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US taxpayers paid for 5.8 billion of Lockheed's 7.9 billion dollar stock buyback
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- Title
- How Lockheed's $7.9B stock buyback bonanza is paid for by you - Responsible Statecraft
- Authors
- Brett Heinz, Kelley Beaucar Vlahos, Eldar Mamedov, Catherine Wilson, Emma Sanderson
- Published
- Aug 1 2023
To my mind, there's two threads here I'd like to pull on:
It's a good time to be in the business of war. Weapons and ammunition are in higher demand than they've been for quite some time, both because of the active war in Ukraine and the rearmament of various European nations. It's possible that the US could negotiate a lower price, but Lockheed Martin's 5.8 billion in profit is .1% of the US military budget for this year. When negotiating with a major supplier that's a fairly small difference to fight over even if it's huge in dollar value. Additionally, LM's net sales for 2022 was ~$66 Billion, with their free cash flow being just a touch over $6B. This seems like a fairly reasonable move to put cash that could have been in LM's bank account back into the hands of investors.
Indeed, a stock buyback is functionally moving cash from the company and to the company's investors, since their existing stock is now worth more. While I've argued in the past that I wished that companies would engage in more R&D and less stock buybacks, I'm relatively OK with LM not putting that $8B into R&D.
The author doesn't actually posit why stock buybacks are bad, nor why a company who supplies weapons being profitable is bad, presuming you already know and share their opinion. I agree as an abstract thing that the US should be a responsible shepherd of the financial resources it has, but that's as far as I'm willing to give the author credit without them backing up their argument in some way.
My problem with stock buybacks is that they're a way to skirt taxes. It's fine if your company wants to move money to its shareholders, but you should be issuing a dividend.
For this case, I think there's also a concern that, if LM's profit margin is that large, the cost for government contracts could have been bid much lower.
Fair enough. Dividends are taxed as normal income, and stock buybacks are taxed in the year the investor sells the stock, and at a lower rate as well. There's definitely some things that need to be fixed in the tax code.
As for why LM should be profitable.... Nuanced arguments can possibly be made that LM's profits are basically profits on investments the government made (e.g. funding the F-35 project) and thus belong in part to the government. Or that LM is so big as to influence US policy a bit too much. But absent those, I can only assume that the opinion is so simple it need not even be stated. The only one that comes to mind specifically for defense contractors is based on a position of somewhat radical pacifism: "Defense contractors need not exist, because militaries need not exist". We over here in the EU just had to deal with that bunch opposing aid to Ukraine, and it is arguably to a degree what got us into this mess to begin with, so thanks but no thanks. A military is necessary even if you do not intend to use it, at least with the rest of the world being the way it is right now.
I'm going to respond twofold; firstly to clarify/repair my original thesis and secondly to address your counterpoint to not-my-thesis.
1: "A little bit less" is, in the long run, not compatible with defense contractors being unprofitable. If you think LM shouldn't be profitable, without further clarification, I'm going to assume (maybe due to overexposure to disarmed/absolute pacifists) that your stance is in conflict with the US having any reasonable military capable of defending itself. Now, LM need not be profitable at all cost lest the commies overrun the US. But if major defense contractors can't consistently stay afloat, then the US won't be able to maintain even basic capabilities. Or in other words: Maybe my ~finance game is weak and I miss some nuance, but the only way I can square away eliminating defense contractor profits is to eliminate defense contractors by eliminating defense. This stance is a completely boneheaded nonstarter to me, and while it peeved me big time before 2022-02-24, by now it royally pisses me off.
I hope this clarifies how I don't think "we could use with a little less" is consistent with "defense contractors are not profitable".
2: I'm not strictly sure I agree. If you account for inefficiencies and differences in purchasing power, China is there or thereabouts with the US. They have nasty advantages above the US in several areas; not only manpower but also some areas of tech. Absent the US being willing to lose its allies in east / SE asia, I'm not sure which capabilities could be cut or reduced that would both make a dent in the budget and not harm US capabilities to help defend its allies overseas. If you disagree that the US should be capable of that, that's fine, but I don't see anyone else capable of picking up the slack in the short term. I'd agree that US allies in such vulnerable positions should do more for their collective self-defense, freeing up the US a bit.[1] If you want to fix the purchasing power difference, I don't think that'll do good things to your approval rating in the US, or to the US economy. Lastly, if you have ideas on how to reduce waste in the DOD budget, I'm sure there are lots of bureaucrats chomping at the bit if those ideas are any good. However, chances are that there's plenty of smart people with a higher clearance and with more knowledge of how it all fits together already working on that, and there isn't any low-hanging fruit.
[1] There's a subtle thing about knowledge sharing and economies of scale involved here that gives the US an outsized impact in driving forward R&D, leading to them massively dominating its allies in terms of tech capabilities. Smaller nations can usually not compete and build their own F-35, and have a very hard time banding together to achieve similar economies of scale. As a result, if the US doesn't start building F-35s, they don't get built, leaving a capability gap. Before the US military could take that step back, I think it'd have to get a lot less picky about technology sharing (the F-35 program is IMO already a good example of this, being sold somewhat indiscriminately to good friends. Much better than previous similar projects). Further, I think the rest of the west would have to establish the structures necessary to make such projects happen with or without the US; and IMO the US would have to become a lot more willing to license or better buy foreign defense goods. It's a very long road until that can be done responsibly, and the US isn't really on it right now.
whelp, that's foot note got bigger than I had hoped...
There was a recent 60 Minutes piece on military price gouging:
I wouldn't call myself a pacifist and I'm way too ignorant to call myself a realist or a pragmatist, but it seems like something is going wrong. A superficial take is that the US makes sophisticated/advanced but overpriced technology. If Syrian drones do a job 1/2 as well but with 1/100 of the price the US is going to end up unsustainable.
Another take is that the MIC is going to lobby to stay relevant, and some of what benefits it is not in line with security on a national or global sense. I grew up with that looking like a planned (e.g., PNAC) invasion of Iraq leading to possibly millions of excess deaths in the Middle East and destabilization of the region. Before that it was landmines in Laos, a bunch of coups in South/Central America, the Banana Wars, etc.
More recently its people like Erik Prince, brother of Betsy DevOs and Blackwater-->Xe-->Academi, helping with Project Veritas, training the Chinese, offering to subcontract for Wagner, etc.
I'm definitely (obviously?) in favor of supporting Ukraine, but sans actual expertise theres an emotion-based mistrust of the MIC and US involvement in war in general. As in "if there was less money in the budget, things would shrink, the lobbying would have less power, and Iraq/Erik Princes would be less likely to exist". I think that's where some of the sentiments about Lockheed/Raytheon/etc. come from, less about profitability and more about oversight and influence.
In the context of defunding the police theres also the idea that if you weren't spending money on X you'd be getting equal or better results on Y. Would we not be safer or more productive as a country if kids had free school lunch, per-dollar? Or supported social workers to replace police for situations they aren't appropriate for? Would Africa be better handled with what I've heard is that Chinese approach of "bringing roads and hospitals, where Americans bring speeches". It would be easy to make that sort of argument.
I couldn't really say that I disagree with you in the grand scheme of things. But I hope by now it is clear that a vague notion of "defense contractors don't deserve profits" needs a very fussy and detailed discussion to actually substantiate it, if you want it to not be an insane proposition.
The price gouging thing certainly seems iffy. I do wonder though.... considering the big prime contractors get basically all their money from the DoD, or ally's DoDs, couldn't you simply apply fiscal responsibility one step later? Consider the defense contractor as part of the government for the sake of optimizing government spending. Not saying you should, just that maybe that's not completely insane. What would we find? There's a few options:
Personally, my money is on option one. There's a reason the F-35 went from this dreaded project that burns billions upon billions, to a fairly affordable fighter. It's economies of scale (again!).
I think I disagree here. Just as a point of comparison, and a very rough one at that as accounting is funny, but: A french Rafale jet is a little more expensive than a F-35, when the F-35 offers much better capabilities. AFAICT, that's not even a reasonable comparison, the F-35 is so far beyond the Rafale, it's kind of insulting to make the price comparison. At least the stuff that I see, the fancy new kit that the US is developing or procuring, is often grounded in reality. Other militaries have much worse habits of always chasing custom-tailored gold-plated solutions for everything. Sure, politically the goals given to the US military are high, but the way they go about planning and procuring for them is not the insane part here.
As for the defunding the police comparison, I'm vaguely reminded of a SecDef saying that congress should consider raising the State Department's budget, as having the military fix what the State Department could've prevented is much more costly. Ahh, there it is! So yeah, absolutely in favor of seeing how we can get the most bang for our buck. In the case of china and diplomacy, I don't think that means talking to china, but talking to their other opponents in the region. Maybe India would be worth a shot.
To clarify, that's a generic you. I don't think that's your stance. It is ultimately where the implied stance in the article led me. Basically, if one criticizes LM profits without further explanation, I'm inclined to believe that they either don't realize how LM being unprofitable long-term erodes very fundamental military capabilities, or they do not want the US to have those capabilities.
Maybe I'm picking up a subtle thing in the article and running veeeery far with it, and/or projecting German discussions onto US issues. Well, y'all can deal with it being the other way around for once, heh.
Also, let me clarify the multi-track drifting I'm doing in my post: (1) is not addressing your post directly; it's more clarifying my original argument, and why my original argument and your reply don't talk about the same thing. (2) is describing all the difficulties I see with actually reducing the US defense budget, even if I fundamentally agree that the budget is extremely inflated.
Not who you replied to, but as an American, being opposed to profiteering is not the same as opposing reasonable profits. But more to the point, buybacks can be mishandled, weakening the company. Even if that is not the case, buybacks produce less tax revenue than dividends, which are themselves taxed at a lower rate than wages/salary. https://itep.org/higher-stock-buyback-tax-would-raise-billions-by-tightening-loophole-for-the-wealthy/#:~:text=The%20buyback%20tax%20moves%20toward,the%20value%20of%20their%20shares.
I mean, I get the entire argument about corporate profiteering, problems of capitalism, etc, and I'm entirely supportive. But that's afaict not the discussion being started by the article: The article singles out LM. Why? Because they're defense contractors, thus all their profits are essentially scalped off of the tax payer. I can understand that, but if one doesn't want to look like an idiot, one has to acknowledge that all corporate profits are scalped off of the broader population and either (a) the money they individually spend on consumption or (b) the money they collectively spend via taxation. So really, if one is worried about corporate profiteering, there's no reason to single out a defense company and make it about their defense business.
Oh, actually, there's a third way for corporations to make profits: Make business abroad and scalp your profits off of not-US-citizens. Not one iota better, but the US public might care less.
And of course there's some amount of profit that's OK for a corporation to make. But come on, the profit from the Ukraine crisis is rolling in, this is hardly business as usual for them. Again, unless that case is made generally about corporations, I'm very suspicious. Reining in capitalism as it exists in the US, all for it. Taking a particularly close look at the defense sector because it's not a very well-functioning market (few sellers, fewer buyers), all for it. But this article doesn't quite make that case.
Even an argument about profiting off of crises is suspect to me. Doesn't matter if it's a pandemic, war, or the climate crisis, there's companies that specialize in addressing those crises, and to deny them their profits when we actually need their services is very close to saying we don't want those crises addressed, unless you can come up with another method of funding that work. Consider any excess profits you disagree with in those situations an idiot surcharge that we have to pay (collectively) for not preparing better for that crisis. And again, plenty of discussions in similar veins that can be had about fairness in how those crises costs are distributed; or about our collective capacity to prepare for it reasonably. I'm just kinda unhappy with how this piece mixes fiscal-responsibility, anti-military and anti-capitalist rhetoric, because those topics are not really related and I'd rather talk about them in separation. Or maybe they are related and I don't see it, but then the article doesn't make that case either.
I agree it's not an ideal article. I was hoping it would spark discussion and it did. Fair business is good for society. Here in the US, we have lacked antitrust enforcement and could stand to modify the tax code to equalize the burden. We are in an era of robber barons again. https://en.wikipedia.org/wiki/Robber_baron_(industrialist)
Buybacks in particular give money to the C suite when the company could afford to increase wages and likely does not.
It does seem that way, but a stronger argument would zoom in a bit and make a case for which parts of the US defense budget can be done without and should be cut.
There are some very expensive airplanes, for example.
This is exactly the sort of analysis I was looking for.
Here is an article against buy backs, but I am not at the moment convinced for or against.
https://hbr.org/2020/01/why-stock-buybacks-are-dangerous-for-the-economy
Normally, I don't think that stock buybacks, by themselves, are a bad thing. However, I get frustrated that companies will spend all their cash (or too much of their cash) on buybacks and then ask for a bailout from the government. Here is one article of many about it.
I also think it is also a death by 1000 papercuts scenario. To over-simplify:
-There is the narrative "socialism bad" unless it is corporate socialism, then it is either ignored or we're told it is "necessary"
-The stock prices rise, the company is worth more, the executives get very generous bonuses but, golly gee, there isn't enough money for the employees to even get CoL raises (besides that'll just cause inflation, we're told)
-People are realizing that corporate profits recently were at an all time high in combination of the above 3 items while they're barely living/surviving.
-I also think that some people are getting fed up with being told there isn't money for (school lunches/healthcare/CoL increases in social secutiry/insert issue that affects millions of people directly) but there is always money for corporations
Limited stock buy backs can be healthy, sure, IF done correctly. However, these corporations aren't "saving for a rainy day" first or investing in their employee retention and are instead spending the money to make the significantly rich even richer through stock buybacks knowing full well that they'll get gov't assistance if their profits are challenged. As consumers we're told to have a two or three month emergency fund yet it seems like multi-billion dollar businesses are in line to go on the dole in mere weeks to the tune of hundreds of millions of dollars each.
People were blamed for all sorts of problems for getting a few thousand dollars during COVID yet corporations have gotten trillions in the auto bailout, the TARP bailout, the airline bailout, PPP loans (that were forgiven), the CARES act, etc. Of course the executives still got paid their golden parachutes and bonus packages at times they were so "broke" they had to ask the gov't for money..
The free market should have weeded out the irresponsible companies and taught lessons to the survivors about robust financial health (and not just hot stock prices) but, alas..
I'm utterly unconvinced that stock buybacks are a good thing for anyone but investors.
Do you have any sources that might change my mind? I'm pretty sure I have a limited understanding of the subject, so I'd be interested in learning why I might be wrong.
The whole concept of companies is to generate money for investors. Companies will do all sorts of things to make a profit in the first place, depending on what kind of company they are, but ultimately they could make an infinite amount of money and it wouldn't help anyone if they had no way to get this money back to the investors.
The two options companies use for doing this are stock buybacks and dividend payments. For various reasons buybacks are considered better for investors, so more recently companies have been doing those more often.
So I mean you're not wrong in saying that buybacks are only good for investors, but that doesn't mean it shouldn't happen.
t's certainly possible for companies to spend too much on buybacks and not enough on other things, but for some reason I don't think Lockmart is skimping on R&D funding, considering that they're currently developing new laser guns, a 6th generation fighter, hypersonic missile defenses, and more all simultaneously.
This concept reduces the effects of business to the point of absurdity. It's like saying the reason why people are born is to die. I suppose that's fine if you're one of those investors, but businesses don't exist solely to serve the investors, they also exist to serve their employees, contractors, customers, suppliers, and society at large. If a company made infinite money but couldn't give any of it to their investors, then literally everyone else is benefiting, and that's something that as a society we should be encouraging.
Forget that for a moment and let me restate my question in a different way. Stock Buybacks were effectively illegal until the 80s because it was viewed as stock manipulation. What justification was there to legalize it? How was it supposed to help society, and given history since then has it achieved it's promises?
Like I said, it's considered a more effective way to increase wealth for investors than dividends. The people who make these decisions are on the board of directors, with massive amounts of money tied up in these companies, so if anyone should be motivated to know, and capable of finding out, the best way to increase the stock price then it would be these people. And clearly they think buybacks are better or they wouldn't be doing them.
It's not like these people are day trading their shares regularly, they are in long term and think these buybacks are the most efficient way to go.
And while yes, theoretically it would be great if we could turn Lockmart into a nonprofit, that's not possible for reasons that should be incredibly obvious. Even when billionaires do donate their money they usually pick other places to donate it than to the Department of Defense.
I get that, but you're not really answering my questions. I want to know how buybacks are supposed to be good for society and why it makes sense to make it legal other than to make rich people even more rich.
I mean they're just like dividends but a little more effective. Or do you think we should just abolish the concept of publicly traded companies entirely?
You've already established that they aren't just like dividends because of the side-effects they carry.
I'm not trying to make a point here, I'm just looking for an answer to my question. I can only assume from your response that the answer is "no, it doesn't".
What side effects do they carry?
My apologies, I thought you mentioned it but it was the article I was reading. The side-effect I was referring to was the increase of price of those stocks, which would effect other potential investors.
Increasing the price of stocks isn't a side effect, it's the purpose. To increase the wealth of investors by making the remaining shares more valuable.
Announcing a dividend payment of 8 billion distributed throughout all the shares would have a similar impact on the stocks suddenly getting more valuable, and would also effect other investors, but just in a slightly different way
An expected stock buyback does not change the price of shares very much. While the business purchases shares on the market and retires them (reducing the overall availability of its shares), in executing the buyback it also spends money, making itself a modestly smaller company. The equity:share ratio remains constant.
Dividends function in a similar way, but issuing an expected dividend reduces the stock prices. After issuing the payment, there's now less company but the same number of shares. An example of this effect is in the six-month chart of JPST, a short-term income ETF that issues dividends monthly (and thus predictably): at the start of each month the share price drops by more or less the dividend amount.
Unexpected dividends and share buybacks, however, can have an influence on stock prices. In this case, however, the effect isn't from the mechanical purchase/dividend, it's from investor expectations. Suddenly, this company has become one that gives (more) income back to shareholders. That income stream has value, particularly if strong within-company growth is unlikely thanks to a mature industry.
If this was true, then stock buybacks would simply be a company deciding to throw away money for fun. Now tell me, do you think the people in charge of running Lockheed Martin would decide to throw away money for fun?
You can also look at the share price. The stock buyback was announced October 18, 2022. And look what happens to the Lockmart share price on October 17-28, 2022. It goes from 397 to 484 in a little over a week.
I'm not even going to bother reading the rest of your comment because you're clearly being willfully ignorant about how stock buybacks work.
Regardless of what happens with the stock price, it’s clearly not “throwing away money” any more than a dividend is throwing away money. Making money for the shareholders is what managers believe they are supposed to be doing.
Also, to try to understand what happened with Lockheed Martin’s stock you need to look at what other news there was at that time. They announced third-quarter earnings on October 18, 2022, and apparently they “beat expectations.”
So, there are two different explanations for why the stock went up, and it’s not easy to say why stock prices move. Often people are just guessing.
Dividends are taxed at a higher rate than stock buybacks. That's a huge reason why dividends should be preferred over buybacks at the societal level.
That's fair, but if the general sentiment of this post was "Lockmart shareholders dodge a % of their taxes due to buyback, tax code should be rewritten to account for this" I wouldn't have bothered replying, because that would be a very sensible take.
I'd argue that the whole point of a company is to make money to exist another day. Doing that will make money for the investors automatically. I do not believe that companies should exist to solely make the investors money1. To me that is an important distinction.
1Unless the business was created with the intent to be bought out by a larger entity (gym, bank, pest control, etc) but those are typically much smaller enterprises--often a 1 or 2 person operation (except the bank obviously). Even then, however, they still need to make money to survive another day until they're bought out.
How? I don't think you understand anything about how companies work if you actually think this is true, what you're describing would be a non-profit company, and obviously those do not make the investors richer even when they grow, because again they are nonprofits. Yes, in the real world when companies grow it does make the investors richer, but only because the investors know that a portion of that growth is being sent back to them, in the form of either dividends or buybacks. If the company had no plan to ever send the money to the investors it would be a different story.
And yes, companies do need to manage long term growth as well, because future profits that can be sent back to the shareholders are important too. However, I don't think anyone is arguing that Lockheed Martin is no longer capable of winning future contracts because they spent all of their money on buybacks. And if you are arguing that, I encourage you to look at all of the absolutely cutting edge weapons systems the Lockmart is either developing (ie, the new laser or the hypersonic missile interceptors) or bidding on and expected to win (NGAD). And that's not a complete list, they're a massive company that specializes in cutting edge technology. Lockmart is doing absolutely fine long-term even if they are also sending some extra money to shareholders short-term.
You seem overly condescending, to be frank.
Are you saying that Amazon investors haven't seen a return on their investment on long term share price alone? Between 2013 to 2021, with no dividends and no stock buybacks, Amazon stock jumped from around $12 and peaked around $180. (Admittedly in 2022 they did a stock buyback when they also split 20:1). I don't think I know any investor who wouldn't be happy with level of returns like that--especially in 8 years--all without dividends and stock buybacks.
The true value is in the long term stock price. Dividends can help get more shares via DRIP and the shares are where the money is at. If it wasn't valued by long term investments I believe Warren Buffet would have been a daytrader.
Well yes, Amazon didn't pay dividends or do buybacks for a while, because it was clearly growing very quickly and needed the capital. And it was always planning to start paying back the investors in the future. Which as you note, it did start doing. Lockmart is neither a quickly growing startup nor is it in desperate need of capital.
And yes, the value is in the long term price. But the ability of the company to pay back the investors is the main thing that drives the long term price of the stocks. The buybacks and dividends aren't unrelated from the stock price, the expectation of future buybacks and dividends is the primary input into the price of a stock.
Just imagine a company that will never pay any dividends or do any buybacks. What advantage would there be to owning shares in it? Why would anyone buy the shares from you, if they know they'll never get anything from them? The complete lack of buybacks and dividends would drive the price to effectively zero, because in the real world the only reason a company would plan to never pay back investors would be if it was completely broke.
We both agree that Amazon didn't pay dividends or do stock buybacks and their value still skyrocketed during that time. Investing $1000 and getting ~$14,000 back in 8 years isn't enough of a reason to invest in a company?
Isn't "buy low, sell high" enough of a reason to buy stock? Buybacks were illegal until 1982. Was it impossible to make money off of non-dividend stocks prior to 1982?
At this point I'll agree to disagree that stocks are "worthless" without buybacks or dividends involved since . < 1982 shows otherwise.
I thank you for the conversation and have a great day, friend.
I'm just replying for the sake of anyone else who may be reading this, if you want to stop replying then feel free.
The reason Amazon grew as much as it did was because people expected future payouts. Initially, there was no promise that an investment in Amazon would have massive returns, so the stock prices were low. Now, there is a very solid promise that Amazon will be capable of and willing to pay back it's investors, so the price of the stock is very high. Buybacks and dividends are intrinsically linked to share price and you can't separate them.
Non dividend shares are a more complicated issue that also aren't very relevant to this discussion.
https://www.investopedia.com/terms/z/zero-dividend-preferred-stock.asp#:~:text=A%20zero%2Ddividend%20preferred%20stock,end%20of%20the%20investment%20term.
Well, good thing compared to what? It depends on which alternatives you’re considering.
One question is, why sell stock? There are other ways to fund large projects. For example, both companies and governments can borrow money. However, the company is on a fixed schedule to pay it back, and if they take on too much debt and can’t pay it back, they will eventually go bankrupt. Also, borrowers are often wary of loaning money to risky companies.
Stock is different because there’s no guarantee that investors will be paid on any particular schedule, or at all. For a bank, stockholders are there to take the risk; you could say that the social purpose of shareholders is to lose all the money they put in if something goes very wrong. This protects other people who loaned the company money, like bond holders, depositors, and sometimes taxpayers when there are government guarantees.
(When a government-run project is badly managed and there are cost overruns or failures, who takes the risk? Taxpayers. There’s no buffer. Although, that’s more of a risk for local governments. For the US federal government, the relationship between government spending and taxes is quite loose. Increased borrowing and inflation are alternatives.)
To convince shareholders to risk their money, they need to believe that the company probably won’t lose value or go bankrupt. Profiting when things go well is why they give the company money in the first place.
So the question for a defense contractor is, what risks are they actually taking? If the government bears the risk of cost overruns or project failure, it’s hard to see why they should get much profit from running a project? I think this needs to be figured out on a case by case basis for each contract, though.
You might compare with SpaceX. I haven’t paid too close attention, but my understanding is that they are in part funded by government contracts, and at the same time they’re also taking their own risks when developing new rockets. If Starship turns out to be a bust, taxpayers aren’t paying for that, I don’t think?
As for dividends versus stock buybacks, they’re just different ways of paying shareholders back. The payment schedule is up to the company and they can get it wrong. If they pay back the money too quickly, not enough risk is being borne by the shareholders. That’s an argument to be made in each case.
Traditionally it’s up to them, though, just like selling stock and bonds is up to them.
(Except for banks, which are heavily regulated. There are federal requirements on the financial reserves banks have to have.)
I don't think you answered my question, either. Investors already have incentives to invest, both in terms of increase of the value of the stocks and in dividends. It seems to me that stock buybacks are at best completely unnecessary, and at worst are stock manipulation. So what reasons are there that it should be explicitly allowed under the law?
I think you’re right that stock buybacks aren’t fundamentally necessary because dividends are a close substitute. It seems like you’re admitting that dividends are okay, though? If dividends are okay, stock buybacks should also be okay-ish, because they’re pretty close.
Buybacks do have tax advantages for investors since a buyback doesn’t have any tax implications until you sell the stock, which is under your control. It’s also a capital gain. Reinvesting the dividend isn’t the same thing. That might be a reason to argue in favor of dividends and against buybacks, if you don’t like investors being able to delay the taxes or get a lower rate.
One argument against buybacks is that it’s stock manipulation, but I don’t think it holds up. “Stock manipulation” is a vague complaint about the stock’s price being somehow wrong, often too high. What’s the right price?
Cryptocurrencies and meme stocks can go up because of vibes, but the traditional finance answer is that a stock’s price should be based on some kind of expectation of stockholders getting paid by the company someday. There are often growing companies that don’t do any dividends or stock buybacks for years, but a stock that will never pay out, even in principle, isn’t really a stock.
If a company unexpectedly declares a dividend and it’s not an indication of anything wrong, the stock price will likely go up. That’s not stock manipulation when the company actually will pay the dividend. The price should go up because it’s worth more to have the money soon rather than at some unknown date in the future.
Similarly for a stock buyback. It’s paying the stockholders and the stock should go up, so it’s not manipulation, it’s good news about a payout. (Assuming it actually happens.) There are also fewer shares after the payout, so the stock doesn’t go down afterwards, unlike a dividend. So the price should stay higher because there are fewer shares, just like a stock’s price should be lower after a stock split.
I don't think that dividends are OK, but it's largely because I haven't really thought much about them because I didn't think I fully understood them. To be honest, I think they're another form of rent; something that exists to extract wealth from a great number of people and put it in the pockets of a few rich people. Someone made a comment earlier about how people's money is "tied up in stocks", but stocks are a purchase, not a loan. Expecting payments in addition to the value of the stock feels usurious to me.
I had this negative opinion of stock buybacks because of the historical problem with it; I didn't see any good faith reason why it would make sense to legalize it. The way you describe it was kind of helpful; it seems less bad when you put it in context. Perhaps what I'm looking for is a historical answer instead of an economic one.
Historically, stock was for funding temporary ventures like sea voyages. Investors would get a share of the profits when the ship returns. Assuming it didn't sink. Shares could be traded in the meantime, but the payoff is what makes the shares worth anything.
A buyout is a sort of partial payoff, even though the company isn't going out of business.
Dividends are basically the company has too much money, and nothing to do with it. What are they supposed to do, put it in a 2% APR savings account with all the other money they aren't using? Put it in a 5% ROI mutual fund?
The point is it's extra money that isn't really "working" towards anything, so might as well give it back to the shareholders in the form of dividends, and then the shareholders can decide individually how to re-invest it.
It's all optimization. You need enough cash to cover short term costs, loan payments, enough to invest in R&D, and the rest just goes to dividends or stock buy backs because you've already exhausted every other useful option.
On top of that you don't want too much cash on hand because it's actually better to an extent to take out loans because then you can increase your tax shield (there's a basic equation taught in business school to help estimate this amount).
I don’t see a strong theoretical argument either way.
There are always going to be arguments that emergency reserves are inefficient since they aren’t doing anything, and that will be true up until there’s an emergency. This would especially be true for a bank, but a lot of companies will be under pressure in a recession. (Banks are highly leveraged, though, which in a way proves your point.)
As you say, it’s optimization, but without being able to predict how much money you’ll need, it will be more of a judgement call.
And although a company might not be able to get better rates than its investors, it seems like their corporate finance department should be able to get average performance for low risk investments?
Lol, yes, very much this. Project financing classes are kinda ridiculous, a lot of math, but all the original data comes from vaguely made up/estimated numbers. Two people can use the exact same calculations, but come up with wildly different answers based on the points where they have to use their own judgment to make an estimate.
Also true, except it isn't the company's mission to also run an investment firm, and if they did shareholders would inevitably complain/have differing opinions. Better to hand out dividends and let the shareholders take responsibility for their own reinvestments.
I think that depends on the company. Berkshire Hathaway, for example, very much is an investment firm, as well as a lot of other things. In other cases, having reserves is important, so the company probably should get good at making some conservative investments.
Also, having lower reserves is effectively more leverage and that some investors like to take on more risk, because they make more money in good times. Society has an interest in discouraging excessive leverage, though, and that might be a reason to discourage stock buybacks and dividends sometimes?
There are ideological arguments about what shareholders want that might not reflect what they actually want. Matt Levine writes about that sometimes. Do you think of shareholders as index funds or mutual funds where it’s just one small component of a portfolio, or as people who own a substantial amount of stock directly? That’s going to affect how much risk they’d prefer.
I can't think of any one comprehensive source that has shaped my opinion but a collection of articles that I've read as they popped up over the last decade+ (around the time of the automotive bailout). For the sake of transparency, I can't remember many (or any) articles I've read to paint a rosy picture of the practice so I admit that it is probable that I am being influenced.
The main winners in the vast majority of stock buybacks are the executive suite (who get stock options) and the hedge fund level investors. In the never ending race to make each quarter better than the last, cutting costs or rising stock prices have been set as the "win" condition for that quarter. Spending money on investing in employees doesn't meet either of those conditions. Lockheed could have taken 10% of that $7.9 billion and given every employee a $6800 bonus and still could have bought back over $7 billion in stocks. (Lockheed claims to employ 116k people worldwide per their page ) But they didn't and the executives still made their bonuses so why would they care?
I would argue that a company with loyal employees as well as a constant flow of quality applications would be much more robust and likely to survive than a "paper tiger" with an inflated stock price.
(BTW, that's just one possible use for a portion of the money and still spend the vast majority on a buyback).
Yeah, that article is solid, in my opinion. Stock buybacks can weaken a company if there's an unexpected downturn and it means they don't have the cash on hand to be resilient, but back when interest rates were so low it made more sense to do buybacks or pay dividends. They're less sensible now from an operational perspective, since debt is comparatively more expensive, but LH is probably more set than most to be solidly profitable for the next few years.
So is the author of this article assuming that everyone was under the impression that LockMart was a charity, and that he needs to inform them that actually they do make a profit? Or is he just trying to generate clicks by people assuming stock buybacks are bad because they don't understand them?
Because if you know that Lockmart is designed to make a profit, and that stock buybacks are a normal way for companies to direct their profits to the investors (again, the whole point of the company) then I'm really not sure what this article is doing, other than telling everyone that Lockmart has had a good year. Which should be fairly well known anyway, especially given how much demand for GMLRS and other weapons systems have increased due to the current war.
Some people oppose buy backs for policy reasons. The headline seems to me to be about communicating that buybacks are not small in companies of this size and also raise concerns with efficiency in US military procurement.
Then maybe the author could have written about why buybacks are bad.
Or about why he feels that a particular contract between Lockmart and the US government is unfair in Lockmart's favor.
He does not do either of these things, which is why I am so dismissive of the article
Entirely fair.
What perspective did the author get across? The only thing they wrote was that Lockmart made a profit, and some vague stuff about the MIC being bad. It's peak clickbait with practically no useful information