Companies Use Borrowed Billions to Buy Back Stock, Not to Invest

It’s actually pretty impressive that they’re spending that much on R&D and still manage to make the next product worse than the previous one.

Apple may be spending a lot on research but they've recently become too obsessed with mobile profits over holistic prosumer experience. I don't think I'm the only heavy Apple user considering leaving the reservation if they choose to focus on mobile consumption above everything else. If they don't fix the MPro[1], I've lost one of the major reasons I use Apple products at all, I thought the agreement was I pay Apple a nice fat 30% profit margin and in return they ensure I'm using the hands-down best computing devices on the market.

The Airport Extreme disappearing is another disappointment.

https://blog.pinboard.in/2016/10/benjamin_button_reviews_the... (not replacing my 2013 MPro until they fix all the issues with the current generation that I'm forced to use at work)

Anyone with collateral can go into debt at 3%(ish) interest. I've never heard of anyone getting a sizable loan for longer than overnight at that rate without collateral. If there is a counterexample please share it. And if a person defaults on a collateralized debt, well, they lose, and usually badly. Margin calls are one of the nastier examples, but foreclosures also come to mind. Even a safe investment like US Treasury bonds can trigger a margin call if, for example, interest rates rise and reduce the market value of the bond enough to fall below margin requirements.

They are a rebalancing between the portions of the business funded/owned by debt and by equity claims where the portion funded by equity claims has grown significantly out of balance as a result of interest rates (and thus discount rates) falling substantially.

Because there are large parts of the market who don't invest across the capital structure (ie they only buy debt or only buy equity), this can still lead to better allocation of capital.

The company can't sell shares it doesn't own. Think of it like a startup founder borrowing to buy out someone else's equity. If interest rates are near zero, it may make sense to borrow cheaply now to buy back stock that the company can then sell later when it actually needs an influx of capital (presumably when interest rates are higher and the stock has risen a bit). It's essentially a financial bet on the company's future prospects.

The market isn't perfect but if companies are really mortgaging their future to provide shareholder returns today, that would seem to be something easily noticed when analyzing the company's financials... thus weighing on future profitability and acting as a counterforce to the boost from the buyback.

This is not a good idea because with shorts you need to time the market correctly... Irrational markets can survive for years and shorts cost premiums, especially those with a distant expiry date. If you're not a stock analyst with inside info, you will not be able to get the timing right.

It's not literally "out of ideas". It's that your ideas don't require all that much money to implement compared to the amount of money coming in. Ideas for improving efficiency might pay for themselves quite quickly, putting you further in the hole. A nice problem to have. Maybe shareholders should benefit?

(Side note: what does "sustainable" mean here? Usually that involves some kind of steady state, not growing indefinitely, which is always going to have limits.)

> But that's not a sustainable business model.

If a business doesn't have a sustainable business model, it should operate in a way that maximizes value to its shareholders as it goes through its end. Remember, preserving the corporation is not the goal; maximizing value to the shareholders is the goal.

The entire purpose of a company is to return value to shareholders. Due to our current tax law, buybacks are a much better way to do that than dividends.

Are you saying that a company should invest 100% back into itself? There are a few very successful companies that do that, but the vast majority do not. Most companies return value to shareholders regularly in the form of dividends (or buybacks).

In the USA, dividends on stock one has held for more than a year is taxed as long term capital gains.

The tax advantage of buybacks is they allow the shareholder to choose when the taxes are incurred, not how they’re taxed.

> ... whereas dividends are subject to ordinary income tax.

Not in Canada:

> Unlike many other countries, dividends from Canadian based companies are eligible for a somewhat convoluted set of calculations that can fondly be described as the dividend gross up and tax credit system. The basic rationale behind this system is that dividends are paid by corporations after the taxman has already taken his cut. Therefore, if dividend payments were fully taxed in the hands of the investor as well, it would equate to a double taxation.

* https://www.fool.ca/13-steps-to-financial-freedom/step-8-the...

* https://www.investopedia.com/terms/d/dividendtaxcredit.asp

It's slightly convoluted, but if you have investments in taxable accounts, then there's a bit of advantage in them than simply interest. Though capital gains in Canada is only taxed at half of one's marginal rate as well.

Are there that many companies bleeding the pig? Possible. But how likely?

I was answering to the comment (paywalled by the article), and I believe a few companies do hold onto the cash when they see the opportunity, but probably not many would have the gut or the data.

I think this works as long as you have income to pay off the debt and actually are paying off the debt. But isn't it a problem when:

- you're only paying the interest and rolling over the debt; that only works with declining interest rates

- your income goes down for whatever reason and you can no longer make the debt payments

- you think "I'll just sell the stock" I accumulated, but that may not be possible if the stock price is declining.

If your income goes down, your stock price is probably also declining at the same time, but you still have those debt payments to make.

> Its not in any one businesses self interest to be philanthropic by paying their workers more or slashing their prices to drive up the available consumption of the working class.

Tragedy of the commons, I suppose. All large business want a slice of consumer spending, but if they don't support consumers, there is no consumer spending to capture.

> Eventually the thread is drawn taught enough that bread stops showing up in the stores and nobody knows where it went because all the bread companies stopped manufacturing because the marginal returns from the poor by feeding them didn't justify the capital expenditure over playing books and offshoring profits.

I hope things don't get that bad. I'm all for the idea of motivating people with money. Some inequality is a good thing. But too much inequality is a disservice to everybody: widespread food instability in the country with the highest number of guns per capita would be a national security crisis that even the wealthy could not ignore. I hope we act with some foresight. We have plenty of distance between here and that point. But I do wonder what level of inequality this country will sustain before things become slightly more egalitarian.

This sounds like the old "the collapse of capitalism is imminent" narrative that socialists have been peddling for about 100 years.

> Eventually the thread is drawn taught enough that bread stops showing up in the stores and nobody knows where it went because all the bread companies stopped manufacturing because the marginal returns from the poor by feeding them didn't justify the capital expenditure over playing books and offshoring profits.

Offshoring profits from what? The profits from not selling bread? Will all the "bread companies" suddenly turn into investment banks?

Let's say "bread companies" disappeared, what happens to the farmers? They all stop producing grain, while people are starving? What happens to the land, it's going to just sit idle for no reason? Why not just let all the starving people work the land that you own?

This scenario is possible, but it would require soviet-style mismanagement that only a central government can produce, for example by fixing the price for grain or setting a minimum wage for farm labor.

> Its not even some hypothetical far future happening. The water is already undrinkably contaminated with lead and nobody has the capital to fix it.

Oh, there's plenty of capital to go around, but nobody wants to put up the capital to fix it in the few areas where this is a problem.

> Shops supplying the lifeblood food of towns just stop getting deliveries. The houses are just left abandoned, the roads rotting, the people just leave with no idea where they are going. Its not uniform, but no collapse ever is, but nobody accounts for it or really even seems to care.

Yet, at the same time, urban centers are growing at massive rates. This is not a collapse, this is a structural change. It sure ain't pretty for those involved, but it's indeed not much of concern for those already living in an urban center, rising costs of living notwithstanding.

> Much of the money isn't going to other investments. It goes to savings.

This is nonsense. Saving in a bank expands the bank's ability to lend. Saving in treasury bonds finances government operations. Saving in the stock market provides the incentive for VCs to invest in startups. Saving in municipal or corporate bonds finances the leveraged operations of those entities, contributing to better long-term planning. Saving in gold at least turns the money over to someone else who will probably spend it on something more useful than gold. For the most part, saving is investment. Only in niche scenarios does saved money leave the money supply.

> Much of the money isn't going to other investments. It goes to savings.

Savings and investments are synonyms in this context. See, eg, the savings identity (https://en.wikipedia.org/wiki/Saving_identity). When Joe Millionaire "saves" some money, he does so by investing it. That's what the word means.

> The problem with giving money to the wealthy is that it doesn't go to startups, it leaves the economy and increases a number on someone's terminal.

That's not how money or investment works.

> The best way to spur economic growth is to give money to people who will spend it quickly

Very possibly, but we're discussing who will invest it, not spend it, and as you note, the rich invest more of their income.

> The best way to spur economic growth is to give money to people who will spend it quickly whether rich or poor. In general, it turns out most very wealthy people have little incentive to spend money quickly. Instead, they save to hedge against and profit from recessions.

Right, you're talking about the velocity of money (https://www.aier.org/article/what-money-velocity-and-why-doe...) which I find a fascinating concept.

It does feel like money is pooling, because as corporations buy back their stock, there is also less stock for others to buy. Since a lot of retirement vehicles in America rely on buying stock, specifically the S&P500, this can really be tricky. Many companies have resisted going public, get bought out by private equity, etc. Private companies are very hard to invest in, requiring a certain amount of wealth and connections. But I think this is why we're in a huge easy VC money startup economy. The money is looking for a place to be invested, and as some analysts say, TINA - there is no alternative, that is, they need to be invested, but the price of assets they can purchase is getting worryingly high.

https://www.bloomberg.com/opinion/articles/2018-04-09/where-...

As other commentators pointed out: Savings and investments are two sides of the same coin here. The money which is used for saving will be invested somewhere - even if the person who owns it just keeps it in an account on the bank.

The problem I see is that the money almost exclusively goes to startups. In the last 10 years the startup scene in the US has been doing very well - not in terms of profits but in terms of funding. This giant "pool of money" created by the FED however mostly benefits just a small part of the workforce: Notably the engineers, scientists, managers, lawyers, investment bankers, etc. in the startup hotspots: In cities like SF, NYC, Seattle, Houston, etc. This is a problem for society because while wages for some parts of the workforce keep growing other workers are left with stagnating wages.

If you buy shares from anyone, either they were comfortable with their previous asset allocation (and will therefore seek to re-invest that money in some other stock), they were selling shares to rebalance their portfolio, or they were selling shares as part of their planned selling to fund their retirement or meet the obligations of their pension payouts (in which case that money will be spent in the economy).

It's only in the middle case (which I think is the most rare of the three) where the share buyback money ends up as savings. (And even there, it's likely in government bonds, lowering the cost of government borrowing when done in aggregate.)

I think it is a bit more complicated than that. The bottom 90% keep a big chunk of what little savings they have in cash or cash equivalents. The top 1% invest most of their savings in treasuries (investing in federal spending) or equities (businesses) or other investments (real estate, etc). This is why many believe it is sensible to reduce taxes for the wealthy; perhaps they will continue to invest the savings in private businesses.

> Instead, they save to hedge against and profit from recessions.

You are arguing that non-governmental investment/stimulus in the depths of a recession is a bad thing?

There's a famous quote:

> Socialism never took root in America because the poor see themselves not as an exploited proletariat but as temporarily embarrassed millionaires.

If you were aspiring to be the next Bezos or Gates, you too might be inclined to support tax policies that would benefit your future self.

Oh but it is going in a wonderful investment: consolidation of elite power.

When “gains every quarter” are the goal and the measure of “gains” is finance, if you own all the valuable assets up for trade in the finance market...

But that’s ridiculous!

Humans are not and never will be rational actors. They carry their childhood memes with them for life via their brains. Offer some science that refutes it if you got it, but the functional processes of literal reality trump our conscious gut and that’s a well debated fact of human behavior.

The narrative has always been “protect inherited power.”

We see Tonight show hosts, religious true believers, true believers in capitalism, etc stand up to protect the “torch” they’ve been handed. Symbolism above all else.

Finance is another source of illusory power that we have a habit of blindly bestowing on others for emotional feels, before utilitarian value. Not saying that’s good or bad, it’s just what I find to be a reasonable summarization.

What a shock! Tim Cook and the rest aren’t investing in r&d. But their era was corporate micromanagement. Business of financial economy. Not nation state building and rivalry, which flooded the economy with public investment dollars via high taxation.

Because yield is only meaningful when considered in a context with risk, and many investing agents are risk averse enough to include a large amount of low-yield low-risk investments in their investment mixture.

What do you think happens to the money invested in bond offerings?

Imagine what would happen if investors didn’t buy bonds?

"Trickle down" economics is a strawman that mischaracterizes supply side economics:

https://www.youtube.com/watch?v=VlWCnA7TbNU

Wasn't that already the original assumption?

Help rich entity; rich entity will help the rest of the economy?

They shouldn't, which is why the corporate tax rate should be raised.

It didn't even address the point. It analysed what companies were doing, not what the recipients of the money were doing.

Employers aren’t going to pay more until employees start asking for more. Employees don’t ask for more because labor isn’t an efficient market like stocks or real estate. Employees tend to set their asking prices too low because they lack up to date pricing information. Outside of unionized labor and government, employers deliberately conceal salary information and make it difficult to do a valuation of a job based on comparable positions.

I don’t see how this can change unless the information gap between employers and employees is eliminated.

> creating 50 jobs that automate away 1000 jobs is a net loss of 950 jobs

Keeping 950 jobs that are technologically uncompetitive is a good way to create a crisis down the road. Let's not confuse the investment and automation debates.

It has always been the case, throughout human history, that advances in technology have reduced the need for some jobs. Given that, the goal should not be to prevent it from happening; you can't in any sustainable way. Rather, making sure that there are other things for the people that would have held those jobs should be the goal. New jobs, reducing the need for jobs altogether, or something else.

But standing in the way of progress telling it to stop is never going to be a realistic solution.

When you say 'save', what do you mean? They aren't putting it in a mattress in their house... they are 'saving' it in investments that fund the economy.

The money they're talking about isn't peoples income, it's companies buying stock. The people they buy it from turn around and invest it elsewhere. Likewise, the "40%" saved isn't sitting in a vault somewhere, it's also invested.

> The best way to spur economic growth is to give money to people who will spend it quickly whether rich or poor. In general, it turns out most very wealthy people have little incentive to spend money quickly. Instead, they save to hedge against and profit from recessions.

This is plain incorrect. Spending on the value-less services and goods makes the economy as a whole poorer, and the more you spend the more you impoverish.

I don't understand what you mean, because you say "the best way to spur economic growth is to give money to people who will spend it quickly". That is "trickle down economics" as I understand what people mean by the phrase, and I agree(?) that it makes no sense. Broken windows, etc.

Take the converse construction. "Let's raise taxes on companies and wealthy individuals so the government can get into the winner-picking business of investing in startups and entrepreneurs." I would personally object to that policy.

That's basically a planned market and those do not work without a perfect government that has total access over all information in the economy. Such a government will probably never exist.

Remember you are talking about denying a CEO the ability to decide whether to invest or not invest in additional production capacity and instead assigning this task to the government. The CEO has more information about his own company than the government, which means that the government is not capable of making this decision. The government is also insulated from the consequences of making the wrong decision, if a company loses revenue or even shuts down the government is not directly affected.

Well I guess that depends on how successful you imagine the government would be at running such a program.

If it is in the US, my intuition is that it wouldn't be very good.

This is not correct. Companies conducting buybacks do so at a low rate over a long period of time exactly to avoid having the impact that you're describing. Companies buy their shares back at the market price, and the normal transaction volume of a large companies shares dwarf the size of buybacks it may be conducting.

I think you misunderstood the main point of @whatshisface.

If a company buys back shares from an existing investor (EI), EI now has cash and is likely to either spend that money (if they're a retiree selling shares for income) or reinvest that cash into some other investment. It's very unlikely that they're going to keep that new money in cash or a savings account.

What's the alternative? The company that has decided it's not worth using the money just creates a pile of unused cash or starts spreading into new businesses to get better returns on it.

You can argue against the tax implications of buybacks vs dividends but either corporations give profits back to investors or they will just have to continue to grow bigger and bigger, which I think the same people hate even more than buybacks.

It's debatable whether most people believed it. It was an argument bandied and a bunch of politicians passed a law. It was not put up to a popular vote (like you would see with Propositions in California).

All we can really say about the beliefs of Americans is captured by a recent CBS News Poll:

> Far fewer think the middle class (31 percent) and homeowners (25 percent) have been helped. More Americans think those groups have been hurt rather than helped by the new law.

https://www.cbsnews.com/news/2019-taxes-most-say-new-tax-law...

You mean like people who saved in their 401(k) for 30 years and are now living off it?

Fake news, click-bait, misleading, agenda driven reporting; call it what you like. I did provide extra information to contextualize why I called it that, not sure why you are so mad.

Do we? Ideally corporate tax would be 0%, and the people actually pocketing cash out of the company entirely would be taxed.

Interest paid, though, is not. Which gives debt a tax edge over equity.

Good to see. There is still the issue of double taxation.

> Investors keep pretty much all of their money invested pretty much all of the time, or the banks that they store their money in do by proxy.

That's only true when banks actually lend. In the wake of the Great Recession, however, many banks drastically cut back on their lending — and to that extent they were no more than giant virtual mattresses into which their depositors' money was stuffed. As a Federal Reserve official said in 2015 about the Great Recession's aftermath: "... the sharper decline in outstanding bank loans to businesses that I mentioned earlier was likely a contributing factor to the slower economic recovery we have observed this time around." [0]

[0] https://www.bis.org/review/r150417b.pdf

> However, if the stock is under pressure (below its “fair” price), say 50 cents in the above example, then by buying the stock back, you are creating true value for your investors.

Which means that your company just gambles its money at the stock market by betting on its own price.

harryh's argument can be modified to work regardless of how the market is valuing the company. Cash is easy for accountants to measure. Some other assets, such as the reputation of the company's products, are hard to measure even when they account for most of the company's market value (as in the case of Apple, Inc, whose stock price is currently about 9 times higher than its book value). So assume there is $100 of easily-measured cash. Don't consider the other assets; don't try to measure them; don't pay any attention to the attempts of the accountants to measure them (i.e., don't pay any attention to the company's book value). Assume the market values the company at $200. I.e., the company's market capitalization (stock price times shares issued) is $200. The argument continues by assuming or pointing out that investors are rational and that the SEC and the financial-accounting profession operate to give investors accurate information about how much cash the company has, so the market will value the company after the buy back at around $100.

One reason an investor might buy shares is to try to take over the company, i.e., end up with all of its shares. Well, it is well known that the people executing a takeover often depend on getting access to the target's cash and other easily-measured (and consequently easily-sold) assets to help pay for the takeover. Specifically, if the company has $100 in cash, the takeover artist can afford to pay approximately $100 more for the company than if it has $0 in cash. (Specifically, if the target has $100 in cash, the takeover artist can go to one of his friends and says, "Loan me $100 and I'll pay you back with the cash held by the company I am planning on buying.) So since market cap is approximately what it would cost to buy the whole company, it makes sense that a reduction in cash would cause a reduction in market cap of approximately the same amount.

Note that even investors who would never contemplate taking over a company can profit by selling their shares to someone who would and does, so they have the same incentive for valuing the company's cash as the takeover artist does: namely, the takeover artist can afford pay more for a company with cash, so the price paid by the takeover artist to the investor will be commensurately higher.

Now the fact that management decided to buy the company's shares rather than deploy the cash in some other way does send a signal to the market that management believes the company's stock is good value with the result that the price might end up at $103 instead of $100. We might call that a "second-order effect" of the buyback. Another second-order effect is that fact that if the market knows a buyback is in progess, they'll tend to hold out for a higher price. (In other words, a big purchase tends to drive up the price; the company will spread the buying out over time to try to limit that effect.) But these second-order effect are limited in magnitude; they are very unlikely to cause the price to end up at, e.g., $200.

Ya, when I said "other assets" I was perhaps being overly succinct. I didn't just mean the value of equipment, IP, or whatever, but also the intangible value assigned by the market that is an estimate of the companies future earnings.

I think the idea is that because there is money going out the door in a buyback, rational investors should value the stock that much lower. And this lowered valuation should balance exactly with the price increase due to increased demand. Not sure it works out like that in practice though.

The company can only create new shares if it has unissued capital. Granted this is kind of a arbitrary legal restriction, so it doesn’t really matter.

But the real issue is that shareholders will be informed when new shares are issued and no one likes dilution. I’m not 100% sure, but I believe existing shares held by the company can be sold without notification until a quarterly report.

> Companies can create new shares out of nothing anytime they want.

Companies have a number of authorized shares and typically need shareholder approval to increase it. Sure, they typically set the number of authorized shares high enough to run into the problem with any frequency, they can't "create new shares out of nothing anytime they want."

This is subject to corporate charter/bylaws and, usually, the 20% rule.

The Democrats usually complain that the money should be used to increase salaries or whatever. Which is fine, I guess. But it’s not about a tax dodge (or at least that’s not the main point).

But its not a guarantee of "receiving" any thing the company makes vague promises which may or may not actually result in a gain to me, its also ignoring the time value of money.

There are I think better and more transparent ways of returning $ to investors.

That’s a super simplified model of the world. Investors put a lot of work into finding out information between earnings calls, including talking to suppliers and customers, acquiring data on sales (obtained via retailers, credit card companies, satellite data, etc), and observing external events that affect the market including regulatory changes and the earnings of peer companies. All of these bits of information can provide insight on the hidden information.

There is, of course, speculation in the market. My objection was to use of the phrase "pure speculation."

As Benjamin Graham said, the stock market is a voting machine in the short term but a weighing machine in the long term.

Not just earning calls provide new information. The market also reacts to economic data, key people leaving a company, regulatory changes, natural disasters and so on. If it changes the company's outlook, it will also move the stock price.

Alphabet just announced a 25 billion dollar stock buyback.

Amazon and Facebook are growth stocks so investors don't mind them holding some cash to make investments, fund acquisitions and what not (which is what everyone here seems to want). However, they'll both probably hit a 100 billion dollars in cash in the next 5 years and I would expect dividends/buybacks to follow soon after as that is more cash than anyone reasonably needs.

They don't (currently) issue dividends because the expectation is they will buy back their stock or will issue dividends in the future.

If a company never issued dividends and never bought back their own stock, then there would be no reason for investors to buy stocks in the first place. Most investors don't invest out of the goodness of their hearts, they invest to get a return on capital.

Do you think that all of those people are insane? Surely you must realize that shares of non-dividend paying companies are valuable because they are expected to eventually begin paying dividends.

Actually the stockholders are last in line -- "profit" is what is left over after all the other expenses are paid. Employees are entitled to their wages as long as they are employed; stockholders are not actually entitled to anything and may never see any return on their investment. Before stockholders can be paid, a company must pay its employees, its suppliers, its taxes, its bondholders, etc. That is the risk a stockholder accepts.

It is wrong to think of a stockholder as having given a "loan," because that is not what stock represents. Stock represents an ownership stake in a business, and ownership is perpetual (a perpetual loan makes no sense -- it is not a "loan" if it can never be repaid).

Stock ownership is transferable for a publicly traded company, which is why someone who did not buy their stake directly from the company can be entitled to all the benefits of someone who did. This is a good thing because it reduces the risk of investing -- if you invest in a company, and later on find yourself short on cash, you can sell your shares (though it may be for less than you paid, but that's just how it goes when you own something). If the buyer of your shares were not entitled to the same benefits as you, why would they buy the shares in the first place?

That is also why a company ultimately serves the interest of its shareholders -- they are the owners. That is how a capitalist system works, so if you think this is problematic then you really have a problem with capitalism. What sort of system would you like to see? Communist systems have not been nearly as successful historically (which is why there are so few remaining) and socialism has only worked well as means of supporting capitalism (e.g. providing people with food, healthcare, education, transportation, and whatnot so that they can participate in a capitalist system in a meaningful way).

Thank you for taking the time to reply, and correcting my misconceptions.

Even then it's rarely the actual goal of the policy either. It's usually a side effect that gets packed in to wider reductions. "Trickle down" as a concept is a political invention.

The disconnect between real-life economics and policy isn't limited to just that either. Just like how all the private equity businesses were the first to be brought in front of congress immediately after the 2008 financial crisis because everyone wanted to blame them (they wanted to blame "neo" Gordon Gekko corporate raiders for all the problems, but quickly discovered all the LBO firms out-performed the market and had invested in companies which would have stagnated or died otherwise). Yet they ended up being the few firms who could had the LBO capital market not existed). In the end much of the capital for the bailouts the Obama administration used came from the same group they wanted to blame.

Then a bunch of new rules got put in place which only solidifier the stranglehold the top-5 banks had as the smaller banks could never have survived had they met the capital and oversight requirements.

It's true that if they keep borrowing, eventually they will borrow too much.

But I would guess CFO's know that. They may not be right about what's a sustainable level of debt, but they probably think there is a limit and not go past that.

I speculated more about this here: https://news.ycombinator.com/item?id=20666217