S&P 500 Buybacks Now Outpace All R&D Spending in the US • Hacker News Board

Re: S&P 500 Buybacks Now Outpace All R&D Spending in the US

#241

Post by ISL » Wed, Dec 11, 2019, 7:10 PM UTC

tylerhou wrote: post #227

ISL wrote: post #82

Earlier quoted context omitted.

In a buyback, a shareholder must sell shares back to the company. When they do, the shareholder's gains are taxed with capital-gains tax. Furthermore, whenever shareholders sell shares after the buyback, their shares are generally worth more, so they pay increased capital gains, too. I don't know which yields more tax revenue in the long run, but buybacks definitely generate some tax income. The only time I could see…

> If the market is efficient (and it isn't, but it can be) then following a buyback, one would expect the market capitalization of the company to be smaller, as the company has paid out money. The company's cash flow is the same, but there are fewer outstanding shares, so earnings per share goes up. Earnings per share matters because when it increases that implies that future dividends per share will also increase. I…

Each share is worth more, but the company is worth less after a buyback.

Before the buyback, it is a company with some extra cash. After the buyback, it is just the company.

Re: S&P 500 Buybacks Now Outpace All R&D Spending in the US

#242

Post by dv_dt » Wed, Dec 11, 2019, 7:12 PM UTC

cs702 wrote: post #12

Large US corporations have been buying back their own stock in record amounts, while investors have been cashing out of US stocks at a record pace , recent data shows: https://www.msn.com/en-us/money/markets/investors-bail-on-st... -- money is not being plowed back into IPOs, secondary offerings, etc. According to orthodox economic theory , large US corporations must be buying back stock with earned profits and new d…

What do broad buybacks say about the professed benefit of capitalism that it's supposed to reduce prices for customers and society? This cashflow seems like it's representative of rentier leverage against market effects that are supposed to squeeze profits in order to deliver innovation and efficiency.

Re: S&P 500 Buybacks Now Outpace All R&D Spending in the US

#243

Post by ISL » Wed, Dec 11, 2019, 7:15 PM UTC

6gvONxR4sf7o wrote: post #192

ISL wrote: post #82

Earlier quoted context omitted.

In a buyback, a shareholder must sell shares back to the company. When they do, the shareholder's gains are taxed with capital-gains tax. Furthermore, whenever shareholders sell shares after the buyback, their shares are generally worth more, so they pay increased capital gains, too. I don't know which yields more tax revenue in the long run, but buybacks definitely generate some tax income. The only time I could see…

>one would expect the market capitalization of the company to be smaller, as the company has paid out money This doesn't make sense to me. If I spend $X to buy a widget worth $X, I've paid out money, but I haven't net lost anything. I'm worth the same in total. If the widget is a share in a company, even my own, that shouldn't change the fact that the net change in total value is zero.

Are shares in Apple or Berkshire worth the same to you without the companies' cash hoards?

Re: S&P 500 Buybacks Now Outpace All R&D Spending in the US

#244

Post by georgeburdell » Wed, Dec 11, 2019, 7:21 PM UTC

try-perforate wrote: post #4

Read an idea in American Affairs in support of taxing buybacks. The logic goes that if all companies have a fiduciary duty to shareholders because the market is the most efficient capital allocator, AND all companies are giving their cash back to shareholders, THEN it must be true that the market can not figure out how to efficiently allocate this $1T of capital. Thus, the government should have “next dibs” for items…

When one has a hammer, everything seems a nail. Taxes are not money looking for something to spend it on. I could argue that corporate taxes are redundant because people ultimately run and benefit from corporations so tax them instead. In reality it doesn’t matter because the government needs $X to fund its obligations and will get it however it can

Re: S&P 500 Buybacks Now Outpace All R&D Spending in the US

#245

Post by crazygringo » Wed, Dec 11, 2019, 7:24 PM UTC

mattmanser wrote: post #188

derefr wrote: post #147

Earlier quoted context omitted.

Five facts, and one generally-held assumption: Fact 1. Companies’ brains (for this level of executive decision-making) are their boards of directors. Fact 2. Boards of directors are made up of people elected by shareholders. Fact 3. “Making the shareholders money” (either through dividends or equity) is the most obvious “platform” on which to get elected to this position; and “not making the shareholders money” is us…

These are obviously not "facts" and companies obviously do not operate in that way. Really obviously. Just observe any company. I appreciate you might have a real hard-on for capitalism, but making up stuff like you just did doesn't help. Companies are cess-pools of politics, incomplete information, petty rivalries, and disparate power. Most shareholders are clueless, poorly informed or spreadbetting. Given this is a…

Have you ever sat on a board?

Employees at a company might be engaging in petty rivalries in a "cesspool"... but the board of directors is composed of extremely professional, educated and informed investors.

Also, the board primarily represents not the small independent investor, but the majority of shares which are owned by professional institutional investors, which have quite the clue and are extremely well-informed -- they have entire teams of research analysts.

The comment you responded to does accurately represent how corporate boards work, if you actually bothered to "observe any company" in reality -- specifically publicly traded ones.

Re: S&P 500 Buybacks Now Outpace All R&D Spending in the US

#246

Post by kgwgk » Wed, Dec 11, 2019, 7:26 PM UTC

ISL wrote: post #82

pc86 wrote: post #9

Earlier quoted context omitted.

What would this look like from a practical standpoint, though? Dividends are a taxable event because you're giving someone money. In a buyback, the value of the stock simply goes up, which isn't a taxable event. How do you determine the cost basis on something like that? If there's a stock buyback over the course of 6 months, how do you determine which proportion of the price increase is due to the buyback, as oppose…

In a buyback, a shareholder must sell shares back to the company. When they do, the shareholder's gains are taxed with capital-gains tax. Furthermore, whenever shareholders sell shares after the buyback, their shares are generally worth more, so they pay increased capital gains, too. I don't know which yields more tax revenue in the long run, but buybacks definitely generate some tax income. The only time I could see…

> After 6 months, if the market cap of the company, plus the funds expended in the buyback, is greater than the inflation-adjusted pre-buyout market-cap, then the company has created shareholder value through some other mechanism

The mechanism may be called profit, earnings, free cash flow... at least for the old-fashioned companies that bring in more money that they spend over the six-months period.

Re: S&P 500 Buybacks Now Outpace All R&D Spending in the US

#247

Post by jonny_eh » Wed, Dec 11, 2019, 7:28 PM UTC

dcolkitt wrote: post #161

loourr wrote: post #58

This is robbery by the management class, and who can blame them. If I can take on debt at a corporate level and personally enrich myself, by increasing the value of the stock through buybacks and then selling it, why wouldn't I? This is all made a whole lot worse by stock option packages that give managers equity at major discounts. I think we'll look back at this as the largest heists in history. Should serve as a g…

I don't exactly understand who you think is being "robbed" here. Shareholders? Because if that's the case there's little evidence of it. US equity returns have had one of the best decades in all of history. That certainly does not support the narrative that American shareholders are being ripped off on a systematic scale.

The economy as a whole. All these companies are putting themselves at risk by taking on debt to do buybacks. As soon as there's a hiccup, this can lead to a cascading effect of bankruptcies, leading to a recession or depression.

Re: S&P 500 Buybacks Now Outpace All R&D Spending in the US

#248

Post by aguyfromnb » Wed, Dec 11, 2019, 7:30 PM UTC

jonathankoren wrote: post #103

crazygringo wrote: post #55

Earlier quoted context omitted.

That doesn't make any sense. The market is the most efficient capital allocator because shareholders are the market, not companies. Companies are giving their cash back to shareholders because each individual company thinks their shareholders can better allocate the cash, rather than the companies themselves. This is equally true for both buybacks and dividends. This is because most companies have no wish to operate…

> Companies are giving their cash back to shareholders because each individual company thinks their shareholders can better allocate the cash, rather than the companies themselves. This is very strange explaination. As stated it sounds like stock buybacks are some sort of altruistic endeavor resulting from some kind of collective shrug. This couldn’t be further from truth. Buybacks are the result of executive incenti…

>This couldn’t be further from truth. Buybacks are the result of executive incentives to hit a certain stock valuation.

Why do you ignore the people who choose to sell their shares to the company?

Stock buybacks move cash from the company's coffers into the hands of selling shareholders, period. Whether it's good or bad to do so at any specific time is certainly debatable, but the idea that it "manipulates" the share price is wrong, both in theory and practice.

Re: S&P 500 Buybacks Now Outpace All R&D Spending in the US

#249

Post by tboyd47 » Wed, Dec 11, 2019, 7:30 PM UTC

crazygringo wrote: post #55

try-perforate wrote: post #4

Read an idea in American Affairs in support of taxing buybacks. The logic goes that if all companies have a fiduciary duty to shareholders because the market is the most efficient capital allocator, AND all companies are giving their cash back to shareholders, THEN it must be true that the market can not figure out how to efficiently allocate this $1T of capital. Thus, the government should have “next dibs” for items…

That doesn't make any sense. The market is the most efficient capital allocator because shareholders are the market, not companies. Companies are giving their cash back to shareholders because each individual company thinks their shareholders can better allocate the cash, rather than the companies themselves. This is equally true for both buybacks and dividends. This is because most companies have no wish to operate…

> Companies are giving their cash back to shareholders because each individual company thinks their shareholders can better allocate the cash, rather than the companies themselves.

I thought the reason for a stock buyback was that the board believes the stock is undervalued.

I can't imagine investing in a company that borrows loads of money from the government just to hand it back to shareholders. That sounds like a total scam to me and a terrible investment. I wouldn't accept stock in a company like that even for free. But what do I know. I'm not a CEO.

Re: S&P 500 Buybacks Now Outpace All R&D Spending in the US

#250

Post by kgwgk » Wed, Dec 11, 2019, 7:31 PM UTC

6gvONxR4sf7o wrote: post #192

ISL wrote: post #82

Earlier quoted context omitted.

In a buyback, a shareholder must sell shares back to the company. When they do, the shareholder's gains are taxed with capital-gains tax. Furthermore, whenever shareholders sell shares after the buyback, their shares are generally worth more, so they pay increased capital gains, too. I don't know which yields more tax revenue in the long run, but buybacks definitely generate some tax income. The only time I could see…

>one would expect the market capitalization of the company to be smaller, as the company has paid out money This doesn't make sense to me. If I spend $X to buy a widget worth $X, I've paid out money, but I haven't net lost anything. I'm worth the same in total. If the widget is a share in a company, even my own, that shouldn't change the fact that the net change in total value is zero.

When a company buys its own shares it’s essentially cancelling them: they become essentially worthless.

Look at if from a different angle: the ones selling the shares to the company are the shareholders. In aggregate, the shareholders own the company valued at $B (market cap) before the buyback, and the company valued at $A plus the cash paid $X after the buyback. If $A=$B they are creating $X out of thin air.

Even simpler to grasp: you have a business 50/50 with a partner. There is $1m in the company account, you reach an agreement and he will sell his interest back to the company for $1mn in cash. You are sole owner now. The company doesn’t have the cash anymore. How much was the company worth before? How much is it worth now?