's a way to lever up the capital structure to the benefit of existing shareholders, as long as profits remain high and interest rates remain low. (And corporate bonds/loans are usually fixed interest, so the interest rates are locked in until they need to go back to the debt markets.)
Or you’ve already moved on, and the next CEO eats the difference. The incentives between those two vary wildly.
It’s only rational up to some level of indebtness (and often companies go too far). If you take on debt just because you can, how are you going to delever the balance sheet when earnings go down and interest rates go up?
Heavily indebted companies struggle to survive distress too.
[1] http://press.spglobal.com/2019-03-25-S-P-500-Q4-2018-Buyback...
That's simply not true. Next you'll be telling us it's illegal for a company to do anything that isn't about maximising shareholder value.
https://www.lawschool.cornell.edu/academics/clarke_business_...
"First, shareholders do not own business corporations, nor do they own the assets of the corporate entities... Shareholders own shares."
Somewhere back in the eighties, it became popular in the business community to say that the purpose of a company is to maximise shareholder value. That opinion and others like it have now so saturated society that people take it as received truth, but it's not. Likewise the idea that shareholders are owners.
Now, as in many things, laws do change over time and if enough people continue to believe this hard enough for long enough, there will eventually be enough case law that it ultimately become true. One day, it might be true, and law. That day has not yet come.
But I don't get the "shareholders do not own business corporations" bit. Would a sole owner "own" a business corporation? Do real estate owners "own" real estate or do they own "bundles of intangible rights"?
Well, why would they? At risk of horrifically simplifying things, I have a company, I decide I want some more money. I sell you the right to vote in some things that concern the company, and I sell you a share of any dividends that get paid out in the future. That's what you get. Do you now own the company? Do you own the company assets? I didn't sell that to you. I sold you the right to vote in some company meetings and decision making processes, and I sold you a piece of any future dividends that get paid out to you and others like you. Doesn't sound like "owning" something to me.
What does that mean? You don’t “own” the company, do you?
If the company is just me and a bag of tools, fixing people's cars on their driveway, do I own that company? What does it even mean for me to "own" it?
An opinion of mine the ownership of a company through stocks is secondary to stocks being a quasi-cash financial instrument like bonds.
If you scroll down to "Significance", you can read for yourself that it's by no means universally accepted ("that this interpretation has not represented the law in most states for some time").
Let's come forwards a little; as the U.S. Supreme Court recently stated, "modern corporate law does not require for-profit corporations to pursue profit at the expense of everything else, and many do not do so."
Where this is basically going is that the common belief - that there is some clear, absolute law that totally says the shareholders are the owners and the company is all about giving money to them - simply isn't true.
Here's some legal people on the subject; https://www.lawschool.cornell.edu/academics/clarke_business_...
Key phrases include "shareholders do not own business corporations, nor do they own the assets of the corporate entities".
Now, there are other opinions, but the very fact that this is an ongoing discussion suggests strongly that it is not as cut and dried as you claim.
Now, some companies sell shares that don't have voting rights (e.g. Google, Facebook). Those are a bit more nuanced. Though even in those cases, there are voting shares, they're just not traded in the public markets. So, the statement that the company is owned/controlled by its shareholders remains correct.
I’m not sure of this argument, but I sense meaning going on at the margin.
My Econ professors had a saying. Something like “you know a correction will start when the last stalwart holdout is convinced he can make money in this market [meaning no one else is left willing to jump in].” Paraphrasing a decade old quote.
If earnings are low then so is the free cash flow too. In which case most of these companies are borrowing cash to pay out dividends which is not a good sign.
Similarly, buybacks are supposed to be value accretive. Paying for it using borrowed cash is not adding value. Additionally, buying back a stock which is trading well over its fundamental value is same as overpriced acquisition.
Arguably they're buying back stock now because they believe it's undervalued. The other prevailing narrative in the media today is that corporations are too powerful and are bleeding the American consumer & worker dry. Which is it? If they're actually bleeding the American consumer dry you'd have to be an idiot not to want a piece of the action, while if they're overvalued and about to collapse there's no reason to be afraid of them.
Apple having the largest buyback amount doesn't seem to tell us a ton by itself, given that they are among the top few most valuable companies in the world.
The headline is "Dividends and buybacks now larger than the total reported earnings of the S&P 500." For that conclusion, it's absolutely relevant that Apple et al are doing the buybacks and that their market cap dwarfs many of the companies on the S&P 500 (which has a threshold of $6B to enter, vs. close to $1T for Apple). Apple deciding that they're going to return some of the cash to shareholders they've been stockpiling for the last 5ish years would dwarf the entire earnings of most of the bottom 200 stocks in the S&P 500. That's not a report on weakness or danger in the market, it's a report of what a small number of companies are doing with a large cash hoard. It's sorta like reporting that "Residents of Medina, WA lost more money to divorce in 2019 than they made in total wages" without reporting that Jeff Bezos is a resident.
I agree with the logic behind the arguments that a company buying its own stock should be a signal that the company believes in its business and valuation, but it also seems that many companies that also believe in their business and valuation also sell stock to raise money in order to expand, with the belief that the sale will result in individual stocks increasing in value even after the dilution. It seems hard for both cases to be true, but perhaps they are.
If this logic is sound, it seems that we should be at least somewhat concerned about this.
Also, I didn't understand how cheap credit is encouraging buybacks if companies aren't buying their own shares on credit. Would someone be able to explain this better than the article? (Thanks!)
[1] https://en.m.wikipedia.org/wiki/Modigliani–Miller_theorem
Consider a company with value of $1000, with 100 shares outstanding. Each share is $10. Buying back 10 shares, the company spent $100, so the company is now worth $900 and has 90 shares outstanding. Each share is still $10.
This is the basic model that shows share price should be unaffected by buybacks, but there are other effects. The buyback could signal to investors that the company is unlikely to be inefficient with capital, so investors would value the company at $910 instead of $900.
Alternatively, in a demand/supply model of shares, the buybacks could have exhausted some of the supply of shares, so the valuation for the company settled on by the rest of the market is higher.
There's no clear answer here, but reality is probably somewhere between these models.
How would you buy 10% of the outstanding stock of a real company and pay exactly the market price for the entire block? On a public exchange, you'd need to bid higher than the market price for someone to sell you a block that big (otherwise it wouldn't be worth their while to sell).
If you're buying in the public market, other sellers will see that some party is willing to pay above the market price for this stock. They'll raise their own ask price as a result. In private, off-exchange sales, you'll be dealing with seasoned investors (family offices, hedge funds etc) where they're likely to know your situation, and you'll almost definitely pay a premium to acquire that stock.
The stock doesn't just vanish. It is held and owned by the company. So no, each share doesn't represent a larger percentage of the company. Unless the company retires the shares.
But the buyback often increases the value of the shares because it allows investors to express their preferences better. If the company has a $1B business and $1B in cash, there is no option to invest in only the business, only the combined business+cash entity. If you think the business will give 9% returns and the cash 2% returns and you have an alternative investment that gives 6% returns, you won't invest in that company. But if they separate the cash from the business then you're willing to invest in the business, which makes the business worth more to investors and increases its share price.
I would disagree with your point about stock issuance suggesting belief in the company. Issuing stock is usually a negative signal that not only is your company struggling with cash flow, but it can't issue debt at a reasonable cost. (Startups issue equity because it is difficult to borrow at such a risky stage of the company, but more established companies like Tesla issuing equity is usually a sign of difficulties with cash flow.) Read up on cost of equity vs cost of debt for more info.
If companies just took on debt to issue a dividend, the share price would be devalued by the market by the dividend amount due to the debt so it would be a pointless exercise.
The TCJA passed by the republicans got rid of the tax system that was causing the problem and switched the USA to a territorial income tax system like other countries have.
https://www.taxpolicycenter.org/taxvox/explaining-tcjas-inte...
> The TCJA’s international reforms are significant. Combined with the reduced corporate rate, they largely eliminate the incentive for US firms to accrue assets overseas, while seeking to protect the tax base from avoidance by both US and foreign-based multinationals.
Share buybacks aren’t about propping up the price (when done correctly). They’re about tax efficiently increasing your ownership share. Or you can think of it as paying money now to reduce the amount you need to pay in dividends, all else equal.
Share repurchasing is just a tax efficient way to return money to shareholders. People love dividends yet look at buybacks as insane. Why?
* Note: buying back shares when your company is overvalued is insanity. I’m not endorsing that. But if you’re in a situation like AAPL, they are hands down the correct move.
Given that there's an incentive to spend other peoples money(shareholders who bought shares) to increase their own(via bonuses, salary, or granted shares) it's fairly safe to assume that execs are following the incentive
This isn't any more true for the executives than any other shareholder, and doesn't really work that way anyway. Buybacks don't increase the value of shares unless the company was undervalued or making less efficient use of the cash than their other capital, and in that case they're smart to have done it.
> via contractual bonuses
The way to solve this is to do accounting for buybacks (and, for that matter, dividends) when calculating bonuses. You obviously don't want to have executives choosing whether to do these things based on that, so don't.
There was a price at the current supply and demand. Buybacks increase the demand which increases the price. The buybacks may be a bad idea and lower the demand from the marketplace but that information takes more time to disseminate and is harder to actually determine where as someone buying up millions of shares is a piece of information that is immediatley known.
>You obviously don't want to have executives choosing whether to do these things based on that, so don't.
That is what people who have problems with buybacks but not dividends, would like to see happen
The company has a value. If the P/E ratio gets worse because the share price went up with the same earnings, more investors will find it profitable to cash out and invest in something with a better ROI. That doesn't happen instantly, but it happens quickly, because cash-flush investment banks realize they can front-run the correction for a profit, which makes it happen.
But the buyback itself often actually improves the ROI of the company and legitimately makes it worth more, because the company itself was getting high returns on its productive capital and low returns on its cash, and now less of its share value is represented by the low productivity cash.
> That is what people who have problems with buybacks but not dividends, would like to see happen
Except that then the perverse incentive for managers becomes to boost the stock price by not issuing dividends, since dividends reduce the stock price. The only real way to fix it is to fix their incentives, and once you do that you're back to preferring buybacks due to the tax treatment.
Buying back shares is repaying that money.
It's a good thing that companies can repay the money they have borrowed, and a good thing that they are doing it.
Given an interest rate regime, CFO's will react accordingly and this is that reaction.
Also, it's odd to see dividends and buybacks in the same data.
Finally - both activities are not bad at all. Buybacks are a strong signal to the market the company believes in it's valuation (FYI investors have access to the same 'cheap capital') and dividends are profits getting out.
None of this is bad, but it's going to get hard to get off of the sugar addiction.
The first bit is bang-on.
At the margin, the lowest investment-grade BBB company drops one notch and becomes High Yield 'junk'. Then insurance companies and pension funds with fiduciary obligations must divest themselves of the bonds, so they sell and force the yield (interest rate) even higher.
Companies have borrowed too much to perpetuate buybacks, jack up the share price, and reward executives with profits on share options. Half of all bonds are at BBB, just one downgrade from junk [1]. This situation is highly unstable, just one snowflake will create an avalanche of downgrades, and a true Black Swan will bankrupt many companies [2].
These companies have run off the cliff, and if they look down into the abyss, they will fall (e.g. GE [3], IBM). As with sub-prime mortgages, CDOs and MBSs during the Great Financial Crisis, pulling the trigger depends on the ratings agencies. Last time they were asleep, or perhaps complicit (euphemism for corrupt). Let's see what they do this time.
[1] https://www.marketwatch.com/story/half-of-investment-grade-b...
[2] https://www.zerohedge.com/news/2019-03-05/bis-warns-market-c...
[3] https://www.zerohedge.com/news/2018-11-13/collapse-has-begun...
IMO it’s a sign companies are doing the intelligent thing and are assuming investors are better investors than throwing money at random shit.
Because a robot that does flips can also flip burgers, pick inventory, sneak up on people (i.e. military) and ultimately that stuff will be worth a lot.
One of their lesser goofy investments.
Google dumped the robots for strategic reasons, moreover, it's going to be a while before payoff.
They are making 'real' investments in late stage companies with actual business models, or things that have obvious potential upsides.
Softbank is basically where companies go for D and E rounds instead of going public. So there is some risk, but way less risk than left-field, early stage investments.
Their 'real estate' investment is in WeWork, which probably will make them a lot of money as long as interest rates don't flinch higher, and as long as there is no real-estate crash.
Sprint, ARM, Yahoo, Uber, Slack - these are not 'crazy' investments, especially depending on price. Yahoo might actually have some 'decent fundamentals' on some level, and be worth something at some price. They have a gigantic audience, and some small changes might make them be profitable at some level, and they could very well be worth something, at some price.
It's a cross between classic private equity and late stage venture capital, all of their investments make sense in that context.
"instead of actually investing in things like capital expenditures, R&D, or higher salaries"
Specifically the last one. The pay gap is larger than ever. The efficiency gains over the last 20 years or more are systematically being funneled up the food chain to executives and shareholders. Even in tech there's a ton of wage stagnation compared to the real cost of living over this period.
I think this is the crux of the assertion if I'm not mistaken. It's broken that the share of increased prosperity isn't anywhere near equally distributed. I wouldn't call that throwing money at random shit.
See Apple for an example of doing it right.
See Chipotle for an example of doing it wrong.
Businesses don't expand just because capital is cheap, they need some kind of demand to fill. That's the fundamental problem with "trickle down" economics, it assumes the economy is supply constrained when it is more commonly demand constrained. And worse, the polices that it produces tend to squeeze the lower and middle classes, further reducing demand.
I was of the understanding that most orthodox schools of economics fundamentally view demand as infinite. Supply-siders hope to meet demand by increasing supply, lowering prices, and making more goods available to those with fewer resources. Policy-wise, this is achieved through production subsidies, fewer regulations, and tax cuts.
Their opponents (demand-siders?) hope to increase access to goods by increasing the purchasing power of consumers. Policies like social safety nets, public education, and tax increases on the investor class promote this goal.
There is nothing artificial about it
CFO's are reacting rationally to the credit situation that they do not control.
Consider that labour markets are tight, and 'productive investments' are not easy to make. They are generally very risky.
And share buybacks are just a tax-efficient version of dividends (since they don't trigger a taxable event for the investors that don't want to convert shares to cash yet).
It's easy to say 'you should be investing that capital into projects.'
But I think people don't realize how much money is actually generated by some of these companies.
I know AAPL is the strongest possible case for my argument, but bear with me.
Their operating cash flow net of CAPEX is ~$65B as of their 2018 year ending in September. I.e., after paying for all of the investments they want to make, they still have $65B in straight up cash left over.
I mean -- what are you supposed to do with all of that?
Therefore the issue isn't so much Apple not being able to find better opportunities than shareholders, but that it can't find better opportunities than Apple -- making those actually good investments would look bad for Apple because of how absurdly profitable it is. That's not a good reason to return capital, if you think about it carefully.
1. Interest rates have been held artificially low by the Fed and other Central Banks, which have also flooded the financial markets with trillions of new dollars/euros/yen.
2. Interest payments are tax deductible, but dividends are not. Debt and equity should be treated equally.
Also, there are now many weak corporate bonds (CoCo, convenant-light), which mean that bondholders have fewer rights and priorities in the line of creditors, should the company get into financial difficulties. So the debts are treated as bonds for the purposes of taxation, but the rights of the bondholders are little more than shareholders - a double whammy for the company makes it a simple decision.
But if cash outflow is larger than inflow then companies are mostly sitting on negative cash flow. The difference is being covered up by borrowing at low rates. These loans put strain on the future cash flow. Without any reserves to fall back on there might come a time when these companies will be strapped for cash.
https://www.wsj.com/articles/buyback-derangement-syndrome-15...