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Dividends and Buybacks Now Larger Than Total Reported Earnings for Entire S&P500

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Re: Dividends and Buybacks Now Larger Than Total Reported Earnings for Entire S&P500

#41

Post by padobson »

jandrese wrote: post #8
mdorazio wrote: post #3

If you need evidence that our economy is at least partly broken, this is it right here. Companies that are swimming in cash reserves are using their money to artificially boost shareholder returns instead of actually investing in things like capital expenditures, R&D, or higher salaries. On one hand (as the article points out), this is driven by cheap credit, but on the other hand I think the question needs to be ask…

> have large corporations just run out of things worth investing in? Businesses don't expand just because capital is cheap, they need some kind of demand to fill. That's the fundamental problem with "trickle down" economics, it assumes the economy is supply constrained when it is more commonly demand constrained. And worse, the polices that it produces tend to squeeze the lower and middle classes, further reducing de…

That's the fundamental problem with "trickle down" economics, it assumes the economy is supply constrained when it is more commonly demand constrained.

I was of the understanding that most orthodox schools of economics fundamentally view demand as infinite. Supply-siders hope to meet demand by increasing supply, lowering prices, and making more goods available to those with fewer resources. Policy-wise, this is achieved through production subsidies, fewer regulations, and tax cuts.

Their opponents (demand-siders?) hope to increase access to goods by increasing the purchasing power of consumers. Policies like social safety nets, public education, and tax increases on the investor class promote this goal.

Re: Dividends and Buybacks Now Larger Than Total Reported Earnings for Entire S&P500

#42

Post by y96V89C668e7Q74 »

guelo wrote: post #36
CydeWeys wrote: post #33

Earlier quoted context omitted.

I was taught in economics classes that buybacks shouldn't increase the stock price at all, which clearly isn't true in practice. It ends up being more complicated than the simple models would suggest.

How could the price not go up? I understand buybacks as reverse dilution. Each share represents a larger percentage of the company, therefore it is more valuable and it's price should be higher. Is that wrong?

I recall learning this too. I never heard that prices shouldn't go up. Maybe the above person meant that the total valuation shouldn't go up? If so, that logic does check out.

Re: Dividends and Buybacks Now Larger Than Total Reported Earnings for Entire S&P500

#43

Post by sonnyblarney »

povertyworld wrote: post #37
sonnyblarney wrote: post #18

Earlier quoted context omitted.

" How the hell is a robot dog that does flips or whatever supposed to improve their advertising business exactly?" Because a robot that does flips can also flip burgers, pick inventory, sneak up on people (i.e. military) and ultimately that stuff will be worth a lot. One of their lesser goofy investments.

Yeah, it was so less goofy they had to unload it on Softbank, the goofy investment kings.

Softbank is not making goofy investments (hover skatebaords), they are making ROI investments (real estate leasing).

Google dumped the robots for strategic reasons, moreover, it's going to be a while before payoff.

Re: Dividends and Buybacks Now Larger Than Total Reported Earnings for Entire S&P500

#44

Post by formercoder »

dustinmoorenet wrote: post #38
nostrademons wrote: post #27

This is how its supposed to work. The whole reason stocks have fundamental value in the first place is because they're claims on the future profits of the company. 100% of a company's earnings legally belongs to the shareholders; it's nice to see them actually returned to the shareholders (vs. blown on overpriced acquisitions) for a change. It does mean the end of a cycle, though, and not just a "stocks go up, stocks…

But they aren't just using their earnings. They are borrowing too.

Theoretically as interest rates go up and corporate taxes go down the benefits of such leveraged recaps should soften. On a stand-alone basis if a firm needs to increase leverage to find an optimal cost of capital, adding debt and buying back stock is a reasonable strategy.

Re: Dividends and Buybacks Now Larger Than Total Reported Earnings for Entire S&P500

#45

Post by bjacokes »

guelo wrote: post #36
CydeWeys wrote: post #33

Earlier quoted context omitted.

I was taught in economics classes that buybacks shouldn't increase the stock price at all, which clearly isn't true in practice. It ends up being more complicated than the simple models would suggest.

How could the price not go up? I understand buybacks as reverse dilution. Each share represents a larger percentage of the company, therefore it is more valuable and it's price should be higher. Is that wrong?

There are fewer shares, but the book value of the company goes down as well because it is spending cash to buy the shares. So it's not necessarily true that the price should go up.

Re: Dividends and Buybacks Now Larger Than Total Reported Earnings for Entire S&P500

#46

Post by csa »

guelo wrote: post #36
CydeWeys wrote: post #33

Earlier quoted context omitted.

I was taught in economics classes that buybacks shouldn't increase the stock price at all, which clearly isn't true in practice. It ends up being more complicated than the simple models would suggest.

How could the price not go up? I understand buybacks as reverse dilution. Each share represents a larger percentage of the company, therefore it is more valuable and it's price should be higher. Is that wrong?

The simple version of the theory is that stock buybacks should be price neutral because shareholders effectively lose cash now (for the buyback) but get a higher proportion of future earnings for that cash. If the price of the stock is perfectly efficient, these values should be equal.

Re: Dividends and Buybacks Now Larger Than Total Reported Earnings for Entire S&P500

#47

Post by formercoder »

y96V89C668e7Q74 wrote: post #42
guelo wrote: post #36

Earlier quoted context omitted.

How could the price not go up? I understand buybacks as reverse dilution. Each share represents a larger percentage of the company, therefore it is more valuable and it's price should be higher. Is that wrong?

I recall learning this too. I never heard that prices shouldn't go up. Maybe the above person meant that the total valuation shouldn't go up? If so, that logic does check out.

I think we’re talking about Miller-Modigliani [1] which says that enterprise value should not change as capital structure changes. However it presumes many untrue aspects of the world in order to make this claim.

[1] https://en.m.wikipedia.org/wiki/Modigliani–Miller_theorem

Re: Dividends and Buybacks Now Larger Than Total Reported Earnings for Entire S&P500

#48

Post by mantasm »

guelo wrote: post #36
CydeWeys wrote: post #33

Earlier quoted context omitted.

I was taught in economics classes that buybacks shouldn't increase the stock price at all, which clearly isn't true in practice. It ends up being more complicated than the simple models would suggest.

How could the price not go up? I understand buybacks as reverse dilution. Each share represents a larger percentage of the company, therefore it is more valuable and it's price should be higher. Is that wrong?

The company becomes equally less valuable after a buyback.

Consider a company with value of $1000, with 100 shares outstanding. Each share is $10. Buying back 10 shares, the company spent $100, so the company is now worth $900 and has 90 shares outstanding. Each share is still $10.

This is the basic model that shows share price should be unaffected by buybacks, but there are other effects. The buyback could signal to investors that the company is unlikely to be inefficient with capital, so investors would value the company at $910 instead of $900.

Alternatively, in a demand/supply model of shares, the buybacks could have exhausted some of the supply of shares, so the valuation for the company settled on by the rest of the market is higher.

There's no clear answer here, but reality is probably somewhere between these models.

Re: Dividends and Buybacks Now Larger Than Total Reported Earnings for Entire S&P500

#49

Post by nostrademons »

dustinmoorenet wrote: post #38
nostrademons wrote: post #27

This is how its supposed to work. The whole reason stocks have fundamental value in the first place is because they're claims on the future profits of the company. 100% of a company's earnings legally belongs to the shareholders; it's nice to see them actually returned to the shareholders (vs. blown on overpriced acquisitions) for a change. It does mean the end of a cycle, though, and not just a "stocks go up, stocks…

But they aren't just using their earnings. They are borrowing too.

That just means that at current interest rates, the stock's forward P/E exceeds the rate of interest. It's rational to borrow money to buy stock if the earnings spun off by the stock exceed the rate of interest. You're basically arbitraging against the bank: the bank gives you money to buy out people who think the stock is overvalued, you give them a set amount of interest for the money, and if it turns out you're right and the stock's future earnings exceed the price of that money, you pocket the difference at the expense of people who left the market. If you're wrong and earnings are less than the interest rate, it's reflected in net income, the stock drops, and you (and the rest of the shareholders) eat the difference, often in a dramatic fashion.

With low interest rates, high corporate profits, and low growth, I'd expect to see a lot of debt added to balance sheets; it's a way to lever up the capital structure to the benefit of existing shareholders, as long as profits remain high and interest rates remain low. (And corporate bonds/loans are usually fixed interest, so the interest rates are locked in until they need to go back to the debt markets.)

Re: Dividends and Buybacks Now Larger Than Total Reported Earnings for Entire S&P500

#50

Post by djakjxnanjak »

dustinmoorenet wrote: post #38
nostrademons wrote: post #27

This is how its supposed to work. The whole reason stocks have fundamental value in the first place is because they're claims on the future profits of the company. 100% of a company's earnings legally belongs to the shareholders; it's nice to see them actually returned to the shareholders (vs. blown on overpriced acquisitions) for a change. It does mean the end of a cycle, though, and not just a "stocks go up, stocks…

But they aren't just using their earnings. They are borrowing too.

Our tax policy encourages this. You can write off the interest you pay to bondholders, but you can’t write off the dividends you pay to shareholders. Everyone involved (except for the government) is better off if you sell bonds and buy back stock.
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