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Buybacks at $46B a Month Dwarf Everything in U.S. Market (2015)

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Re: Buybacks at $46B a Month Dwarf Everything in U.S. Market (2015)

#71

Post by LoSboccacc »

rtpg wrote: post #50
sabalaba wrote: post #49

Earlier quoted context omitted.

Taxing capital gains at 39.6% (our current top income bracket as of 2016) would be bad for business, job creation, and growth in the US economy. California also taxes long term capital gains (LTCG) at a top rate of 13%. It would mean that an investor in California would experience a LTCG rate of 52.6%, the highest in the entire OECD. Capital has legs and having a non-competitive capital gains rate would incentivize i…

This assumes that capital can get the same ROI anywhere in the world, which is not at all true. If the strongest businesses are based in the US, the US can force investors to play by the rules they want. It's just another part of the equation.

Shell companies all over the world disagree. You can have access to the US market and still dodge taxes.

Re: Buybacks at $46B a Month Dwarf Everything in U.S. Market (2015)

#72

Post by [deleted] »

rtpg wrote: post #50
sabalaba wrote: post #49

Earlier quoted context omitted.

Taxing capital gains at 39.6% (our current top income bracket as of 2016) would be bad for business, job creation, and growth in the US economy. California also taxes long term capital gains (LTCG) at a top rate of 13%. It would mean that an investor in California would experience a LTCG rate of 52.6%, the highest in the entire OECD. Capital has legs and having a non-competitive capital gains rate would incentivize i…

This assumes that capital can get the same ROI anywhere in the world, which is not at all true. If the strongest businesses are based in the US, the US can force investors to play by the rules they want. It's just another part of the equation.

[deleted]

Re: Buybacks at $46B a Month Dwarf Everything in U.S. Market (2015)

#73

Post by howlingfantods »

JDDunn9 wrote: post #15
howlingfantods wrote: post #12

Earlier quoted context omitted.

Also, companies that borrow money to finance stock purchases (eg Apple) also save on their taxes because interest expense on debt is tax deductible.

Expensing interest only saves you the total interest x interest rate. So they just get a 35% discount on their interest rate.

You're absolutely right that the savings on interest is post tax. However the tax deductibility of interest creates a substantial tax shield and in general, has a net positive value for the company since changing the capital structure by increasing debt decreases the weighted average cost of capital. Studies suggest that debt, because of the deductibility of interest, on average leads to ~1 dollar of additional company value for every 10 dollars of debt financing (vs equity financing).

Re: Buybacks at $46B a Month Dwarf Everything in U.S. Market (2015)

#74

Post by downandout »

freddie_mercury wrote: post #66
downandout wrote: post #56

Earlier quoted context omitted.

>California also taxes long term capital gains (LTCG) at a top rate of 13% I'm sure that Zuckerberg et al have brilliant tax accountants, but this is one thing that has never made sense to me. Volunteering to pay an extra 13% simply for the privilege of living in Northern California seems insane to me. Any of these guys could move a few hours down the road to Tahoe or Reno and save themselves billions of dollars in s…

You pay state taxes based on where the income is generated from (for most states but definitely for California), not where your house is. Putting their house in Tahoe/Reno but leaving the HQ in California wouldn't affect their income taxes. They'd have to move the company HQ to Reno/Tahoe to avoid the taxes.

Not true in the case of shareholders. For example, if MZ became a Nevada resident and quit working for Facebook but still had all of his shares, he would not be subject to California taxes when he sold them. Even if he continued working or consulting for FB, California taxes would likely only apply to the income or options derived from that work (though California has some onerous and complex "substantial nexus" rules that may apply if he still worked there, yet another reason to simply not startup there in the first place).

Re: Buybacks at $46B a Month Dwarf Everything in U.S. Market (2015)

#75

Post by kgwgk »

dingaling wrote: post #68
walterbell wrote: post #11

Are there public companies where projected buybacks would result in the company being taken private, after N years?

Yes, Michael Dell took his namesake company private again in 2013 after $25 billion of buy-backs.

He (they) also put $25bn on the table to buy the 85% he did not control already.

Re: Buybacks at $46B a Month Dwarf Everything in U.S. Market (2015)

#76

Post by iofj »

spectrum1234 wrote: post #57
cperciva wrote: post #6

Remember, in a perfectly liquid market without taxes, a company which executes a share buyback will have no change in its stock price, since the shared redeemed will be exactly balanced by a reduction in the value of the company; and this is also exactly equivalent to distributing profits in the form of a dividend. On the other hand, when the rate of taxation on capital gains is lower than the rate of taxation on cor…

But none of this explains the main reason they would do this (a buyback or a dividend) instead of reinvest the profits. Yes the have lots of cash, but they have for awhile. So the interesting question is why are they doing this now given the medium/long term ROI a company with cash looks generate. It could mean they stopped seeing obvious medium/long term investments. Maybe a small bubble is 5-10 years away.

To see the answer to your specific question you need to look and compare these graphs:

1) https://ycharts.com/indicators/sp_500_eps (note: slowly rising, if you ignore seasonality)

2) https://ycharts.com/indicators/reports/sp_500_earnings (note: dropping fast)

TLDR earnings are going down, but earnings/shares are going up. So what is going on ? Earnings for the US economy as a whole are dropping (pretty fast even). But the metric investors use to value shares, earnings per share is going up.

That means U.S. companies are buying back shares at a faster rate than their earnings are dropping. Why ? Exactly to generate this outcome : normal valuation metrics for shares (net-present-value of future earnings per share) go up as a result of this operation. When cutting a million corners the share price of any (large cap) stock should be roughly NPV(8%, future_cashflow).

The next question to ask is ... given that this uses a LOT of debt that is currently at very low interest rates, what happens if interest payments inevitably go up (either as a result of inflation, or of the FED raising rates) ? The problem with low interest rates is that, at the moment, 1% rate rise would quadruple interest payments for the government, and double interest payments for AA corporations.

Re: Buybacks at $46B a Month Dwarf Everything in U.S. Market (2015)

#77

Post by downandout »

lyncnshare wrote: post #70
downandout wrote: post #56

Earlier quoted context omitted.

>California also taxes long term capital gains (LTCG) at a top rate of 13% I'm sure that Zuckerberg et al have brilliant tax accountants, but this is one thing that has never made sense to me. Volunteering to pay an extra 13% simply for the privilege of living in Northern California seems insane to me. Any of these guys could move a few hours down the road to Tahoe or Reno and save themselves billions of dollars in s…

The tax only applies to realized gains. As long as they aren't selling their shares they aren't being taxed. They can also sometimes contribute the shares to tax advantaged vehicles (remember Romney having $101 million in his IRA [1]) or set up other structures to minimize their tax burden. That being said, Northern California is a wonderful place and housing and cost of living prices indicate that many people are wi…

>That being said, Northern California is a wonderful place and housing and cost of living prices indicate that many people are willing to pay to live there.

No place is wonderful enough to pay billions of dollars in extra taxes just to live there. If you are a top engineer making $500K/yr, you're only paying ~$65K/yr in CA taxes, and you wouldn't make anywhere close to $500K in other cities. So the decision to live in CA makes perfect financial sense in that scenario. But in the case of a billionaire founder, it simply doesn't make any sense to sell shares while living as a California resident. You're essentially volunteering to pay a ~65% increase in total capital gains taxes over what they would be in a tax-free state.

Re: Buybacks at $46B a Month Dwarf Everything in U.S. Market (2015)

#78

Post by hedonistbot »

iofj wrote: post #76
spectrum1234 wrote: post #57

Earlier quoted context omitted.

But none of this explains the main reason they would do this (a buyback or a dividend) instead of reinvest the profits. Yes the have lots of cash, but they have for awhile. So the interesting question is why are they doing this now given the medium/long term ROI a company with cash looks generate. It could mean they stopped seeing obvious medium/long term investments. Maybe a small bubble is 5-10 years away.

To see the answer to your specific question you need to look and compare these graphs: 1) https://ycharts.com/indicators/sp_500_eps (note: slowly rising, if you ignore seasonality) 2) https://ycharts.com/indicators/reports/sp_500_earnings (note: dropping fast) TLDR earnings are going down, but earnings/shares are going up. So what is going on ? Earnings for the US economy as a whole are dropping (pretty fast even). B…

I might be wrong here but aren't most US companies flush with cash these days? I would assume that they use their cash reserves for the buybacks and not debt. Are there any stats on what is used to finance the buybacks?

Re: Buybacks at $46B a Month Dwarf Everything in U.S. Market (2015)

#79

Post by jensen123 »

cperciva wrote: post #6

Remember, in a perfectly liquid market without taxes, a company which executes a share buyback will have no change in its stock price, since the shared redeemed will be exactly balanced by a reduction in the value of the company; and this is also exactly equivalent to distributing profits in the form of a dividend. On the other hand, when the rate of taxation on capital gains is lower than the rate of taxation on cor…

Even if the tax percent was exactly the same on capitals gains and dividends, buybacks would still make sense. Dividends typically are paid out at least once year. On the other hand, you only incur capital gains when you sell shares. So, with share buybacks, you can potentially wait many years before you pay the tax, having the money accumulate for you in the meantime.

Re: Buybacks at $46B a Month Dwarf Everything in U.S. Market (2015)

#80

Post by HappyTypist »

hedonistbot wrote: post #78
iofj wrote: post #76

Earlier quoted context omitted.

To see the answer to your specific question you need to look and compare these graphs: 1) https://ycharts.com/indicators/sp_500_eps (note: slowly rising, if you ignore seasonality) 2) https://ycharts.com/indicators/reports/sp_500_earnings (note: dropping fast) TLDR earnings are going down, but earnings/shares are going up. So what is going on ? Earnings for the US economy as a whole are dropping (pretty fast even). B…

I might be wrong here but aren't most US companies flush with cash these days? I would assume that they use their cash reserves for the buybacks and not debt. Are there any stats on what is used to finance the buybacks?

Most US companies have cash overseas and have never bought them back to the US because doing so will incur a third gone in taxes. Thus they are lending the cash to the US entity to execute but backs, hoping that a tax holiday is declared in the future.
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