Read an idea in American Affairs in support of taxing buybacks. The logic goes that if all companies have a fiduciary duty to shareholders because the market is the most efficient capital allocator, AND all companies are giving their cash back to shareholders, THEN it must be true that the market can not figure out how to efficiently allocate this $1T of capital. Thus, the government should have “next dibs” for items on the agenda that it knows need capital, namely infrastructure and healthcare.

Thought that was an interesting take.

Edit: here is the link but it may be behind a paywall. https://americanaffairsjournal.org/2018/12/share-buybacks-an...

Large US corporations have been buying back their own stock in record amounts, while investors have been cashing out of US stocks at a record pace, recent data shows: https://www.msn.com/en-us/money/markets/investors-bail-on-st... -- money is not being plowed back into IPOs, secondary offerings, etc.

According to orthodox economic theory, large US corporations must be buying back stock with earned profits and new debt[a] because they don't have better uses for that money. Rational executives and company boards looking out mainly for shareholders must have concluded that buying back shares at current prices is a better use of money than investing, you know, in the business.

Maybe.

In reality, executives and directors could very well be authorizing stock buy-backs to keep share prices up so their stock options remain in-the-money for as long as possible. If that's the case, the buybacks are meant more for the benefit of executives and directors than for the benefit of the business or its shareholders.

[a] Corporate debt to GDP is now at an all-time high: https://ei.marketwatch.com/Multimedia/2018/11/29/Photos/NS/M...

AQR published a paper on share buybacks last year [0] with the opening sentence "People seem to forget some of the very basic lessons of financial economics when it comes to share repurchases".

One of the big things missed by all the articles covering share repurchases, is that they are increasing at a rate similar to company market cap. That shouldn't be too surprising. The real story is why is R&D not keeping up?

It's worth a read for a more nuanced view.

[0] https://pdfs.semanticscholar.org/dcc3/e0d7288395c2891f1fee19...

> drowning out real investment.

The conclusion that buybacks are alternative for real investments is wrong.

The aggregate change between R&D and capex versus buybacks and dividends is not just some arbitrary decision. ROI from R&D and investments is slowing down for various reasons.

Instead of investing more without reason to do so, companies should give profits to owners or pay off excess debt.

There is wrong and right way to use buybacks. When company is not overvalued relative to its earnings, buyback is viable alternative for dividends. Taking debt to do buybacks or pay dividends is insane.

For technology companies, buybacks signal to me that they have dying (or dead) engineering. It is rather financial engineering at work.

One of the kpi at play here is EPS [1], typically used to evaluate CEO performances. To me, this was about numerator increasing over a rather static base. What instead happens, is that denominator is reduced (with buybacks) to jack up EPS value. It amazes me, that most of run-of-mill (non analyst) folks simply buy into EPS↑ story.

[1] https://www.investopedia.com/terms/e/eps.asp

This is robbery by the management class, and who can blame them.

If I can take on debt at a corporate level and personally enrich myself, by increasing the value of the stock through buybacks and then selling it, why wouldn't I?

This is all made a whole lot worse by stock option packages that give managers equity at major discounts.

I think we'll look back at this as the largest heists in history. Should serve as a good lesson to central bankers in creating wack incentive schemes (but it probably won't)

This supports Peter Theil's theory that innovation has stagnated. When companies give their profits back to the shareholders instead of investing in continued innovation, because they can't figure out a way to innovate with that capital.

The world needs more Elon Musk type of entrepreneurs.

Companies that can productively reinvest capital at attractive rates of return get a strong valuation premium in the market. Every company would love to be in this position. Companies that can make a compelling case to shareholders for long-term investments get to make long-term investments and like Amazon often get super valuation premiums.

If a company can't reinvest capital at attractive rates then returning it to shareholders is the best option. Forcing companies to invest in unattractive investments is the path to a zombie economy. I can't count the number of companies that should have returned money rather than going on some unprofitable growth binge.

R&D spending is a badly understood black box. we incentivise miss measuring it with weird tax breaks and complex rules. From an economic point of view, it's not clear that existing firms should be engaging in it: many industries follow model where specialists create new products which are then available to industry via a mix of buying out small firms, licensing their products or imitating them (that seems to be how big chunks of silicon Valley work and also drug discovery and fashion for instance, three quite innovative sectors).

The result is the number being inflated up by firms dodging taxes, down by people working in their garages, sideways by including things and excluding other things based on weird regulations.

Share buybacks are similarly in a weird place: tax rules favour them twice, once when buying back and again when borrrowing to fund that. Plus interest rates are at a record low so that encourages them too.

People have a 1950s model that assumes research is something AT&T do and that the amount they spend is an honest reliable value. But they don't and its not. Some where someone is building WhatsApp 2.0 or 6G comms equipment in their basement in weekends. Their time and energy is counted for nothing in these numbers. And when they sell their company ro Facebook who issues shares to buy it and then buy those shares back (as that's the tax efficient way to buy things), they value they created will be a "buy back" not an "invention"...

1. For mature tech companies selling high margin products, R&D is typically 8-16% of revenue while operating profit margins are 20-40% of revenue. Even after taxes and interest, it’s natural for buybacks to exceed R&D

2. Not all R&D spent is booked as accounting GAAP R&D. Any internal tool for example can not be booked as R&D because it’s not sold to end customers.

3. Companies outside of tech do not report their amount of R&D spend but include it with SG&A. If deemed immaterial then you don’t see it

Hey, the fed's giving free money. Why wouldn't execs do this? Imagine being at the top of a public company, with unlimited borrowing ability and retirement in a few years. Why wouldn't they?

This is a misleading comparison. When you spend money on R&D, it's spent. Somebody is actually consuming man-hours to do work that then can't be used for something else. When you "spend" money on buybacks, it's just moving money around. No scarce resources are consumed, it's just a meta-determination of who gets to decide how to actually spend the money.

And moving the money from huge risk-averse corporations to investors that may have a higher risk tolerance may increase investment into innovative new ventures.

Every time i read these threads i feel criminally incompetent in finance. You would think that putting your money to work for you would be incentive enough to dig deep, but i don’t seem to have the mental stamina to figure it all out. There’s probably a latent fear that I’ll also realize just how much money i haven’t made and regret that too.

I need a course or something that i can walk into with $20k or whatever and do all the things. Self-directed education doesn’t seem to help and Edward Jones just wants to sell me their shit.

I've said this before and I'll say it again: in the absence of a tight coupling between profit and payouts (either buybacks or dividends) the value of a stock becomes detached from the value of the company, and approaches pure opinion. When profitable companies don't pay out dividends or buy back stock, their stock price growth has nothing to peg it to the actual profit of the company. Likewise, when unprofitable companies pay dividends and buy back stock, their stock price begins to directly contradict their (lack of) growth. In short, with tricks like this available, the stock market is a bad way of measuring how the economy is doing.

It's not clear from the article whether or not the companies borrowing money are the same companies buying back their own stock. But if they are, then it's clear that the economy (as indicated by real value being produced) has already crashed, and this is just a hack to delay admitting this, so that execs and the financial sector can continue to profit. It's become clear that the government will bail out companies when this strategy inevitably fails, so it's average people who will pay the cost.

To be honest, I am a bit surprised this hasn't happened sooner. It's a fairly obvious hack: if you fail to produce value, just borrow money and prop up your stock price. Perhaps that's why: maybe it's too obvious--the people who make their money by finding new and creative ways to move money around have to at least create the appearance of investing in real value.

There's two ways to look at everything. Buybacks can be seen as companies giving money back to the shareholders. Or if you decouple the company from it's stock, you'll see that buybacks are an investment in the company's own future, since they believe that their own stock is at a discount now, and they'll make more selling it later.

Companies are buying back shares. Individual investors are selling shares [1]. Private equity [2] and VC are raising record sums [3].

Alternate title: financial markets shifting capital from public to private companies. The economy’s R&D engine has shifted. Financial markets are following.

[1] https://www.wsj.com/articles/investors-bail-on-stock-market-...

[2] https://www.wsj.com/articles/private-equity-firms-are-raisin...

[3] https://news.crunchbase.com/news/the-q2-2019-global-venture-...

Totally amazed that share buybacks are controversial. If a company believes its shares are undervalued, and the best place to use its capital, then it should buy them back. In the same way, if a company decides retiring debt is in its best interest, then it should use the money that way instead (and that often happens when it has high priced debt in the markets that's callable and interest rates fall). Comparing share buy back and R&D makes no sense. Would we rather have Apple invest in R&D that it doesn't believe in, just so it has a place to put its money? If companies couldn't buy back their stocks, they most likely would pay dividends or just bank it (which is what Apple did for decades), and the share price would rise anyway.

Share buybacks don't dodge taxes - at least not directly. They allow the price to rise for those people who aren't selling (in the same way that banking the money would).

The economy is becoming increasingly automated and dominated by a handful of large, hugely successful companies that can keep printing out the same widget or service over and over , generating reliable, recurring revenue streams. There is no need for research when your competitors are tiny and or non-existent, with no hope of closing the gap.

R&D is an investment. So are buybacks. The powers that be have made the call that at this moment in time buybacks happen to be more lucrative than R&D. There is significant investment in R&D going on - happening in the form of investments in startups which will be targets of acquisition later on.

Tangential thought: Startups are experiments that validate theories on product - market fit by generating positive cash flow. As a corollary, if you are a startup, your developers should be focused on validating that theory (iterating on MVP) and not fondly reminiscing and recreating Ginfrastructure(TM). Post acquisition, there will be a rewrite.

As there is a drop in internal R&D, there will be a corresponding rise in acquisitions now or in the next few years. So it is a good time to be working in a startup - preferably one that is making money!

Its probably a bubble coming what happens when the stock market goes down? Ie tradewar causes price inflation of goods on imported goods from China. Central bank then increases interest rate to fight higher inflation. Price of new money goes up, stock market goes down.

Perhaps I'm being simple, but I don't really understand the problem here. Companies are sitting on too much cash that they don't know what to do with. There is only so much that can productively be spent on R&D. If they don't do something with their cash, investors will start demanding a dividend. Once you start giving dividends it becomes hard to stop giving them. To prevent perpetual dividends, companies perform a buy back which also helps out investors but is a one time thing which doesn't need to be repeated.

Good. Markets without buybacks and dividends are a ponzi scheme. The whole point of selling equity in a business is to raise funds, use it to grow, then return funds to investors.

I’m not getting this headline. Buy backs are something done with profit.

So replace the headline with “s&p 500 Profits now outpace all R&D spending in the US”.

I don’t get the comparison. I don’t see why it should be a good or a bad thing. Seems like two completely arbitrary numbers being compared.

I have built a site which allows you to see whether individual companies are buying back stock or diluting e.g. buying back https://shareseer.com/search?q=hd

diluting https://shareseer.com/search?q=t

Why do people think that if you pour more money into something like R&D you'll get more results? That isn't how it works. You get diminishing returns on anything, do you not think internal statisticians and economists at the company haven't calculated that?

US R&D Spending Has Reached a Post War Record High https://thesoundingline.com/us-rd-spending-has-reached-a-pos...

All change requires energy, and we're going to have less energy, so the speed of change inevitably has to go down.

Because the only energy added to the planet comes from the sun and the only viable option to collect that energy are trees and plants.

This is a disturbing trend that's been developing over the past 100 years, and I believe it is the main reason for our country's stagnating economic growth. Let's take a look!

100 years ago, companies on average dispersed 90% of their earnings back to shareholders as dividends. But by the 1970's however that number fell to below 50%. Fast forward to the 2000's and the payout ratio is down to around ~30%.

What happened? Companies used to distribute their profits back to their owners, the shareholders. But that isn't what's happening anymore. In my amateur historical analysis, I believe there are two causes for this disastrous trend:

1) Tax dodging

2) The Casino/Gambling Mentality of Stock Market Investing

My theory is that the trend started with investors 50 to 100 years ago looking to dodge taxes, and gain a little free compounding. Makes sense! Right?

But it's just gone too far. Now investors receive almost nothing for owning a stock. Take Apple Inc. for example. In 2019 Apple made a profit of $55 billion. How much of that did they pay back to their shareholders? $14 billion.

And Apple isn't even the most egregious case. They at least pay a dividend. Google, Amazon, and Facebook combined paid $0 back to their shareholders this year!

So how has this insanity continued to go on for so long? The answer is simple: Adults don't know what stocks are. They think that a stock is a thing that you buy, its price goes up and down, and the game is to try and sell the stock when the price goes up, and hope that the price doesn't go down. And the machine that keeps the whole thing moving along is the Stock Buyback.

REFERENCE: https://web.archive.org/web/20070106223644/https://www.eaton...

Buybacks are mostly evil, and used to make their managers/c level wealthy:

https://www.epsilontheory.com/the-rake/

Another way of saying this: S&P 500 profits now about 10% of all R&D spending in the US.

(Assuming buybacks return 10% to shareholders, which is optimistic)

Because buybacks are just another way of returning profits to shareholders.

I've watched somewhere that these buybacks is to keep the stock prices afloat lest their employee stock options get hammered and they lose employees. Tech workers are operating on fumes.

Buybacks have only been legal for the last few years. There was/is a very good reason that they should be illegal.

Buyback hurt the company but enrich the CEO and other executives.

Amazon has done 0 buybacks in the past 30 quarters [0] and is one of the best-performing components of the S&P 500 index. I'm not convinced that all corporate executives are right to assume that the best use of capital is to simply repurchase stock. Look what it's done for Amazon: it's delivered great economic value.

[0]: https://www.marketwatch.com/story/amazon-doesnt-buy-back-any...

Hypothetical question: what happens if a company buys back 100% of its stock and hence has no owners? For example, who would choose a CEO in such case?

Intrinsic value of the company > devaluing cash pile

(Presenting as "record stock growth" but in reality just trying to hold even value.)

If we could just get rid of the silly taxation issues for dividends we wouldn't have this issue.

When shares of stock owned by an equity mutual fund are bought back by the company, the fund uses that money to buy shares of other companies. The money does not disappear or immediately go to consumption. Buybacks allow money to be transferred from companies with poor growth prospects to companies with better growth prospects.

a dividend gives back the capital w/o having to lose any voting rights.

When a buy back occurs you have to give up votes to gain liquidity.

Interesting that the market is at an all-time high and companies still feel their stock is cheap enough to warrant investing in. When will this bull stop?

This will not end well...

Can someone explain this to me with beans? Like, let's literally count some beans...