What's the argument for stock buyback programs generally? We have more cash than we know how to spend reasonably?
Now, if you're using debt to finance share buy backs, then yeah... it's a short term ploy. But most companies don't use buy backs this way.
But the cash outflow to purchase those shares makes the company less valuable at the same time. In a completely efficient market, the amount of money that the company pays to buy back a share should be exactly balanced by the ownership percentage of that share, resulting in no net change to the price of the company's other shares.
Suppose your blended portfolio grows at 10%/year nominal, and you're in the 20% capital gains bracket. Then you would owe 2%/year taxes if you realized it every year. Would you not then need an interest rate lower than 2% nominal (i.e. 0% real, assuming 2% target inflation) to come out ahead? That's also assuming you're not already receiving some dividends/income or can't be selective about tax lots to sell.
You could say "well you can simply accumulate an interest balance without ever repaying the loan, and hope the assets appreciate faster than the interest compounds", but then shouldn't you have already levered up prior to ever considering taxes? So taking on additional loans pushes you outside of your risk tolerance? Do you borrow or pay taxes depending on your portfolio performance? How does this work?
I'd be interested in seeing what someone with an actual finance background has to say about this "strategy". The popular image is just "free money", but while I have enough assets to start buying things with margin loans myself, I'm failing to see how to get some of that free money.
It seems generally reasonable that using an asset to collateralize a loan should be a taxable event, but the narrative about how this gets used seems off to me when trying to figure out the details.
You're assuming that someone has a portfolio that has a cost basis that is very close to the current market value. Most ultra wealthy folks have holdings that have been held onto for a very long time, with cost basis' that might as well be $0 compared to the value of the assets. Even non-wealthy folks that saved in a traditional brokerage would have a cost basis that is very low compared to the value of the assets. During the 'accumulation' phase, there likely is not much being sold at all.
If you want to access this capital, then you're paying 20% on every dollar. You don't need a 2% interest rate to make out ahead in this situation, it can be substantially higher and still be a better deal than paying the cap gains taxes.
Taking on loans also means you're adjusting how leveraged you are, so I feel like there's a missing risk analysis component here. Otherwise of course I'd just take out as many loans as I could right now to get that sweet 10% expected growth at only 6% interest or whatever. So I can't borrow to avoid the tax man because I already borrowed as much as people are willing to give me.
If you pay 50 cents to a financial service provider to avoid paying 1 dollar to the government, you’ve definitely come out ahead and the government has definitely lost. But the real winner is probably the financial service provider that is mostly pushing paper around rather than figuring out how to create the multi-billion dollar business that is needed to start the whole process in the first place.
In the US, stock buybacks are taxed. But, its a fairly negligible amount (1%).
If you have more money than you're able to make good use of improving the company (r&d, acquisitions, new locations, whatever), you can give it back to investors. Which can be either a dividend or a buyback, and in theory (ie, ignoring pesky details like taxes) those are supposed to be equivalent.
It lacks a moral component.
> We have more cash than we know how to spend reasonably?
- pay your workers a good bonus?
- invest the money in the market?
- lower prices?
> What's the argument for stock buyback programs generally?
* https://www.forbes.com/sites/aalsin/2017/02/28/shareholders-...
I like the idea of giving long-term shareholders an easier way to weigh in on buybacks.
Unless you're Berkshire, most investors don't want this. They buy a company for its success in widgetry. If they wanted to pay someone to invest in the market, they'd buy an actively managed fund.