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> In reality, executives and directors could very well be authorizing stock buy-backs to keep share prices up so their stock options remain in-the-money for as long as possible. If that's the case, the buybacks are meant more for the benefit of executives and directors than for the benefit of the business or its shareholders.

This plan shouldn't work because buybacks shouldn't cause stocks to rise unless the market thinks they're a good idea. For example, if a company with 1 million shares is worth $90 million and has $10 million of cash on top of that, then each share will be worth $100. If it uses that cash to buy shares it will be able to get 100 thousand of them, so it will become a $90 million company with 900 thousand shares. Each share is still worth $100.

That’s only true as long as the buybacks are done using a cash pile. There are a lot of companies that, instead of trying to grow, give dividends to their investors (think utility companies). Their stock prices tend to be pretty stable, since their inherent worths don’t change much. Suppose there is a 100 million dollar power company that instead of giving dividends of 1% per year, they instead bought back stock with that money. We would expect the stock valuation to go up by about 1%, since it’s now 99% of the stocks holding 100% of the 100 million dollar business.

Right. Buybacks don't raise the shareprice relative to doing nothing, but they do raise the shareprice relative to paying dividends. Maybe it would be better to describe this as "dividends lower the share price".

I suppose the converse is that any profitable company’s share price will go up continually, as long as they don’t give dividends.

> We would expect the stock valuation to go up by about 1%

Yes, but not overnight. It will take one year or one quarter or whatever would by the period required for the price to recover if it had distributed the 1% dividend. (You said an annual dividend of 1% but that seems too low for a stable business!)

> This plan shouldn't work...

It works fine in the short term. It even makes the company more attractive to people who think it is a bad deal - maybe I expect them to go bust in 12 months, but there is an opportunity right now for me to buy shares off Trader A and sell them to a company for a slight markup, leaching money out of a failing concern. I've actually bought government bonds using very similar logic. I can't say if my logic on that specific trade was right, but as long as traders expect buybacks in the near future the price will be artificially elevated.

Essentially, for a shortish time-frame (don't know how long) stocks trade as tokens giving access to a cash flow instead of a measure of the intrinsic value of the company.

The issue is that the price will drop immediately on the prospect of further share buybacks ending. The shareholders who didn't sell are left holding the bag - a company with less cash, more debt and likely a wealthy executive bowing out while the going is good. As soon as something goes publicly wrong that suggests the end of buybacks (maybe a corporate debt crisis of some sort) the stock prices will probably drop further than usual because the buybacks end.

So the part that this doesn't cover is any sort of earnings multiple/discount. For simplicity assume the $10M was earnings over the last year. Your EPS is $10. After your buyback, assuming all things equal, your same $10M now makes your EPS $11.11.

The point there is the mechanics of buybacks make more sense when you think of how they behave marginally, and what it says about how the company's future earnings are being discounted.

Doesn't one require the other? You have to buy back the stock from someone. That someone is necessarily divesting themselves of the stock as a result.

You are technically correct, but the GP is alluding to the intent of the companies/executives.

In one case the intent is good (proper allocation of cash); in the other it is not-good (engineering financial bonuses for themselves).

If you're referring to "...investors have been cashing out of US stocks at a record pace", than to further clarify - investors are divesting out of the public stock market entirely. They're not selling their Apple stock in a buyback to invest the proceeds of the sale into an exciting IPO, or a deep value small cap. They're just taking it out of entirely. Think what that implies about the macro structure of a "market economy" when the majority of new money going into stocks is executive/company initiated stock buy backs, and not "investment".

Macro, it seems to mean that owners believe in their companies and want more equity. Hardly a bad thing unless you're trying to predict the next recession

You don't have to "believe" if you are planning on getting out before the chumps do. It's like robbing a bank, only legally.

As costs to borrow continue to fall, the search for yield is exacerbated. Buybacks seem like a rational choice for executives to meet their performance goals/incentive structures given that the list of other options is becoming shorter/harder.

Here is link to an updated data set for [a] https://fred.stlouisfed.org/graph/?id=QUSNAM770A,

Meh, seems like a straightforward effect of ultra low interest rate that's been well-known for years.

See https://seekingalpha.com/article/3672916-buyback-arbitrage-i... for several examples of how smart this is. The TLDR is that this is just a company unable/unwilling to lower its dividend yield and arbitraging that yield against low interest rates. Every share it buys back represents a dividend it never has to pay again. A ~2% loan for 30 years in present-value terms is cheaper than a 3% dividend yield into perpetuity for some number of shares it can buy.

Investors might be cashing out because the stock market is at a high. This is literally investing 101. Buy low sell high.

Yeah, 101 for people who think they know more about market timing than the average other person who shares the same believe.

That's more like Gambling 101. Investing 101 would be dollar cost averaging.

Then why are companies buying back at record highs? Surely they are not dumber than Joe the Investor on Main Street.

Low interest rates as well as high cash levels. The whole point of markets is to raise cash then pay it off. Not to tank the price and rip off investors.

Also, buying back shares keeps stock prices high, makes each outstanding share worth more (less dilution), so more value for the remaining owners.

yup, this is taught in MBA programs as a classic example of a moral hazard/principle agent problem. executives are offloading downside risk to shareholders and locking in profits for themselves.

one way to discourage such behavior is the lengthen the time horizons of performance incentives like stock grants and bonuses (to, say, 7 years).

In reality, that is the only reason IBM is still floating around $100. It isn't worth that, and if they didn't buy back their stock, they'd crash their value.

Retirees cashing out?

Boomers discovering one more way to screw the next generation. Hey, they go theirs.

Delicious board bonuses.

What do broad buybacks say about the professed benefit of capitalism that it's supposed to reduce prices for customers and society? This cashflow seems like it's representative of rentier leverage against market effects that are supposed to squeeze profits in order to deliver innovation and efficiency.