Stock buybacks used to be illegal. It's a loophole way of paying employees at a lower tax rate than salary.
HBR discusses some downsides of buybacks: https://hbr.org/2020/01/why-stock-buybacks-are-dangerous-for...
HBR discusses some downsides of buybacks: https://hbr.org/2020/01/why-stock-buybacks-are-dangerous-for...
It's reasonable to be upset about the fact that this is arguably a tax dodge! But all of the other criticism of buybacks apply equally to dividends which no one seems to get upset about. Fundamentally this is the corporation saying it doesn't have a market-beating way to reinvest this capital, and it's giving the money back to its owners to more productively invest.
The fundamental purpose of a buyback is not to raise the stock price. The purpose of a buyback is to reduce the amount of outstanding shares, which makes every existing owner own an increased percentage. If a company buys back 10% of its stock, each long term shareholder now owns 10% more of the company. Over the long term, steady buybacks increase shareholder value this way, but the purpose of it isn't to slam the order book and juice the price. That's counterproductive, because you'll buy fewer shares at higher prices, and within a trading day, the market will push the price back to normal anyway.
They do, but it is only paid by the people who took the money (instead of being forced to do so), and, more importantly, only on the difference from what they paid.
If you pay out $1mln of dividends, then everyone collectively owes (let's say at a qualified rate of 20%) a total of $200k. If you buy 20,000 shares from one guy at $50/share, you returned the same $1mln of cash to shareholders, but if he bought last year for $45, he only owes (let's say at a long-term capital gains rate of 20%) a total of $20k in taxes.
If they buy back x, it strengthens shares by 1/(1-x)
So if they buy back 50%, remaining shareholders have 2x ownership.
Make up whatever nonsense you want about the “fundamental purpose” of something, it doesn’t matter. The purpose of a system is what it does:
https://en.m.wikipedia.org/wiki/The_purpose_of_a_system_is_w...
Stock buybacks increase share price. There’s no reason to look any farther than that. The purpose of stock buybacks is what stock buybacks do.
Searching on the subject of "buybacks where share price decresed", Google returns Merck as an example (reffing Harvard Business Review), which actually works quite well to illustrate. The HBR article even notes the main strategy "historically, companies that bought back their own shares have posted immediate returns between two and 12 percentage points above the market average"
"Merck's stock price dropped after a major buyback announcement when investors focused on expiring patents and a drying drug pipeline"
Except: Feb. 23, 2000, NYT, "Merck & Company, the No. 1 United States drugmaker, will buy back as much as $10 billion of its shares, which have fallen 18 percent this month." (Closest share price I can grab is 2/25/2000 at $57.39)
Share price then climbs steadily (tiny drop in July) up to a max at 12/29/2000 of $89.27 before finally crashing.
The first example Google returns is full of info on the stock behavior that makes it look like the stock buyback did not initially jack the price. Owners had 10 months to pull in a 55% share price increase before it crashed. And they floated through the 2000 March 10 bubble popping until the stock market really started deflating in 2001.
Much of the gains in the stock market the past decade or so are simply the result of a greatly reduced number of shares available to purchase - as a result of buybacks, takeovers and going private (there are roughly 1/2 the number of listed companies today as in the 1990s).
Fundamentally this is the corporation saying it doesn't have a market-beating way to reinvest this capital
But their stock is priced like it too, so they are plowing most of their free cash flow into buying back shares, and it more than offsets the melt. The result? Their shares are steady and up about 95% over the past 5 years despite overall revenue decline across this period.
Sure, you could have this sleepy turbocharger factory start investing in real estate, or get into uranium mining, or begin trying to write and sell cloud computing software. But their strategy is to keep making a good product and regularly eat up stock to overcome declining earnings per share, and it's working rather nicely.
The new admin just did that last month in the Big Beautiful Bill.
Before tech companies demonstrated the principle of infinite growth, the purpose of a company was to generate revenue (paid as dividends) for its shareholders.
So much growth hasn't really been possible before.
If a company can keep growing and investing infinitely, one might argue that it's time for the DOJ / FTC to step in and stop them from eating the entire business sector. That's the sign of a monopoly pushing into every market like an invasive species and making the existing businesses in those markets go extinct. Kind of like how tech companies are now movie companies, music companies, game companies, pharmaceuticals, grocery stores...
Perhaps we have different definitions of “infinite,” but either way I’m pretty sure nobody’s demonstrated that yet.
They temporarily raise the stock price for the people who are the counterparties to the stock purchase, but isn't that also creating a taxable event for them?
Once the buyback is done, what's keeping that share price from sliding right back down to earth? The shareholders who support the company and hold watch a group who bet against the company by selling shares reap a profit, in a tax advantaged way, while their own dividends are effectively stolen. The buybacks are actually a crap deal for anyone who is a responsible buy and hold investor.
Warren Buffett bought a couple percent of American Express, and now owns 22% of the company despite not buying a share in decades. It really becomes apparent over time. American Express just carefully repurchased shares over the years and Buffett's stake became greater and greater.
They own an extra 11%. Not 10%.
1/100 versus 1/90
I’m not sure if this is basically the same or just related to the first item, but I’m also going to make them also fix the bug where taking away 1/4 then adding 1/3 returns you to the same amount.
Buybacks only create a taxable event for the shareholders that wish to sell.
And the share price doesn't slide down because there are now less shares on the open market. Theoretically the market capitalization decreases by the amount of money spent on the buyback.
Also, if you issue a dividend the market expects that dividend to be ongoing, hell or high water. Share buybacks do not have that social expectation, so the "temporary" nature of them is an asset for companies that don't want to go from a growth stock to an income stock.
The plan really seems for the buyback never to be done. Or only in case of economy-wide disruption when there is something to blame— a kind of reverse-Buffet.
In fact , adding more punch to the bowl is a key advantage over the legacy tender offer process— tenders directly compete for shares for just a little while. Buybacks, while they have limits, are much more persistent and flexible.
Perhaps it was some historical accident that when the SEC made reacquiring shares easier, everyone started doing more of it … but at some point the explanations of efficient capital allocation just become too much.
And maybe I don't understand the stock option game and stock BuyBacks don't count towards the strike price for options. But I doubt it
I don't know what planet you're living on, where nobody's ever been upset about dividends.
> For most of the 20th century, stock buybacks were deemed illegal because they were thought to be a form of stock market manipulation.
https://www.forbes.com/sites/aalsin/2017/02/28/shareholders-...
Henry Singleton who founded Teledyne is known as the buyback king because he used his high-flying stock in the 1960s to snap up tons of smaller electronics companies, and when his stock crashed to $8 during the years of stagflation, snapped up millions with buybacks. In the end, he had used his stock as a currency to acquire dozens of companies at what essentially became 80% discounts.
http://csinvesting.org/wp-content/uploads/2015/05/Dr.-Single...
A very good very in-depth PDF read about him if you're interested in this type of thing.
Sure, bids hitting the orderbook theoretically keeps a stock price higher than the counterfactual where the bids did not exist, but it's simply urban myth that failing companies can keep their stock price high over the long term with buybacks. The math doesn't pencil out.
QED: manipulation
> failing companies can keep their stock price high over the long term with buybacks
This assumes they care about the long term.
Maybe executives shouldn't have stock. Then it wouldn't be manipulation.
But they do. That is their main compensation people like to point (the CEO isn't really getting paid those millions, it's stocks). So the CEO is paid in a way that encourage the CEO to commit DIRECT stock manipulation.
…that’s what a share of stock is.
which just formalized ways that the SEC was finding corporations not guilty and transparent enough, this blueprint paved the way for corporations to all copy it as well as reducing the administrative overheard of caring at all
the exceptions make the rule
If you think returning money to investors is bad, I have to ask: Why would anyone invest in the first place?
If my option is a 5% dividend or a 5% share buy-back, the net-of-taxes benefit of the 5% dividend is 15%-20% less due to capital gains taxes than the share buy-back. The effect with annual compounding over many years is quite material...
What does that phrase even mean? It's nonsensical. Whether via buybacks or dividends, money goes from the corporation to its investors. That's why investors invest.
Metrics like debt service costs to cashflow are also relatively healthy.