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Comment by MattGaiser | Hacker News Reader

You need profits for stock buybacks. Buybacks are just superior to dividends as a way to return capital.

>You need profits for stock buybacks.

You merely need capital. Lots of buybacks are funded by debt

This is pretty insane actually. Is there a common metric that captures which companies are funding buybacks with debt? or is it easy to figure out? I am not a finance person.

If the long term debt increases during a period of buybacks, particularly more than net income, than yeah this is the case. And yes that happens.

BTW, this is exactly what private equity companies do when they take a company private. They borrow a lot of money to buy the outstanding stock. Often the company they are buying with debt (held by the company) is not profitable. And sometimes the company goes bankrupt.

So yes this happens.

With interest rates as low as they are (on both government backed and corporate investment grade bonds) and a reasonable forecast of higher inflation ahead, why shouldn't companies borrow for a variety of corporate activities, both operational and treasury?

They should, and they should use the money to do the corporate activities you mentioned.

No. But it's generally common knowledge. Here are some articles

https://fortune.com/2019/08/20/stock-buybacks-debt-financed/

https://www.cnbc.com/2019/07/29/buybacks-companies-increasin...

https://crsreports.congress.gov/product/pdf/IF/IF11393

From the last one: "Data on the percentage of buybacks that are leveraged are inconsistent. For example, the bank J.P. Morgan Chase reported that leveraged buybacks accounted for 14% of overall buybacks during 2018, which it said was the lowest percentage since 2009. But Yardeni Research, a respected securities market research firm, reported that they were 56% of the total."

this is another one of those things you learn in business school, a commonly disdained yet imminently useful education, particularly for engineers.

> funded by debt

Or recently, government support packages.

Which is debt.

Leveraged buybacks reduce the multiple. It’s not a cheat code to make your stock go up.

A lot of the companies getting into debt have their own cash reserves.

Dividends ought to not be at a tax disadvantage over capital gains for this reason.

The problem is also unrealised gains vs realised ones. I don't pay any tax on the stock price increasing. I have to pay tax on dividends.

If I don't need the money, I can just let it continue to grow tax free.

Are they not? I thought qualified dividends (that is, dividends on stocks that have been held long enough to qualify for long-term capital gains) are taxed at the long-term capital gains rate.

You still have the one year of dividends taxed at the short-term rate, since dividends are taxed on disbursement whereas capital gains is only taxed on stock sale.

Dividends are taxable at the time of distribution; the price effects of a buyback are taxable when shares are sold [1], and delayed taxes are preferable to immediate taxes.

[1] unless the holder has elected for trader tax treatment, in which case shares are marked to market at the end of the tax year

Strictly no. You need "free" zero interest money from the Fed! That's how MOST stock buy-backs are financed - it going onto the balance sheet as debt which someday will bite them.

This is the shitty side of many modern CEOs. But the legal and tax incentives combined with Wall Street demands create the environment for it.

I think most criticism of buybacks would go away if we eliminated the capital gains tax and treated income equally regardless of where it comes from.

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