US corporations announced $437B of buybacks in Q2 2018, doubling previous record

https://money.cnn.com/2018/07/10/investing/stock-buybacks-record-tax-cuts/index.html

by kaycebasques • 8 years ago

46 70 8 years ago

money.cnn.com

Analemma_• 8 years ago

Meanwhile, in March real wages fell 0.1% despite low unemployment: https://twitter.com/erikbryn/status/1016667480771780610

Three cheers for the Trump tax cuts that we were promised would boost wages. How much did we add to the deficit for this crap?

berbec2• 8 years ago

$2.3T [1]

1: http://www.latimes.com/politics/la-na-pol-tax-cuts-debt-2018...

prolikewh0a2• 8 years ago

Anyone who thought the working class would benefit in any way from these tax cuts was delusional. Profit is almost never seen by the creators (workers) of the profit in this current system.

craftyguy3• 8 years ago

Anyone who thought the working class would benefit in any way from these tax cuts was delusional.

Sure, but the 'anyone' includes a large (though not majority) portion of the US voting population. Now what?

berbec2• 8 years ago

Good thing companies are putting that big tax cut into hiring more worker and increasing wages. Otherwise, it would just be a big plus for corporate bottom lines and yet again invalidate trickle down, voodoo economics.

clumsysmurf• 8 years ago

God forbid!

Goldman Sachs : "every percentage-point increase in labor-cost inflation will drag down earnings of companies in the S&P 500 by 0.8%"

https://www.wsj.com/articles/wage-gains-threaten-to-squeeze-...

ljw1001• 8 years ago

I'm not an economist, but doesn't that make people .2% better off on average? It's almost like GS is interested in something other than the common good. :)

mdorazio2• 8 years ago

To me, the increasing buyback trend is an indicator that the US economy is effectively nearing a peak and the underlying economic model that depends on infinite growth is going to need rework in the not too distant future. Companies generally do buybacks when they don't have any productive use of their profits that would contribute to fundamentals (and thus boost share price the old-fashioned way). Companies are piling up profits and then realizing that it's easier to boost share price by just buying their own shares than by investing in more long-term things.

As per-worker productivity increases and wages continue to see only modest gains this trend is likely to continue. That's worrying for the vast majority of Americans who aren't executives or shareholders.

Retric2• 8 years ago

Buybacks have significant tax advantages and are little different from dividends. Really, the entire point of companies is to give shareholders money, so buybacks don't say much about the wider economy.

germinalphrase• 8 years ago

It is certainly one point of companies.

trhway• 8 years ago

it is obviously natural to take money out of business (like give back to shareholders) when taxes are low and invest into and expand business when taxes are high. The taxes were just lowered to allow to take the cream off the top. While i'm not a supporter of it, i can't not agree that the economy probably can take and survive this hit right now.

elvirs• 8 years ago

curious if taxing buy backs was any part of the proposed tax reform. kinda highly doubt it but still hopeful

mdorazio2• 8 years ago

I feel like your statement just moves the goal posts, though. Yes, buybacks are a substitute for dividends, but that doesn't address the broader issue that I'm seeing: companies don't have anything productive to do with their profits. Whether it's buybacks or dividends is irrelevant - giving large amounts of money back to shareholders directly isn't what companies with strong growth plans do. We're reaching a point where profits are just getting continuously recycled back into the top 10% of the population instead of being used to expand the economy in more traditional ways.

clairity• 8 years ago

the underlying economic model that depends on infinite growth is going to need rework in the not too distant future.

particularly when we're cutting off a key historical component of those models: immigration. people are the drivers of growth; more people ==> more economic activity.

and whatever your politics, it was pretty obvious to anyone with a pulse that the tax holiday would go to shareholders, not to wage increases.

and without more people to sell things to, the ROI on capital investment is not so great.

so rather than into reinvestment or rewarding workers, money principally flows to capital holders.

AFNobody• 8 years ago

It is really just an acknowledgement that buybacks are more tax efficient dividends. So now "value" companies, instead of paying dividends, perform stock buybacks.

It is a tax efficiency thing, nothing more.

refurb• 8 years ago

Companies don’t buy stock when they think it’s going to go down in the future.

tardo99• 8 years ago

Actually the data suggests the reverse.

jpao794• 8 years ago

I agree with the other commenters on this subthread that buybacks are most often times simply a more tax efficient way of handing back profits to shareholders. I think it's a good thing that companies share profit gains with shareholders. At a certain point, well run and well focused companies can saturate their market domain but still have amazing fundamentals.

You have to ask yourself, particularly as a shareholder but also a member of society, do you want the company to extend into other industries where they could not only be over-extending themselves beyond their core competency but also over-exposing themselves to macro-economics, geo-politics and anti-trust issues.

Do we want all companies to chase monopolies in multiple domains like Amazon? Should Verizon/Comcast/etc. use its monopoly profits from telecom to go after media, then cloud computing and then conquer consumer goods and healthcare or should it just return profits to share holders? If the money goes back to the shareholder, then the shareholder can go find the category leader in those other domains and invest it more wisely.

That said buybacks can definitely be manipulated by some management teams to game their compensation, which is a definitely bad thing.

ubernostrum3• 8 years ago

If we were seeing occasional buybacks obviously tied to company performance, you might have a point.

But realistically we're in a situation where that is not the case, and it's dishonest to make arguments as if it is, or to have a hand-wavy "I guess it's possible it could be bad" throwaway line at the end to dismiss the pretty obvious reality that buybacks are not being used for the purpose you yourself advocate.

dnomad• 8 years ago

Buybacks, in practice, are not good for investors. They are basically always abused by management to defraud investors. I'm not sure why people focus on the theory of buy backs and not the actual application. Study the history of how corporations like Cisco actually use buybacks, it is best described as "shareholder rape."[1]

[1] http://www.businessinsider.com/congratulations-to-cisco-insi...

DesiLurker• 8 years ago

why do these buybacks happen (seemingly) closer to market top rather than bottom? thats just reflecting a common theme across market over last year or so. seems like a very dumb way to utilize cash on hand. is there a more structural reason for this?

cmer• 8 years ago

It's all about jacking up the stock price for shareholders. Unfortunately.

simonsarris2• 8 years ago

Unfortunately? Shareholders buy shares for two reasons:

1. The share price may go up

2. The dividends pay out

These have been the reasons for buying shares since shares of the Dutch East India company was chartered. If neither of these ever happened, there would be no shares purchased.

A buyback is just a bonus instead of a salary.

You could make the criticism that a company having nothing better to do with its money is bad, and I agree, but in the interim paying it out as a bonus is a great way to reward shareholders for holding. It's also better than a dividend in case next year the company does find something better to invest the money in, because investors really don't like when companies decrease dividends.

pascalxus• 8 years ago

once the stock price hits certain highs, the CEOs get huge bonuses. So, it doesn't really make sense to buy back when the stock is low.

kevinhiggins• 8 years ago

Some boards have given CEOs earnings per share based compensation plans, so it’s also a quick way for those to meet their compensation objective. Wise boards don’t structure compensation plans in such a manner, but some do.

astrodust8• 8 years ago

It's often coincidental. The stock is flying high because the company is producing a lot of free cash-flow, and the company can't find a use for the cash so it does a buy-back.

When the stock is tanking your company is usually in rough shape and has no money for such reserves for a buy-back, the cash will be necessary to survive or restructure. In those situations, when things get really dicey, they'll do share consolidation. That's often to avoid getting de-listed when their stock price dips too low.

forapurpose• 8 years ago

A related analysis of the economics of the 'Buyback Economy', from about a month ago:

https://news.ycombinator.com/item?id=17296102

bb20182• 8 years ago

I'm always a bit unclear on how stock buybacks get reported so badly, though I suppose it is in the complexity of the transaction. If that $437B was in dividends I doubt anyone would think twice about it, yet that is in essence what they are.

maerF0x03• 8 years ago

Except they're not. Buybacks increase the share price, that means leveraged investments (such as options) have a disproportionate increase in value.

bb20182• 8 years ago

Sure - but is anyone complaining that companies are getting rich off options?

Buybacks increase the share price and that is why board of directors prefer them over dividends (since their bonuses may be tied to them) but this is simply an aligning of preferences. If I own a company I want it's value to go up.

If I could choose between my $100 stock going to $110 or my $100 going to $105 with a $5 dividend I'd choose the first since it is more tax efficient.

adrr2• 8 years ago

Wouldn't it make more sense to issue more stock when the stock is at all time high and buyback when the stock is low like during a recession?

jannes• 8 years ago

That would dilute the share price when it's high and boost it when it's low. Reaching some kind of equilibrium in the middle...

What would be the point of that? A stock buyback is not an investment, but rather a transfer of wealth that's not taxed very much.

adrr2• 8 years ago

For a company, it would be obtaining capital cheaply on a per share basis. Most of these companies have huge debt. Take for example, Amgen which is spending $10 billion to buy back shares. They have over 31 billion in debt or which is $10 billion is short term.

graeme• 8 years ago

That’s what Warren buffett advocates.

startupfounder• 8 years ago

This is all about price to value.

Price < Value

This is very interesting and shows that there is an amazing amount of cheap cash available that is just piling up. Spending that cash on buybacks increases the value of the outstanding stock that existing shareholders have and then supply goes down, price goes up and the stock price goes up.

Dumb investors.

akshayB2• 8 years ago

Buybacks generally benefit top 1% or the C-level and make them richer. The impact on 401k of common is just a gain in few percentages or maybe some extra dividend. Also there is a conflict of interest CEO's are paid in stock and the only way in which they ensure they make more money is to take actions which boost the value of company stock.

Market cap and higher the stock values also can be used in so many different ways, like acquisitions and also as a tool to leverage as an equity against which money can be borrowed.

astrodust8• 8 years ago

It's also a sign the companies have too much money and not enough opportunities to spend it on.

akshayB2• 8 years ago

Companies hoard cash because they want to ensure continuity.

I loose respect for companies which go an extra mile to exploit loopholes. All companies do it. For example - Apple borrows money to pay dividend to stock owners even though they have unbelievable amount of money. But somehow the messed up US tax code this action sounds logical.

maerF0x03• 8 years ago

And yet Chinese investors and Softbank keep finding dozens of places to throw Billions.

fjsolwmv5• 8 years ago

What's wrong with gaining a few percentages or extra dividends?!

southphillyman• 8 years ago

A lot of publications predicted this exact scenario as the tax cuts where being sold as a job/wage booster.

What boggles my mind is how so many people vote "for jobs" promised by a particular party, get shafted, then go right back to the same party next election cycle and eat up the same rhetoric about job creation in exchange for votes.

AtlasBarfed• 8 years ago

Buybacks are almost solely to artificially trigger stock option targets for CEOs, right? Otherwise that is money that should be paid out as a dividend or reinvested into operations and research.

koolba• 8 years ago

Buybacks are almost solely to artificially trigger stock option targets for CEOs, right? Otherwise that is money that should be paid out as a dividend or reinvested into operations and research.

No buybacks provide a potential tax advantage for investors. Dividends have tax consequences in the year that they're received. Buybacks lift the price of the stock by an equivalent amount but do not force the investor to realize the gains so they can defer the taxes to a later date.

kaycebasques• 8 years ago

so they can defer the taxes to a later date.

This assumes that the share price has maintained that elevated level at a later date.

Ideally, you want to cash out on some long-term positions right around the time of the buybacks. The buybacks have raised the share price, but you’re only paying long-term capital gains taxes, which used to be capped at (I think) 15% for all investors, regardless of income bracket.

simonsarris2• 8 years ago

No, its the diffence between a bonus and a salary. A stock buyback is like giving employees [shareholders] a bonus.

Some employees get bonuses every year based on how the company is doing. Employees are OK with getting a lower bonus next year. Employees get very, very unhappy when their salary gets decreased in a bad year.

Investors are the same way. They punish a stock when a company decreases its dividend. If you aren't sure you can make a promise in perpetuity, don't increase your dividend, instead give shareholders a bonus, aka stock buyback. Then, if next year you need the cash to invest in the company, instead of another buyback, you do that. Investors stay happy because you didn't decrease your dividend.

Some companies, like Target (which has never decreased its dividend ever) might have a hard time competing with Amazon because Amazon can make almost no profits on paper (until recent years) while funneling all their revenue back into the company. Target does not have this luxury. They DEFINITELY cannot say to investors "okay we're cutting our dividend for 2 years to compete with amazon by funneling it into growth." They'd get crushed.

tl;dr, buybacks are wiser than dividends for any company that might want to spend the money on growth in following years, instead of doling it out to shareholders, as is done with dividends.

Another reply already explained the tax implication reason.

maerF0x03• 8 years ago

Stock buybacks disproportionately benefit option holders and executives. That's why they're doing it. They're robbing shareholders of future growth or returned cash.

https://www.reuters.com/investigates/special-report/usa-buyb...

cs702• 8 years ago

Quoting Steve Perlstein of the Washington Post, who recently wrote:

Let’s recall those heady days of 2006 when home prices were rising 10, 15, even 20 percent a year, allowing millions of homeowners to refinance mortgages and collectively take out more than $300 billion in cash from the increased value of their properties. Some spent the money on furniture, appliances, cars and vacations, adding fuel to an already roaring economy. Others reinvested it in the already booming real estate and stock markets. When it finally occurred to everyone that those houses and those stocks weren’t really worth what the debt-fueled market said they were, markets crashed, banks flirted with insolvency, and the economy sank into a deep global recession.

Now, 12 years later, it’s happening again. This time, however, it’s not households using cheap debt to take cash out of their overvalued homes. Rather, it is giant corporations using cheap debt — and a one-time tax windfall — to take cash from their balance sheets and send it to shareholders in the form of increased dividends and, in particular, stock buybacks. As before, the cash-outs are helping to drive debt — corporate debt — to record levels. As before, they are adding a short-term sugar high to an already booming economy. And once again, they are diverting capital from productive long-term investment to further inflate a financial bubble — this one in corporate stocks and bonds — that, when it bursts, will send the economy into another recession.

Go read the whole piece. Whether you agree or not, it will make you think:

https://www.washingtonpost.com/business/economy/beware-the-m...

JohnTHaller• 8 years ago

Wait... the majority of the corporate tax cuts wound up going to the 1% and not to create new jobs? If I had pearls, I'd be clutching them.

US corporations announced $437B of buybacks in Q2 2018, doubling previous record

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