Not why it can’t be done so much as why it isn’t done. Share buybacks allow companies to reward executives directly as their compensation is tied to stock price. If we started not doing that, the priorities might shift, but those executives like things the way they are.
Before Tim Cook Apple had never done a buyback - Jobs was always thinking Apple could do better with the money in R&D than paying off shareholders. Wall Street did not approve of this position, but Jobs wasn’t one to listen to anybody, so it did not matter. Most CEOs are not going to take such a strong position when they, the stockholders, and every other executive can be guaranteed a financial reward through a buyback.
> Share buybacks allow companies to reward executives directly as their compensation is tied to stock price. If we started not doing that, the priorities might shift, but those executives like things the way they are.
This isn't right but it's adjacent.
Executives don't need buybacks to get whatever compensation. Their compensation is negotiated and you can write the contract to make it whatever.
However, paying dividends is a taxable event, which means shareholders don't like it. You have to pay the tax on the dividend immediately instead of when you sell the shares, even if you just use the money to buy more shares. Buybacks don't work like that unless you're the one who sells your shares in the buyback. Which you can be if you'd rather have the money immediately (and pay the tax) than de facto increase your holdings in the company.
If transferring money to shareholders as dividends forces them to realize taxable gains before they want to then they'd prefer the company keep the money and invest it in something internally instead. Buybacks give them away around that.
But that's not necessarily bad. The shareholders (the ones who sold their shares) get the money instead and then invest it in something else, ideally a different company so that the existing large company doesn't get even bigger.
Also, when the company keeps the money, it doesn't have to use it for R&D at all. Companies often use it to acquire other companies, which is the worst.
You don't really want a tax incentive to make big companies bigger.
I've been reading the Chernow biography of Rockefeller, and this simply isn't true. We've almost never enforced "anti-trust law", and it's basically never been particularly effective.
The Sherman Act was widely considered a failure (even after passage in 1890). It did little/nothing to affect the fate of Standard Oil, which actually grew for a decade after passage, to over 90% control of the market by 1904. This is despite the state of Ohio engaging in a much more successful legal attack, based on technicalities of the trust charter, having nothing to do with the federal law.
The thing that actually brought down Standard Oil was...competition. By the time the company was actually broken up in under the Sherman Act in 1911, it had declined to ~60% market share. The overall story is essentially the same as today: the law ends up being used to punish declining companies for prior bad behavior.
Laws mostly don't work by actually filing cases. They mostly work by deterring malicious activity because people don't want a case brought against them. The cases are only for the ones who fail to be deterred, which is pretty uncommon for large corporations because they can afford lawyers to tell them what not to do.
The problem comes when you erode what was meant to be a strong antitrust law through decades of narrowing interpretations and then it's not deterring them anymore.
> the law ends up being used to punish declining companies for prior bad behavior.
The solution to this one is to take the politicians out of it and allow customers to file antitrust class actions.
Chicago school assholes backed by economic-right postwar "think tanks" managed to radically shift our standard for "harm" in anti trust enforcement, back in the '70s, though a combo of lobbying and positioning their folks in the right places. The result was that it became nearly impossible to take anti-trust action. That's why it seems like we suddenly stopped enforcing it—we did. This was followed shortly by a shift way to the right by Democrats on economic issues (among other things—listen to Clinton in the '90s talk about crime or schools or lots of other topics some time, he sounds exactly like a Republican) after Reagan's landslide, which put any hope of reversing that bad course on hold indefinitely.
The first notable push-back on that state of affairs was Lina Khan under Biden, who ever so slightly course-corrected us back toward healthy market competition in the tiniest of ways, and every business bro reacted like she was committing mass murder. Meanwhile, we need that times ten for at least a decade just to get us back to something resembling functioning markets. At this point I doubt we'll see a shift back toward reasonable market regulation... ever. Plutocrat capture of the levers of power is so complete that the only way I expect the US to see serious anti-trust action ever again is as a tool of corruption.
> However, paying dividends is a taxable event, which means shareholders don't like it.
Shareholders love dividends because it is taxed as capital gains ( long-term capital gains if you own the stock longer than 1 year ). It's why most of the publicly listed stock ( of profitable companies ) pay dividends - because shareholders want dividends. Apple was forced to pay dividends by investors. So was Meta. As was Alphabet. All under shareholder pressure because dividends get tax as capital gains. Any company sitting on a pile of cash will get pressure to pay it out as dividends by shareholders.
Hm. Not quite right. Regular shareholders don't like dividends. It means you have an immediate tax liability so you are paying taxes twice. The company paid taxes, and now you have to pay taxes. Then that money has to be invested elsewhere eventually incurring another tax event.
It's much better to have the company buy shares back. That way the stock price goes up. You then only face the tax event once you sell the stock later in the future. So you just avoided a tax event.
The reason for dividends is that pension funds and the like do like dividends for whatever reasons.
Individual investors and people who have a long term approach like Warren Buffet are against dividends.
I like having a dividend. A company like NVDA forces shareholder returns to the whim of the market price, but dividends stabilize things because the stock is actually tangibly worth something. It also forces a certain discipline in the company, since shareholders don't like dividends getting cut. It also limits empire-building, di-worsification, and "good ideas" that have questionable ROI.
> A company like NVDA forces shareholder returns to the whim of the market price, but dividends stabilize things because the stock is actually tangibly worth something.
All of the whims that go into the market price are still there. If you're a shareholder who doesn't care about the share price you're going to have a bad time.
> It also forces a certain discipline in the company, since shareholders don't like dividends getting cut.
Which usually leads to mismanagement more than anything because the company gets into a situation where they should lower the dividend but is under pressure not to and then starts eating their seed corn so they can still pay the dividend.
> It also limits empire-building, di-worsification, and "good ideas" that have questionable ROI.
> Share buybacks allow companies to reward executives directly as their compensation is tied to stock price.
To be fair share owners also like the stock price to go higher, they also like dividends (and higher dividends would tend to drive the stock price higher too), but an X% increase in share price caused by buybacks is favoured over an X% dividend because it isn’t immediately taxed.
My understanding is that executives prefer buybacks because they mostly are compensated with stock options, which don't pay dividends (until exercised) but which appreciate disproportionately from buybacks.
Dividends actually directly lower the stock price. Keep an eye on your portfolio when your holdings go ex-div -- the price falls because it no longer includes that cashflow.
It does not lower it in any long-term sense, because, unless it's a one-time dividend, there's another dividend next quarter, and generally assumed to be continuing payments for the foreseeable future if the company is healthy.
This doesn't sound correct. Giving out an expected dividend lowers a stock price since otherwise one could arbitrage it, but this is evidence that the dividend raised the price when it got priced in
No, most dividends are "qualified" and taxed at the long term capital gains rate, assuming you've held the underlying for a decent amount of time.
Still, they're taxed, whereas buybacks allow the shareholders to control exactly when they take income.
Also buybacks will tend to select for frequently traded shares with high cost basis, further reducing total taxes and selecting for longer term shareholders. They really are just better than dividends in every way.
Maybe some of these 2-brain cell executives should consider that their "buybacks" will be worthless when US throughput starts to be equally worthless compared to the rest of the world...
Of course, I'm being a bit pejorative, they aren't thinking big picture at all, just concerned with what happens tomorrow not the day after...
However, they are in part responsible for the nonsense happening at the moment wrt to American policy, it seems like a game who can light cash on fire the fastest ..
I don't think they do know. Nor do I think most of the shareholders know. If they did they would know that they can make way more money with forward thinking and planning beyond a quarter. The lack of that is the clearest indication I can imagine that they do not know.
See, this is the thing. An investor isn't tied to the fortunes of any one company. An investor can bail when things go south, and investors who care enough to be writing to executives or the board are also the ones most sensitive to signals things are going badly.
This is why 'activist' investing works - you can take on debt, or drive a debt-funded acquisition so that the immediate value of a share goes up, bail while people are buying the inflated price, and be running the con again while the debt kills the company. The execs are bound by the board, and don't feel empowered to fight these kinds of changes - often, they're replaced if they do (or as part of the board takeover).
Long-run, this is bad for the companies this happens to, and the overall economy, but it's good short-run for investors, and savvy investors don't need to worry about long run, because at worst they can liquidate their position before the market catches up and sit in treasuries if there's no other good poaching target.
The failure of anti-trust enforcement, of anyone to sue for long-term over short-term gains, the tax-advantaged position of stock-centered comp, and the acceptance of even debt-funded buybacks all work together to reinforce this failure state.
Most large investors are actually big groups like pension funds that do need to think longer term though. This is really just a combination of laziness and ignorance. Not a factor of evil individual investors. Those do exist but I really don't think they have as much impact as people think they do.
Most investors today are basically stock printer go brrr....
If one looks at US money printing in the past two decades, they'll find that the S&P's gains are basically just a mirror to the increased injection of dollars, a facade made to prop up the market. There really has been no actual growth compared to like Japan in the 1980s or China and India in the early 2000s, or Vietnam today. Just a few companies, mostly in tech, which are propping up the rest of the market.
> pushed the company's market capitalization to $72.13 billion
This, on annual revenue of ~$19B.
Apple today is closing in on 2x that revenue every month now. Quarterly net profit exceeds annual revenue in 2006. The Apple Watch group is roughly half the size of the whole company in 2006.
At some point, it became clear that the business throws off vastly more cash than can be productively used in R&D (here I will note that Apple's recent profit gusher is already net of investments in things like the Titan car project, Vision, and all the other stuff they work on but never release).
Share buybacks are are at least nominally a financially neutral exercise - it generally does not benefit either shareholders or executives.
They can however signal 'strength' in stock price by creating more demand and signalling to the market that the company itself which has 'insider information' believes the stock price is worth less than the price they're bought for.
It's a fair point about Jobs - but - Jobs was never sitting on more money than the economies of most nations.
Jobs Apple was a consumer product company, Tim Cook Apple is a Private Equity Operating Entity in a way. Their financial operations dictate as much about their valuation as anything else.
> Jobs was always thinking Apple could do better with the money in R&D
> Jobs wasn’t one to listen to anybody, so it did not matter.
It did matter. Jobs was wrong. Apple indeed couldn't do better. It's not even that Apple couldn't produce R&D results worth all this money. Apple couldn't even manage to spend at that pace. Steve Jobs' projects could and did use a lot of money but nowhere near that pace. And the pace of earnings got better still after Jobs.
Jobs was right on another aspect which was that this pile of money provided Apple solid, safe ground. Apple was safe from any risk of a few years of bad earnings. That was very costly safety.
It took a different CEO to finally work to reverse the damage. That project has taken many years and (arguably) isn't finished yet. And that's in parallel to massive increases in R&D.
It doesn't do a lot of basic science - I expect. But it does or funds a lot of engineering and applied science. that's the point of the article, that in the up-to-recently US system, corporations even with lots of earnings didn't have to.
That's the key phrase, they benefit all shareholders. Buybacks on the other hand only benefit the following shareholders:
1. those with regularly vesting stock options and stock grants - basically employees. For non-tech companies especially, this only means high-ranking employees
2. those who intend to sell - that is, soon-to-be-ex shareholders
3. those who borrow against their stock - typically high-net-worth individuals who own a lot of the stock
Stock buybacks are thus a non-egalitarian way to return profits. To reward all shareholders equally, pay dividends.
It seems like your assumption is that a stock buyback is a short term gain.
One of your arguments is that the strike price for options is set based on a certain amount of stock in circulation, and decreasing that amount will “artificially” raise the stock price, making the options more valuable. I agree that higher stock price benefits those with options, and I would even agree that it is possible that when those strike prices were valued, the valuation did not take into account the possible global change in the amount of stock (although a market would have included this valuation).
I suppose the other part of the argument could be that R&D is good for the stock in the long term in a way that stock buybacks are not… the buybacks pumping up the price of the stock before it is driven into the dirt by competitors who do invest in R&D.
There, I’ve done my best for your argument but I still don’t really believe that increased stock prices for everyone is not benefiting everyone more or less equally.
> It seems like your assumption is that a stock buyback is a short term gain.
My argument is a stock buyback isn't a gain for a long-term, buy-and-hold investor. Unless
a) they sell some of the stock or
b) it pays dividends
they don't see the benefit of a higher stock price or reduced share count.
Qualified dividends and long term capital gains are taxed at the same rate. So anyone who says "buybacks are more tax-advantaged" is leaving out the second part: "because you can borrow against a higher stock price without paying taxes". Since most (non-rich) people don't do that stock buybacks have the same tax (dis)advantage as dividends. If you know of a way to get tax-free money out of a higher stock price other than borrowing on margin, please tell me. I'd love to learn.
> decreasing that amount will “artificially” raise the stock price
It isn't "artificial". There are fewer shares in circulation/more demand for the shares. That legitimately translates into a higher price. But stock options and grants are generally given to employees and especially executives. So a reduced share count and higher share price is particularly good for them.
> One of your arguments is that the strike price for options is set based on a certain amount of stock in circulation
My argument was more that when employees are paid a significant portion of their compensation in stock they tend to sell much of it upon vest (sensibly) in order to diversify or even just to pay their bills. Ergo, being frequent sellers, they benefit from the higher stock price more than they would from regular dividend payments. A higher stock price directly translates into higher compensation. Wouldn't this be a powerful incentive for company management to prefer buybacks over dividends?
> I suppose the other part of the argument could be that R&D is good for the stock in the long term
I didn't say anything about R&D spending. A company should return as much profit to shareholders as it sees fit.
I was rebutting the common, I believe simple-minded, argument that buybacks and dividends are completely equivalent. Even though the company spends the same amount of money, I think they are different in some very significant ways.
I think I'm mostly agreeing. Anyway here's my story.
Buybacks can be good or bad for shareholders, depending on the buyback price.
Example. I take $1000 and securitize it as 1000 shares. The company sells the shares for $1 each. This is a no-fee closed fund, whatever. I'm the "CEO". I personally buy 1 share.
Anyway, one day the stock trades at $0.90 and the company buys back 500 shares at that price. (How $0.90? Maybe the largest shareholder was distressed and needed cash, maybe somebody didn't read the SEC filings. Maybe "the ticker tells the whole story" and the ticker told $0.90 for a few days. It doesn't matter.) Now the company holds $550 and has 500 shares outstanding. Each share owns $1.10 of USD. Expenses are zero. I kindly volunteer my services as CEO and sole employee.
Pretty soon the stock might trade around $1.10. (Why $1.10? wHo knows?) The people who sold for $0.90 might regret that decision now. Continuing shareholders make money if they sell now. Was this "good for shareholders"? Depends on which shareholder.
Now I (the CEO) decide the company will do a buyback. The company offers $2 a share. I sell my own share for $2. To make it simple, say the company buys back 275 shares at $2. Now it's broke. The remaining shares trade for ... whatever. Somewhere between $3 and $0? ($3 because growth rate!)
I personally doubled my investment. Anybody who sold at $2 also did well.
That's not a valid example of things that can happen in the market. You're making up ridiculously unrealistic numbers and clearly don't understand the basics of how the process works.
Share buybacks are always executed at the current market price. The company doesn't offer a higher price. A large buyback order might move the share price up a tiny bit but triggering an increase from $1 to $2 is impossible for any company traded on a major US exchange.
Well there you go again, lying and making things up. No stock buyback has ever caused a doubling in share prices. Going through intermediate prices is irrelevant.
Yes, it was a made-up example. I feel that was obvious.
If your point [about share price jumping suddenly] was irrelevant, then maybe you shouldn't have mentioned it. How is this my problem?
I see that you edited your previous comment before replying. Very clever. Now (12:03 Pacific) you have a company worth $1000 trading on a major stock exchange. Ok.
Maybe you can make a spreadsheet similar to what I described in words, but using more believable numbers. If so, you can see the kind of effects I'm talking about. Buybacks are good for some shareholders and bad for others. Buybacks can be used to reward management, though others will be affected (+ or -) at the same time.
Or maybe you won't/can't make that spreadsheet. Again not my problem.
Buybacks in theory do not cause share price to rise like your example though. Investors already price in that cash will be either reinvested at a high rate or returned to shareholders. You are reducing share count of a company that now has less cash which nets out in share price.
Demand tends to push price up. Investors don't really know who's buying until later.
But yes, of course it's a toy example. I should probably have made the buybacks drive the price from $1.10 to $1.20 or something, with a much smaller reward for the founder & CEO. I got bored and kept it simple. (Or I got greedy for that $1 profit, maybe.)
All the working parts of the example are on display. You can make other examples that seem better to you.
Well there you go again, lying and making things up. The trades are executed in compliance with Rule 10b-18. If you want anyone to take you seriously then at least come up with a realistic example.
I'm talking about how equity works at the most basic level, in a vehicle worth 1000 USD. It's an ice cream stand, capisce?
You may well be offended because we were rude to each other. That's fair. But you're not telling me to stop being a dick. You're telling me my ice cream stand has to be listed on a major US stock exchange. That's not a strong argument, and it's not really on topic.
This is a nonsensical example because companies aren't just barrels of cash, stock buybacks do not occur above market price, and companies never spend themselves broke to buyback shares because that would be retarded. You might try learning how corporate finance actually works before posting like you are an expert on it.
I worked in finance for years before I went into SWE and studied it in university before that. Your example would be found in no textbook (because it is complete idiocy) and you would know it if you ever cracked one, which you obviously haven't. You are just another bitter loser peddling conspiracy theories of how the financial system is rigged against you because you are envious of the money that people who actually understand it make.
You've been crossing repeatedly into personal attack. We ban accounts that do that. I don't want to ban you, so please don't do that.
If you know more than someone else, that's great, and if you want to share some of what you know so the rest of us can learn, so much the better. But please be careful to do it without putting others down, no matter how ignorant they are or you feel they are.
You've been crossing repeatedly into personal attack. We ban accounts that do that. I don't want to ban you, so please don't do that.
If you know more than someone else, that's great, and if you want to share some of what you know so the rest of us can learn, so much the better. But please be careful to do it without putting others down, no matter how ignorant they are or you feel they are.
> My argument is a stock buyback isn't a gain for a long-term, buy-and-hold investor.
It's better for me as a long term investor because I can better control my tax liability. It also allows for long term growth without a tax drag until I'm ready to switch out of my accumulation phase.
If a buyback gives stockholders the choice of selling or holding, realizing the gain now or later, and a dividend does not, why not prefer the buyback?
Hard to say for sure. I don't know either of them.
But I'm not casting aspersions on the commenter. I'm responding directly to his implication that if he doesn't understand X then X is false. That's not a thing.
4. Those who intend to re-invest all returns in to the stock, who avoid a taxable event when their ownership of the company goes up without having to first pay tax for the dividend.
A stock buyback rewards all stockholders equally. Those who sell, get their reward in cash. Those who do not sell, get their reward in the proportion of their ownership of the company going up.
> Those who do not sell, get their reward in the proportion of their ownership of the company going up.
This is incorrect. If the company buys back say $100m worth of its stock, it's true that the individual shares remaining represent a larger fraction of the company, BUT the company itself is worth $100m less after the transaction (because it has spent that $100m on purchase of something that can't be added to the balance sheet - basically incinerated that money from company's point of view, similarly to how paying out dividends is "destroying" money). These two factors cancel out perfectly, and the book value per share remains unchanged.
You're right, I missed that! But, essentially this makes the case for buybacks even worse - paying over book value for shares means that the company is reducing its book value via the buyback. So, it's worth less after the buyback.
Yes. Book value is just one metric for value, but let's keep using it. I could also say that paying less than book value is increasing the book value, so the company is worth more after the buyback. As you say, it depends on the purchase price.
There is supply and demand to consider. Buybacks create a tendency toward higher share prices, but only while they continue. That demand cuts off when the buybacks stop.
If the buybacks are at a discount to whatever the stock turns out to have been worth at the time, then that benefits all the shareholders. That can be a great use of money for all shareholders.
But buybacks at inflated prices benefit only exiting shareholders. Exiting shareholders tend to include hired management. Of course nobody really knows the valuation that well, so obviously there's a guessing game.
This is pretty hard to argue against for anybody who agrees that valuation is a thing at all.
> Buybacks create a tendency toward higher share prices, but only while they continue.
Buybacks increase the share price because you have a company that is worth (for sake of argument) the same as it was worth before, except now there are fewer shares available.
A fixed market cap divided by fewer shares equals a higher share price.
In the limit case imagine buying back all but 1 share. Now that 1 share represents the entire value of the company, so the share price would equal the market cap.
The company is worth a bit less after the buyback, because it's given away some of its money, which was part of its valuation. But the effect should still be positive on the share price.
Buybacks do not necessarily create an increase in stock price. Economically no value has been created. Cash on a balance sheet has simply been exchanged for shares. The people selling their shares in the buyout get the "value" of the company at that moment. The remaining shareholders now own a larger percentage of a smaller company i.e. a company that no longer has the cash used for the buyout.
Markets tend to reward companies that use buybacks as there is a belief the buybacks are a demonstration of discipline by the management team. Conceptually COMPANIES SHOULD BUY BACK STOCK IF THEY DO NOT HAVE BETTER ROI PROJECTS IN THE PIPELINE. This frequently happens in mature industries.
As noted above, buybacks are another means to return cash to investors. Today, in the US, the tax rate on qualified dividends and long-term capital gains are equivalent for most shareholders. This has not always been the case. When tax rates for capital gains are lower than dividends, buybacks are a more efficient means to return capital to investors.
Buybacks also allow for more tax planning. When dividends are issued, the investors have to pay taxes on them at that time. Stock buybacks allow investors to choose when they want to pay taxes. They can sell into the buyback and pay taxes now or hold the stock and pay taxes at a later time.
Buybacks are can be part of normal corporate capitalization decisions - what is the appropriate debt to equity ratio for the company.
Finally, changing dividend levels has its own impact on stock price. If a company increases its dividend, them market expects it to remain increased. In this case the stock price goes up as investors expect more dividends in the future. When a company cuts its dividend (rare event), the stock price drops dramatically as the market punishes company not only for the reduced expectation of future dividends but also because companies only cut dividends when they are having severe problems. Some companines issue a special dividend related to a one-time event such as selling a division. The stock price does not do much in these events.
All of this is to say that stock buybacks are not why corporations reduced basic research investment. I was at GE watching the famous research centers getting cut. The bottom line was the research coming out of the centers was not creating a meaningful ROI. At one point the researchers went to the various GE businesses looking for projects where their expertise could add value - an internal consulting group. They gave up after a year as there was so little success. Corporate research centers are expensive. They need to earn their keep.
That only works if the stock buyback increases the price permanently. Intel stock buybacks at $50 don't look so great now, but the dividends you got are still worth the same.
Buybacks of overpriced stocks also do not benefit investors.
> Those who intend to re-invest all returns in to the stock
Sell the stock then use the gains to buy the stock? I'm very confused by this.
> without having to first pay tax for the dividend
Long term capital gains and dividends are taxed at the same rate. The only tax-free way to benefit from a higher share price (that I know of) is to borrow against it.
> get their reward in the proportion of their ownership of the company going up.
Which only matters if the company pays dividends, or the shareholders eventually sell.
The company has some money. They choose to return it to shareholders. There are two legal ways to do so: Buy back some stock, or issue a dividend.
Now assume I am a long-term investor, who invested money into a company, and wants to keep all that money in the company, instead of taking money out.
If the company pays a dividend, I can put the money they paid me back into the company, but I have to pay capital income tax on the money in between. If they buy back some stock, I have essentially fully reinvested my money to grow my share of ownership in that company, but I have not paid any tax on this, and will only have to do so at the end. As I get to grow compound interest on my money, I will come out much better in the long term.
> As I get to grow compound interest on my money, I will come out much better in the long term.
You will pay the capital gains tax rate either way. Either when you buy 15% less additional shares, or when you sell them at the end and pay the 15% then.
If you start with 15% less and compound it, you still end with 15% less.
(15% is just an example)
You might be placing a bet that at some point in the future there will be a reduction the capital gains rate, but, as far as I can see, you are not earning more due to compounding.
Actually no, they have the same benefits as a dividend except they don't create a forced tax liability.
Stock grants can actually include dividends.
Even if you don't sell or borrow against it you benefit because you don't have that tax liability, and the money you woulda paid in taxes can continue to be invested.
Yes. This is correct. Share buybacks are financially equivalent to a dividend from the company's perspective, and slightly better from the shareholder's perspective because they can choose when to take the dividend and pay capital gains tax instead of income tax on it.
That only reinforces my viewpoint that buybacks advantage rich shareholders.
> your cap gains rate can vary substantially over time
It is 0% (up to like $100k for a couple filing jointly), 15% (up to about $580k), and 20% above that. Income tax has many more brackets than that and they kick in at way lower incomes.
It's true that your income can vary substantially over time. It might be nice to do earn all your capital gains and dividends in retirement. You will likely need less income then to live on and can incur $100k/year in gains and dividends tax-free. On the other hand, remaining invested in a stock that does buybacks during your working years also concentrates your risk in that stock. So people will likely sell anyway and take some capital gains to diversify.
And finally, if we want companies to improve productivity (read: fewer employees) then we can't solely tax labor to fund everything. We have to tax the part of the pie that's actually growing: this is represented by stock prices and dividends.
> On the other hand, remaining invested in a stock that does buybacks during your working years also concentrates your risk in that stock. So people will likely sell anyway and take some capital gains to diversify.
This really undercuts your previous argument that only certain classes of shareholders benefit from buybacks. Now you are assuming that everyone falls into one of the classes anyway.
So we're back where we started: Buybacks benefit all shareholders equally.
If I'm reading it right, group #2 plan to sell 100% of their holdings during times of heavy buybacks. I think they intend to benefit as much as possible from whatever price increase might be driven by the buyback demand.
That is US-specific tax policy, but many international companies are listed on US exchanges and purchased by international investors. As a Canadian, my retirement savings in my TFSA are subject to 15% taxes on dividends and 0% taxes on capital gains (for US-listed stocks).
The tax advantage of stock buybacks is that investors aren't forced to immediately realize gains. They have the freedom to time sales to minimize overall income tax liability, for example by harvesting losses in other investments in a future year.
This is true. I'd still file tax-loss harvesting under "advanced maneuvers employed by high net worth people".
At a societal level, and I understand this is a completely different point, I also question whether it's prudent to allow tax dodging this way. We already tax labor heavily and at the same time we incentivize companies to improve productivity (read: use less labor). How do we pay for society without taxing some of the productivity (read: profits) or taxing labor even more? You can only cut so many services.
Even folks who are just saving for retirement benefit, since they need not take any income on top of their normal employment income. They may be in a lower bracket when they sell.
Also the reality is that its somewhat rare for retirees to spend down their entire portfolios.
Because if I don't intend to sell right now, and the company is otherwise a healthy, going concern that can pay sustainable dividends, the actual share price is irrelevant to me. If anything, given my belief in the company, a lower share price is better. I can buy more shares!
But you now own a larger percentage of the company because you own the same number of a smaller total number of shares outstanding, so you benefit whether you are a seller or a holder. If you intend to buy more it is neutral because the price per share goes up, but each share represents proportionally more.
If you ever want to sell, getting in the limit nothing for the shares might matter, no? There are other things: for example, share based M&A or compensation or other investors with different preferences - no relevance or interaction?
All fair points. Share-based M&A can be good for investors. But if the stock price is going up because the company spent money on buybacks, then the company could also just pay cash for M&A and skip the buybacks.
Higher compensation is good for employees who get paid stock and for upper management, who are nearly always paid largely in stock. There's an argument that's good for shareholders because of better retention. But if that were the case, why not just pay employees more cash?
Are there many investors that are never sellers (that is different from selling soon-ish)?
Paying cash could be quite different than paying in shares for M&A.
If owning/using shares makes no difference to cash (whether to employees or in M&A situations), why not do buybacks then if there is no difference between cash and shares anyway?
This is simply untrue in every detail. All common stock is pari passu. A buyback of common benefits all common stock holders pro rata with their holdings. Similarly, vesting grants without buybacks harms the common holders by dilution. A buyback of the amount of vested is the least that is required to keep the common holders whole.
The person you're responding to's argument is incoherent and not worth engaging in. The crux of it is that long term shareholders aren't benefited by buybacks because share price doesn't matter to them because they will never sell. Somehow however, dividends are good for them because they will not reinvest them for some reason? It doesn't make any sense.
This is just nonsense. Anyone can sell the stock if they wish, there is no privilege for the high-net worth. Additionally, shareholders benefit from reduced share count because it increases their claim on future profits thereby increasing compounding.
Buybacks are still better if you want to hold forever and don't care about share price. With a dividend distribution you must pay taxes and reinvest the diminished proceeds. You end up with a smaller share of the company than in the buyback scenario. Example:
A: Hold $10 of stock. Buyback of 1$ per share. You're left with $10 of stock.
B: Hold $10 of stock. Dividend of 1$ per share. You're left with 9$ of stock and $1 cash - taxes payed. Once reinvested you have $9 + (1 * tax rate) in stock.
You're making two mistakes: One is thinking that dividends are magic money that do not cause share prices to fall in exact accordance with the distribution and the other is that buybacks lift the share price somehow (they do not, see Modigliani-Miller).
Actually, normal people can do the borrowing thing. It's not really as necessary since you have normal employment income but you can do it and it can work. If you continually add more principle to your pile-o-stock than your monthly spending the growth will outpace your interest and you won't accumulate an unbounded amount of leverage.
At least if your broker offers decent margin rates or you sell boxes.
Well, also, your 401k and IRAs are probably superior to this strategy and can't be used as collateral as they're protected in bankruptcy. So it's not worth it until you fill those up.
The reality seems to be that only the genius founder is allowed to do any unorthodox moves as the CEO. Once he's out, the board selects a CEO that will basically continue business as usual without rocking the boat. The new CEO essentially won't have a mandate to use any controversial or original approach.
Companies are controlled by shareholders who appoint the board who appoint the CEO. If the CEO decides to pay employees more, the board will change him because shareholder put money to get money out, not to give to employees.
Companies can give "shares" to employees, which means excess profits can be made dividends out of which employees "touch a bit".
If you would have your own company (privately own and full control) you are of course free to share the excess profit as you see fit.
Edit: and of course, share buy back avoids some taxes that you must pay, which in other schemes would have to be paid.
an unexpected but welcome change is that real wages of low-income workers increased too during the recent years, but the historic trend obviously shows the enormous disparity (check figure C 1979-2019)
and for context on the context, the size of the active population also increased - so fewer people age out of the workforce than how many started working
> Why couldn’t the companies with excess profits just pay they employees more in salaries?
They could, but why should they? Which advantage get the shareholders from this?
The only reason why a company with excess profits "should" pay the employees more is if
i) for a given role, the expected results of potential applicants varies a lot (i.e. the company has an incentive "to hire the best of the best")
ii) the market for these exceptional talents is tough (i.e. if the company does not hire the best, someone else will; additionally, if the company does not pay the employees really well, they will be poached)
Different markets. Companies are created to allow investors to create profits selling something (things, services, etc). Companies compete with other companies to attract capital. Companies which offer higher expected returns for comparable levels of risk will attract more capital. This reflects supply and demand for capital.
Employees are part of a labor market. Supply and demand in the labor market drives compensation levels. When you have a rare skill that is perceived to be valuable, you can get higher compensation - e.g. Meta AI researchers getting $100M contracts or Juan Soto getting a $750M baseball contract.
As mentioned elsewhere, some companies give stock to employees. In my experience this is for one of two reasons. 1) Employee retention - stock grants tend to have multiyear vesting periods designed to keep the employee at the company. 2) Start up companies that do not have the cash to pay employees.
None of these explanations would lead to simply paying employees more with excess cash (unless the cash was created by a group of employees that you were trying to retain).
Have you ever been a c-staff? C-staff are employees as well. Usually more expensive employees. Well run companies are trying to figure out how to win in the marketplace. To do this they hire the employees they need to win. Investors do this with CEOs.
I agree that it is much more difficult for a CEO to get fired than a line employee as CEOs have significant influence in picking their boarda. However, the consequences to a company of replacing a CEO are generally more significant as well.
1. They don't have to
2. If employees want to be exposed to excess profit (and loss) they can buy shares like everyone else. (Not a super strong argument tbh)
3. It's impossible to measure how much any given employee/department really contributed and they don't want to create a culture of chasing fat bonus checks.
4. To some extent they do tend to. Profit sharing plans and ESOPs aren't that uncommon
> 2. If employees want to be exposed to excess profit (and loss)
It's funny that people tell me they want this because they'll see some of the sales outliers. But then I explain that 1/2 or more of their salary will be dependent on some type of performance metric and most clam up.
> couldn’t the companies with excess profits just pay they employees more
Would that improve productivity (for that company)? Do most people refuse to work for Apple because it doesn't pay enough? Is apple limited by lack of productivity? Is Apple limited by lack of R&D budget? Would Apple release on the world more, better stuff if it paid 10% more?
Then too, most US Apple employees own a lot of Apple shares - they do get paid more when Apple pays dividends, buys back, increases the share price (/ shrinks the number of shares - same thing). Even recent Apple employees who did buy/ get the shares they could really did very well! They are shareholders.
As it is, Apple has a large number of employees in the most expensive areas of the world. It's not exactly that it's desperately skimping on employee compensation.
My impression is that Apple, still now, has a hard time finding worthwhile things to do with its profit. It generates a lot of cash, uses everything it can manage, and releases the rest productively.
The same reason you don't give a store $2 for something priced at $1 or write anything other than a zero in the box on your tax form that lets you pay more if you like.
That would not make the share price number go up, which in turn means it doesn't make the leadership's net worth number go up, which means the leadership won't make that choice.
The leadership’s net worth is going up based on their compensation plan including stock options, regardless. If you are more explicit about your assumptions it might be easier to believe or refute the argument.
Having an industrial policy has been disastrous for most countries that have tried it. Works fine for a few years and then everything falls apart as the grifting builds up and disruptive innovations destroy the underlying reasons for the original policy goals.
The only people who matter are shareholders. Employees are a means to the end of making money for the owners of the company whether through stocks or other kinds of ownership.
the purpose of a company is to deliver maximum return to shareholders; if they're not doing that, then they're failing their fiduciary duty and the shareholders might try to force the company to change its ways
the shareholders want the money coming to them, not to the employees
(this is why the Public Benefit Corporation, "B-Corp" structure was invented, so that the company's stated purpose can be something other than simply generating value for its shareholders)
They could, but then they'd have to report lower profits by the same amount. I want to actually defend this though: Corporate profit is a very narrow measure, by design. It was never intended to capture how well the nation is doing.
The train of thought here is that product people innovate and launch companies, but operations & finance people have no idea how to innovate or create new products.
Putting in a finance/ops person as the CEO will stagnate a company from a product standpoint.
And yet when Jobs returned to Apple he blew up ATG (the Advanced Technology Group) that gave us Quicktime, etc. He also shutdown Apple's research library (and gave all the books to Stanford, I believe).
He seemed to have little patience for "scientists" — preferred engineers that shipped shit.
I think that at best he saw research as expensive, at worst he saw it as elitist.
Apple was giving away the Keys to the Kingdom by way of licensing Macintosh clones, among other things. If ATG were responsible for hemorrhaging cash I am not sure why they did not re-appear then when Apple was firing on all cylinders. Only Jony was crowned.
And there's no way the library and its books were a cost — unless perhaps it was attracting snooty engineers who were reading Foley and van Dam when they should have been fixing bugs. ;-) (That actually might have been me.)
I could be putting too fine a point on it, but my impression was that he was kind of jealous of "academia". Not only did he not graduate from but even seemed to eschew higher learning. And to be sure he would have had a harder time bullshitting an expert in a given domain. They had a kind of power of knowledge that he lacked.
At the same time he was clearly enamored with Avadis, very much the academic — appeared to be grooming him for role of Apple CEO. He must have been very disappointed when Avadis left the fold.
> They said a Unix weenie was code for software engineers who hated what we were doing to Unix (the operating system we licensed)—putting a graphical user interface on it to dumb it down for grandmothers. They heckled Steve about his efforts to destroy it. His nightmare would be to speak to a crowd of them.
The value proposition NeXT found on UNIX, was the same as Microsoft (after they let go of Xenix, thanks to MS-DOS golden goose deal with IBM), a means to an end, the market of companies and universities that wanted something with UNIX in the box.
If companies want to reward executives directly they can cut out shareholders entirely and pay salaries and bonuses. If companies want to reward shareholders (including executives) they can pay dividends (which Apple did do under Jobs). Nothing about the priorities of companies changed with share buybacks.
As others have mentioned that isn't comparable because salaries are taxed. The tax rate on unrealized gains in the US is zero percent from what I understand.
Not correct. Capital Gains taxes depend on the holding period. Short term capital gains (stock held less than a year) are taxed at the same rate as salaries (ordinary income rate). Long term capital gains (stock held at least a year), are taxed on a reduced level that peaks out at 20% (depends on total taxable income) with a possible additional 3.8% Obama Net Investment Tax.
Here's what you said:
"If companies want to reward executives directly they can cut out shareholders entirely and pay salaries and bonuses. If companies want to reward shareholders (including executives) they can pay dividends (which Apple did do under Jobs). Nothing about the priorities of companies changed with share buybacks."
My response (and the whole thread) is pointing out that buybacks are another way to reward executives who have received shares as compensation. Buybacks are not reported as an expense. They are reported as an investment.
This is all boilerplate, very far from "what does that even mean?" territory.
The whole point of owning shares is to share in a company’s profits. In simple terms, you make money through dividends or buybacks. Without that, there’s really no reason to own the stock. Sure, prices go up and down, and you can try to profit from that, but if a company never plans to return money to shareholders, there’s nothing real behind the price. Eventually you’d just be holding on until the company fades away or goes bankrupt.
Buybacks are just another way of giving profits back to shareholders—an alternative to dividends with different tax implications. Their purpose isn't to "allow companies to reward executives directly", they are just an alternative way for shareholders to share in the profits.
A company could tie executives compensation to the amount of dividend if it wanted. That might be a good idea.
Unfortunately CEOs have to do buybacks at every opportunity, because otherwise shareholders will sue them for failing to maximize shareholder value.
> Jobs was always thinking Apple could do better with the money in R&D than paying off shareholders. Wall Street did not approve of this position, but Jobs wasn’t one to listen to anybody, so it did not matter.
(Head spins) wait what?! No! You’re not supposed to do that! If you fail to always maximize short term profits, people might start thinking CEOs actually have agency, and they won’t be able to hide behind the “maximizing shareholder value” excuse!
I don't think it's typically this explicit or direct, but it can definitely flow more like 1. company is not doing buybacks, 2. performance is judged against comparables in the short (quarterly) term using metrics that prioritize the affects of buybacks, 3. major stakeholders (big stock holders, institutions, funds, etc) put pressure on the board, 4. CEO pushes back and is dismissed for performance or "not hitting targets". Functionally a lot of players in power positions prefer buy backs, optics are better for a surging stock vs. modest increase in dividends, and it favours short-term metrics.
A lot of this comes back to Dodge v Ford. The Dodge brothers sued the Ford Motor Company because Ford wanted to cut prices and invest in the company while removing dividends to shareholders. The Dodges disagreed with this and sued. The courts found in favor of them.
Ford was an egregious case though. The court's judgement was surely correct but it also hardly matters for the real world. CEOs usually don't publicly announce they plan to literally and deliberately burn all their profits, even if it in reality they absolutely plan to spend it on vanity projects or whatever.
It doesn’t have anything other than a pre-alpha release and it’s got a clear warning that it’s only for use by developers. That will keep adoption far away from people special casing the browser. Further, it’s open source so incomplete public development is the only way to go for this type of project.
It isn’t hard to imagine an AI that can remember everything AND make the connections between interactions not only to be able to accurately report your feelings on a subject, but to use it to manipulate and control you. The belief that AI will always tell you the truth is foolish and we now know that all the leading AIs will resort to blackmail for self-preservation. https://www.bbc.com/news/articles/cpqeng9d20go
Now imagine an AI that has unlimited blackmail material on each and every citizen and either a permission or a survival instinct driving it to use it to manipulate the population. After all OpenAI, doesn’t only have access to one person’s interactions they have that for all users.
For real, top of his trade and he ends up needing to plea for money. Hopefully some successful artists who have played Parkers will be able to help out.
I have a P32 guitar which is probably forgotten by many. I played a neighbor’s fly, and it was so much better than my crappy guitar at the time that I decided I wanted a Parker. The P32 was all I could afford but it is extremely playable and overall a really great guitar, even though everyone thinks it looks weird.
I was surprised by the FTC taking a stand but then read the following:
“The Digital Services Act (DSA) is an EU regulation that aims to create a safer online environment by holding digital platforms accountable for illegal content and *disinformation*.”
What do Chinese EV mandates, incentives, or carbon regulations look like? I had assumed that Chinese EVs were simply less expensive than gas cars and no extra incentives were needed.
I remember reading somewhere the waiting list for an ICE car permit (my interpretation: license plates) is several years. EV permits are available immediately.
With good reason too: Chinese cities had terrible air quality 10 or 15 years ago.
