Dividends and Buybacks Now Larger Than Total Reported Earnings for Entire S&P500 • Hacker News Board

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

#51

Post by jrs235 » Fri, May 24, 2019, 6:51 PM UTC

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?

Because the company cash to buy the stocks should decrease the amount of capital cash on hand by the same amount resulting in no change in the capitalized value of the stock.

The stock doesn't just vanish. It is held and owned by the company. So no, each share doesn't represent a larger percentage of the company. Unless the company retires the shares.

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

#52

Post by AnthonyMouse » Fri, May 24, 2019, 6:52 PM UTC

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?

You're not accounting for the transfer of cash out of the company. If you have a company with a business worth a billion dollars and a billion dollars in cash, it should have a market cap of two billion dollars. If it uses half a billion dollars to buy back shares then it should have a market cap of $1.5B because it has $500M less cash. Then it also has 75% as many outstanding shares, so the value of each share is the same.

But the buyback often increases the value of the shares because it allows investors to express their preferences better. If the company has a $1B business and $1B in cash, there is no option to invest in only the business, only the combined business+cash entity. If you think the business will give 9% returns and the cash 2% returns and you have an alternative investment that gives 6% returns, you won't invest in that company. But if they separate the cash from the business then you're willing to invest in the business, which makes the business worth more to investors and increases its share price.

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

#53

Post by EliRivers » Fri, May 24, 2019, 6:54 PM UTC

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…

100% of a company's earnings legally belongs to the shareholders

That's simply not true. Next you'll be telling us it's illegal for a company to do anything that isn't about maximising shareholder value.

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

#54

Post by nostrademons » Fri, May 24, 2019, 6:54 PM UTC

y96V89C668e7Q74 wrote: post #35

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…

> indicates that they can't find growth opportunities at any price. This is a great way to put it! Thank you. Would it be fair to say that this suggests the market isn't really expanding and has essentially become zero-sum (or technically I guess it could mean that expansion is free, but that seems unlikely)?

The public market isn't really expanding and has essentially become zero-sum. This doesn't preclude the existence of other capital markets that might actually be taking share away from publicly-traded companies - for example, late-stage VC/PE financing (a la Uber, Lyft, and most other Silicon Valley unicorns), crowdfunding, or cryptocurrency ICOs & STOs.

Nature usually abhors a steady-state: when you think you've reached one, it often means that there's a competitor that's too small for you to see but growing exponentially.

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

#55

Post by kgwgk » Fri, May 24, 2019, 6:54 PM UTC

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?

A bigger percentage of a less valuable company, because buying the shares back costs money. Ignoring taxes and other “minor” details (like a discount applied go cash that could be “wasted”), if a company market cap is $10bn and it has $1bn in cash after a buyback investors in aggregate would still have $10bn after the cash is used to repurchase 10% of shares: $1bn in cash and $9bn in stock trading at the same price as before (there are 10% fewer shares, but the company is worth 10% less).

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

#56

Post by mactrey » Fri, May 24, 2019, 6:54 PM UTC

y96V89C668e7Q74 wrote: post #35

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…

> indicates that they can't find growth opportunities at any price. This is a great way to put it! Thank you. Would it be fair to say that this suggests the market isn't really expanding and has essentially become zero-sum (or technically I guess it could mean that expansion is free, but that seems unlikely)?

No, the market can still expand, it's just that shareholders (as proxied for by boards and management) would today rather have the marginal dollar in pocket rather than invested in some growth opportunity. Companies have invested billions in growth opportunities in past decades and we're currently seeing how the returns from those investments play out, and that's where today's growth is coming from. There just aren't as many good places to put money to work in the market right now.

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

#57

Post by javagram » Fri, May 24, 2019, 6:55 PM UTC

ProfessorLayton wrote: post #40

kortilla wrote: post #7

Earlier quoted context omitted.

Where are there companies using credit to issue dividends? If companies just took on debt to issue a dividend, the share price would be devalued by the market by the dividend amount due to the debt so it would be a pointless exercise.

IIRC Apple is borrowing hundreds of billions to pay as dividends/buybacks because it's cheaper to pay interest than it is to pay taxes on money earned overseas.

They were doing that but I believe this is not something that makes sense any longer.

The TCJA passed by the republicans got rid of the tax system that was causing the problem and switched the USA to a territorial income tax system like other countries have.

https://www.taxpolicycenter.org/taxvox/explaining-tcjas-inte...

> The TCJA’s international reforms are significant. Combined with the reduced corporate rate, they largely eliminate the incentive for US firms to accrue assets overseas, while seeking to protect the tax base from avoidance by both US and foreign-based multinationals.

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

#58

Post by [deleted] » Fri, May 24, 2019, 6:58 PM UTC

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?

[deleted]

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

#59

Post by kgwgk » Fri, May 24, 2019, 6:58 PM UTC

EliRivers wrote: post #53

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…

100% of a company's earnings legally belongs to the shareholders That's simply not true. Next you'll be telling us it's illegal for a company to do anything that isn't about maximising shareholder value.

Who do they belong to if not to the owner of the company?

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

#60

Post by kovacs » Fri, May 24, 2019, 6:58 PM UTC

kortilla wrote: post #5

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…

You think returning money to investors is a sign the economy is broken? IMO it’s a sign companies are doing the intelligent thing and are assuming investors are better investors than throwing money at random shit.

Asking that question seems to imply that you didn't really see the commenter's reasons for asserting that...

"instead of actually investing in things like capital expenditures, R&D, or higher salaries"

Specifically the last one. The pay gap is larger than ever. The efficiency gains over the last 20 years or more are systematically being funneled up the food chain to executives and shareholders. Even in tech there's a ton of wage stagnation compared to the real cost of living over this period.

I think this is the crux of the assertion if I'm not mistaken. It's broken that the share of increased prosperity isn't anywhere near equally distributed. I wouldn't call that throwing money at random shit.