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You here little about the massive stock buybacks of most companies. The main reason they do it is to avoid dilution from the even more massive option awards that they give their top employees.
SP500 companies spent 2/3s of profits purchasing 2.7% of their market capitalization each year, but only reduced the total share count 0.7% in the last decade.
If you are playing poker for 30 minutes and you can't recognise the patsy, the patsy is you.
I asked a highly regarded professor of Finance to opine buybacks versus stock based compensation about a year ago. I am quoting him here but not his name. :
Devesh: I came across this article, which is slightly dated:
If correct, this means a large portion (or most of the buybacks) might just be repurchasing stock issued in comp each year.
Finance Professor: First, a piece of advice. Don’t believe much that you read (including what I write), especially about buybacks. The mythology on buybacks is staggering, including the claims that they are funded mostly with debt, that they come at the expense of value creating investments and that they are primarily to cover stock-based compensation. The truth is that stock-based compensation is not only a much smaller amount than the buybacks, but the companies that are the biggest buyback players are not the ones where stock compensation is a large percent of expenses. Finally, starting in 2007, stock compensation has shifted away from options (which used to be the primary reason for buying back stock to cover exercise) to restricted stock units (which don’t require these gymnastics). The truth is that the buybacks, for the most part, are cash infusions to investors, and much of that cash gets reinvested back into the market.
@sma3, this is a good example of when cure becomes worse than the disease.
Not all buy backs are bad (e.g., Priceline decreased their share count by 40%); but the abuse seems to be more systematic than I had previously hoped for.
The political reasoning for the buy back tax needs to change - currently it claims buy backs to be artificially enriching shareholders, which gives good cover for the disguise employed by top management.
One of the things that convinced me to take a flyer on SYLD is their screens only include companies engaged in net share buybacks. Their screens for shareholder yield also include paying down debt.
I tried watching the video, but I find it hard to watch and/or listen to most people that lack any kind of professional experience or training. So I don't know what their complaints with buybacks are.
BTW. I know of two other ETF's, PKW and WTV, playing the buyback theme. Per MFO premium, the debt/equity ratios are .75 for SYLD, 3.06 for WTV, and 3.47 for PKW.
Finance Professor: First, a piece of advice. Don’t believe much that you read (including what I write), especially about buybacks. The mythology on buybacks is staggering, including the claims that they are funded mostly with debt, that they come at the expense of value creating investments and that they are primarily to cover stock-based compensation. The truth is that stock-based compensation is not only a much smaller amount than the buybacks, but the companies that are the biggest buyback players are not the ones where stock compensation is a large percent of expenses. ... The truth is that the buybacks, for the most part, are cash infusions to investors, and much of that cash gets reinvested back into the market.
Let's start with that last part, and for simplicity say that all (rather than much) of the cash is reinvested back into the market. Let's also assume that the cash for buybacks comes from profits. not from debt.
Then from the individual investor's perspective, there's little difference between distributing the cash in the form of (qualified) dividend distributions and using it the cash buy back shares. In the former case, investors pay cap gains rate tax and reinvest back into the market. In the latter case, share price is boosted. And by assumption investors extract the gain (paying cap gains tax), reinvest the gain back into the market.
Same net result, same tax consequences.
One difference between distributing profits via divs and via buybacks is the effect of dilution when options are exercised. However, if the move is toward RSUs w/o voting rights, the dilution effect is somewhat mooted (by being muted).
Another difference is the effect on stock performance based compensation. Buybacks benefit C-level employees by boosting the value of their options (or RSUs). Also by enhancing their reputations as skilled managers.
If one changes an assumption, saying instead that many people do not reinvest (redeploy) profits in the market, then buybacks have the potential to benefit mom and pop investors. They don't have to pay taxes on the profits until they cash them out years later. But that would be an instance of tax code distorting investor (and company) behavior.
Comments
SP500 companies spent 2/3s of profits purchasing 2.7% of their market capitalization each year, but only reduced the total share count 0.7% in the last decade.
If you are playing poker for 30 minutes and you can't recognise the patsy, the patsy is you.
Devesh: I came across this article, which is slightly dated:
https://www.pionline.com/article/20170316/ONLINE/170319937/the-s-p-500-s-hidden-828-billion-annual-expenses
If correct, this means a large portion (or most of the buybacks) might just be repurchasing stock issued in comp each year.
Finance Professor:
First, a piece of advice. Don’t believe much that you read (including what I write), especially about buybacks. The mythology on buybacks is staggering, including the claims that they are funded mostly with debt, that they come at the expense of value creating investments and that they are primarily to cover stock-based compensation. The truth is that stock-based compensation is not only a much smaller amount than the buybacks, but the companies that are the biggest buyback players are not the ones where stock compensation is a large percent of expenses. Finally, starting in 2007, stock compensation has shifted away from options (which used to be the primary reason for buying back stock to cover exercise) to restricted stock units (which don’t require these gymnastics). The truth is that the buybacks, for the most part, are cash infusions to investors, and much of that cash gets reinvested back into the market.
Not all buy backs are bad (e.g., Priceline decreased their share count by 40%); but the abuse seems to be more systematic than I had previously hoped for.
The political reasoning for the buy back tax needs to change - currently it claims buy backs to be artificially enriching shareholders, which gives good cover for the disguise employed by top management.
I tried watching the video, but I find it hard to watch and/or listen to most people that lack any kind of professional experience or training. So I don't know what their complaints with buybacks are.
BTW. I know of two other ETF's, PKW and WTV, playing the buyback theme. Per MFO premium, the debt/equity ratios are .75 for SYLD, 3.06 for WTV, and 3.47 for PKW.
Then from the individual investor's perspective, there's little difference between distributing the cash in the form of (qualified) dividend distributions and using it the cash buy back shares. In the former case, investors pay cap gains rate tax and reinvest back into the market. In the latter case, share price is boosted. And by assumption investors extract the gain (paying cap gains tax), reinvest the gain back into the market.
Same net result, same tax consequences.
One difference between distributing profits via divs and via buybacks is the effect of dilution when options are exercised. However, if the move is toward RSUs w/o voting rights, the dilution effect is somewhat mooted (by being muted).
Another difference is the effect on stock performance based compensation. Buybacks benefit C-level employees by boosting the value of their options (or RSUs). Also by enhancing their reputations as skilled managers.
If one changes an assumption, saying instead that many people do not reinvest (redeploy) profits in the market, then buybacks have the potential to benefit mom and pop investors. They don't have to pay taxes on the profits until they cash them out years later. But that would be an instance of tax code distorting investor (and company) behavior.