This is demonstrably false. Think about what this means to investment banks. If the stock price usually went up after a buy back, it would create an amazing arbitrage opportunity, and most of the...
They started buying shares of their own company's stock from investors.
Which meant there were fewer stocks out there for other people to buy.
And when there’s less of something, the price goes up.
They could jack up their stock price without really doing anything.
This is demonstrably false.
Think about what this means to investment banks. If the stock price usually went up after a buy back, it would create an amazing arbitrage opportunity, and most of the price increase would dissipate over time, except for the occasional massive price swings on completely unexpected stock buyback announcements. This is not the case. Buyback announcements have a questionable affect on stock price.
Look at the long term market returns of SPY (S&P 500 ETF) vs PKW (Top 100 Buyback ETF.) PKW underperformed the last five years, and barely outperformed over a ten year horizon. The variance is no more meaningful than the underperformance of SDY (Top 100 dividend kings.)
Think about what this means to stock valuation. When a stock buyback occurs, the company decreases cash by the same amount it decreases it's market capitalization. Instead of 10b shares in a $100b company that has $1b cash, there are now 9b shares in a $90b company that has $0 cash. The stock price remains at $10. (For those of you googling the impact of buybacks on stock price: It doesn't matter that the EPS goes up. The PE multiple also contracts. Try googling the impact of cash/debt changes on the PE multiple.)
Buybacks no longer signal that management thinks the stock is undervalued. That might have been the case 15-20 years ago, but now it signals that management has too much cash on it's hand, has no good investment opportunities, and is too afraid to increase dividends. How many times have you heard that most buybacks occur at the market peak?
Stock buybacks are, on the whole, useful
Stock buy backs are a useful way to return large lump sum amounts of cash to shareholders, without setting any future expectations, because unlike dividends, buybacks have a set total spend amount and a well defined end date.
Stock buybacks return cash only to those investors who want it, deferring taxable events to those who do not want cash.
There are however some valid criticisms of stock buybacks in the video
Buybacks increase wealth inequality. Dividends decrease the overall stock price. Executives with stock options would much prefer to keep the stock price the same. Executives with stock would much prefer the increase in voting rights of fewer shares.
Stock buybacks can cause misleading account e.g. they allow executives to get paid millions of dollars through options and RSU's, which then appear on the cashflow as a buyback instead of as an expense.
It sounded like there might be more quotes in the rest? But if those are all your words, my mistake. I'm a bit unclear on your argument, though. You're saying that the stock price doesn't go up,...
It sounded like there might be more quotes in the rest? But if those are all your words, my mistake.
I'm a bit unclear on your argument, though. You're saying that the stock price doesn't go up, but executives benefit anyway? There is an increase in voting rights, but based on the history of price changes, the stock market doesn't value it like executives do?
Yes, that's clearer. Thanks! Now that I understand your argument, some questions for discussion: It seems like having regular dividends is a tradition, not inherent in how they work? There's...
Yes, that's clearer. Thanks!
Now that I understand your argument, some questions for discussion:
It seems like having regular dividends is a tradition, not inherent in how they work? There's nothing to prevent a company from announcing one-time dividends.
I'm not at all sure that allowing shareholders to defer taxes indefinitely is useful to society, though obviously shareholders like it. Wouldn't it be nice if you could defer taxes on ordinary income like wages until you're ready to spend the money, like you do on capital gains? But why is it good tax policy?
It seems like stocks that have regular dividends are supposed to go up in anticipation of a coming dividend and then go down when the dividend happens, in a sawtooth pattern. So, overall, they seem kinda neutral?
On the other hand, maybe we should compare a stock buyback to what would happen without any buyback (or dividends)? Profits result in increased cash on the balance sheet and make the stock go up. If you have a profitable company and want the stock to go up, just don't do a dividend, or buy back stock either. And this has sometimes worked pretty well, famously for Berkshire Hathaway and tech companies. Just like with the stock buyback, this also defers any taxes for the shareholder until they sell.
Good point. I've already paid taxes on my income. Why should I pay taxes on capital gains? Especially as a portion of the capital gains is getting eaten away by inflation. True, and stocks with...
It seems like having regular dividends is a tradition, not inherent in how they work? There's nothing to prevent a company from announcing one-time dividends.
Good point.
I'm not at all sure that allowing shareholders to defer taxes indefinitely is useful to society, though obviously shareholders like it. Wouldn't it be nice if you could defer taxes on ordinary income like wages until you're ready to spend the money, like you do on capital gains? But why is it good tax policy?
I've already paid taxes on my income. Why should I pay taxes on capital gains? Especially as a portion of the capital gains is getting eaten away by inflation.
It seems like stocks that have regular dividends are supposed to go up in anticipation of a coming dividend and then go down when the dividend happens, in a sawtooth pattern. So, overall, they seem kinda neutral?
True, and stocks with buybacks would go up incrementally, but the number of shares decrease for each buy back.
On the other hand, maybe we should compare a stock buyback to what would happen without any buyback (or dividends)? Profits result in increased cash on the balance sheet and make the stock go up. If you have a profitable company and want the stock to go up, just don't do a dividend, or buy back stock either. And this has sometimes worked pretty well, famously for Berkshire Hathaway and tech companies. Just like with the stock buyback, this also defers any taxes for the shareholder until they sell.
Lets take that to extreme. Lets say I have a company with a million dollar bank account, that earns only ten thousand dollars a year, and the earnings are paid out as dividends. Does that make any sense? If the company can reinvest the money into something better than standard market returns, it should, otherwise it really should return the cash to investors, otherwise no one will want to buy the company other than investment banks looking to unlock the cash through a buy out. Berkshire has a proven track record of waiting until market corrections to spend it's cash, and also uses significant leverage. Tech companies are in a similar situation.
This is demonstrably false.
Think about what this means to investment banks. If the stock price usually went up after a buy back, it would create an amazing arbitrage opportunity, and most of the price increase would dissipate over time, except for the occasional massive price swings on completely unexpected stock buyback announcements. This is not the case. Buyback announcements have a questionable affect on stock price.
Look at the long term market returns of SPY (S&P 500 ETF) vs PKW (Top 100 Buyback ETF.) PKW underperformed the last five years, and barely outperformed over a ten year horizon. The variance is no more meaningful than the underperformance of SDY (Top 100 dividend kings.)
Think about what this means to stock valuation. When a stock buyback occurs, the company decreases cash by the same amount it decreases it's market capitalization. Instead of 10b shares in a $100b company that has $1b cash, there are now 9b shares in a $90b company that has $0 cash. The stock price remains at $10. (For those of you googling the impact of buybacks on stock price: It doesn't matter that the EPS goes up. The PE multiple also contracts. Try googling the impact of cash/debt changes on the PE multiple.)
Buybacks no longer signal that management thinks the stock is undervalued. That might have been the case 15-20 years ago, but now it signals that management has too much cash on it's hand, has no good investment opportunities, and is too afraid to increase dividends. How many times have you heard that most buybacks occur at the market peak?
Stock buybacks are, on the whole, useful
Stock buy backs are a useful way to return large lump sum amounts of cash to shareholders, without setting any future expectations, because unlike dividends, buybacks have a set total spend amount and a well defined end date.
Stock buybacks return cash only to those investors who want it, deferring taxable events to those who do not want cash.
There are however some valid criticisms of stock buybacks in the video
Buybacks increase wealth inequality. Dividends decrease the overall stock price. Executives with stock options would much prefer to keep the stock price the same. Executives with stock would much prefer the increase in voting rights of fewer shares.
Stock buybacks can cause misleading account e.g. they allow executives to get paid millions of dollars through options and RSU's, which then appear on the cashflow as a buyback instead of as an expense.
Edits for clarity.
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You might want to fix the quoting; it's rather confusing as-is.
It's not clear that the first four lines are quotes from the video?
It sounded like there might be more quotes in the rest? But if those are all your words, my mistake.
I'm a bit unclear on your argument, though. You're saying that the stock price doesn't go up, but executives benefit anyway? There is an increase in voting rights, but based on the history of price changes, the stock market doesn't value it like executives do?
How about now?
Yes, that's clearer. Thanks!
Now that I understand your argument, some questions for discussion:
It seems like having regular dividends is a tradition, not inherent in how they work? There's nothing to prevent a company from announcing one-time dividends.
I'm not at all sure that allowing shareholders to defer taxes indefinitely is useful to society, though obviously shareholders like it. Wouldn't it be nice if you could defer taxes on ordinary income like wages until you're ready to spend the money, like you do on capital gains? But why is it good tax policy?
It seems like stocks that have regular dividends are supposed to go up in anticipation of a coming dividend and then go down when the dividend happens, in a sawtooth pattern. So, overall, they seem kinda neutral?
On the other hand, maybe we should compare a stock buyback to what would happen without any buyback (or dividends)? Profits result in increased cash on the balance sheet and make the stock go up. If you have a profitable company and want the stock to go up, just don't do a dividend, or buy back stock either. And this has sometimes worked pretty well, famously for Berkshire Hathaway and tech companies. Just like with the stock buyback, this also defers any taxes for the shareholder until they sell.
Good point.
I've already paid taxes on my income. Why should I pay taxes on capital gains? Especially as a portion of the capital gains is getting eaten away by inflation.
True, and stocks with buybacks would go up incrementally, but the number of shares decrease for each buy back.
Lets take that to extreme. Lets say I have a company with a million dollar bank account, that earns only ten thousand dollars a year, and the earnings are paid out as dividends. Does that make any sense? If the company can reinvest the money into something better than standard market returns, it should, otherwise it really should return the cash to investors, otherwise no one will want to buy the company other than investment banks looking to unlock the cash through a buy out. Berkshire has a proven track record of waiting until market corrections to spend it's cash, and also uses significant leverage. Tech companies are in a similar situation.
Oh wow. This is why I wish YouTube had threaded comments and serious discussion.
Like dividends, it's a way of paying out profits to shareholders. But the taxes are different.