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Comment by jjeaff | Hacker News Reader

Ya, that's finance 101. But here's Finance 5400:

Smart, wealthy shareholders love cash hoarding. Especially if the cash is held tax free in overseas accounts.

The share price is boosted allowing them to get returns in the form of pure capital gains.

If the company were to pay dividends, sure, most of those dividends would be taxed at capital gains rates as well. But that money has to be taxed at the highest US corporate income tax rate first. Thus, significantly reducing overall value.

To go a step further, the wealthy don't even have to cash out their shares as the price climbs and climbs. They can get low interest loans using the shares as collateral. This deferring taxes indefinitely and leaving all their capital in these huge companies that are outperforming the SP500 anyway.

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> Ya, that's finance 101. But here's Finance 5400:

And another point: you have to imagine that the richest companies in the world have the best possible financial expertise on staff. It is safe to assume they know what they are doing.

The goals of extremely ABC-heavy portfolios (i.e. those of its founders and top executives) probably involve a lot less volatility for ABC than diversified external investors would want to see.

While I think you're probably right, a blanket assumption that "they're smarter therefore they know best" is why everyone was so surprised by what happened to Enron. I do not think this is the case with Alphabet, just saying you shouldn't blindly trust experts. There's also the subprime mortgages issue from just over 10 years ago which is much better understood now, but at the time people didn't understand them and just assumed the experts were right.

And Bear Stearns, and Washington Mutual, and Deutsche Bank, and AIG, etc., etc.

"It is safe to assume they know what they are doing" because they're managing a ton of money has been proven wrong over and over again.

Nobody is claiming that money managers have omniscience.

What they do certainly have is more information and expertise than a random internet commenter. They don't know everything, but it's safe to assume they know more than you.

Well the actual decision-making tends to be more important than just what one knows. A pile of cash seems more indicative of investment paralysis than some grander strategy. Like, "we can't figure out the best investment to make with this money, so the safest thing we can do is hoard it until we come up with a better idea".

Again, this is pure speculation. You have approximately 0% of the information available to the people who make these decisions, so why bother guessing? It's boring and pointless.

I would argue its actually kind of fun to speculate, but fair enough.

At the end of the day look where the major banks ended up after the crisis. Mostly unchanged. They knew what they were doing. It's just that what they were doing wasn't in the public's interest.

Better than unchanged, even. Sure, some lost and were scooped up, but by and large the financial sector is even stronger than before with all of the consolidation that's happened.

> "Smart, wealthy shareholders love cash hoarding"

Any evidence to back this up? Activist investors generally pressure companies to not hoard cash, for exactly the reasons outlined earlier. Example: http://money.com/money/3484599/icahn-letter-apple-cash/

"Icahn controls 53 million shares of Apple, worth $5.3 billion, which gives him about a 0.9% ownership in the company. In his letter, Icahn lays out his reasons that Apple should repurchase its own shares"

Companies can return money to investors using share-buybacks - this avoids any taxable event for investors, while also not suffering from the downsides of hoarding cash.

There is one significant tactic where it makes sense to hoard cash temporarily - keeping it overseas while waiting for a tax holiday or a reduction in the tax rates. This only works as a temporary tactic though. If any company announced that they were going to hoard cash over a long period, it would depress the share-price significantly. This is exactly why activist investors like Icahn pressure their companies to reduce their cash hoards.

Repurchasing shares though is better for him than dividends. Decreasing the supply of shares, which increases the per share price, can often be better for investors than getting the cash directly.

How does hoarding cash increase the share price to generate those capital gains?

Shouldn't they be buying back their own shares?

The company's market cap will typically factor in the giant hoard of cash. As it increases, so does the stock.

Doesn't that contradict noego's ultimate point?

A company that has an extra $100MM in cash will have a market cap approximately $100MM higher than the same company without the extra cash.

noego's point is that that $100MM might be more valuable if freed up to invest in a risk-asset, but not that is has no value whatsoever.

Dividends at taxed at income tax rates

They are taxed as capital gains for recipients.

Edit: *qualified dividends

> They are taxed as capital gains for recipients.

No, ordinary dividends are taxed as income.

True for ordinary dividends, but almost all stock dividends meet the criteria to be treated as qualified dividends, taxed at capital gain rates. For example, in Vanguard's S&P 500 index fund, about 98% of dividends are qualified [1]. Of commonly traded classes of stocks, only real-estate funds mostly pay out ordinary dividends.

[1] https://advisors.vanguard.com/VGApp/iip/advisor/csa/investme...

But you are forgetting the fact that the corporation will have to pay corporate income tax on that money before they can use it to pay your dividend.

That's true, regardless. They paid tax earning that $100M. What they do after is irrelevant, as neither dividends nor buybacks are tax deductible.

No, they didn't necessarily pay tax earning that 100m. See double irish sandwich and other modern tax avoidance strategies allowing companies like apple to hold infinite amounts of cash in overseas accounts tax free.

In the U.S., if you've held the stock for at least one year, its dividends are taxed at a very favorable long-term capital gains rate. Stock held for less than a year is however taxed like regular income.

The required holding period for qualified dividends in the US is typically 60 days, not 1 year.

(It's 90 days for preferred shares.)

It's not that favorable if all the corporate cash is stored overseas in low tax holding countries.

The corporation will have to repatriate the money and pay corporate income tax on it before they give you your dividends.

Alternatively, they could just grow that hoard of cash and let your stock appreciate after which you can sell a few shares and get capital gains rates on capital that didn't have to be double taxed.

> They can get low interest loans using the shares as collateral. This deferring taxes indefinitely

And in case a superinflation strikes, all those loans are effectively wiped out while they keep the assets (the corporate off-shore hoard might suffer as well though, but it might be sufficiently mobile and well-managed to avoid the worst). If capitalism was a video game, it would get terrible ratings due to utterly botched difficulty scaling.

Yeah, but in a sharp downturn you get margin called and possibly wiped out if you aren’t careful. A lot more rich people have lost everything from that sort of problem than the number of rich people made even richer as a result of extreme inflation. And Weimar like inflation seems increasingly less of a near term risk considering that German 30 year yields just turned negative for the first time ever today.

These ultra high net worth people are getting loans at such low interest rates because the collateral is so much larger than the loan.

If you have $10B in stock, you probably aren't going to borrow so much as to even get close to a margin call in a market downturn.

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