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

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

#261

Post by topherPedersen »

This is a disturbing trend that's been developing over the past 100 years, and I believe it is the main reason for our country's stagnating economic growth. Let's take a look!

100 years ago, companies on average dispersed 90% of their earnings back to shareholders as dividends. But by the 1970's however that number fell to below 50%. Fast forward to the 2000's and the payout ratio is down to around ~30%.

What happened? Companies used to distribute their profits back to their owners, the shareholders. But that isn't what's happening anymore. In my amateur historical analysis, I believe there are two causes for this disastrous trend:

1) Tax dodging

2) The Casino/Gambling Mentality of Stock Market Investing

My theory is that the trend started with investors 50 to 100 years ago looking to dodge taxes, and gain a little free compounding. Makes sense! Right?

But it's just gone too far. Now investors receive almost nothing for owning a stock. Take Apple Inc. for example. In 2019 Apple made a profit of $55 billion. How much of that did they pay back to their shareholders? $14 billion.

And Apple isn't even the most egregious case. They at least pay a dividend. Google, Amazon, and Facebook combined paid $0 back to their shareholders this year!

So how has this insanity continued to go on for so long? The answer is simple: Adults don't know what stocks are. They think that a stock is a thing that you buy, its price goes up and down, and the game is to try and sell the stock when the price goes up, and hope that the price doesn't go down. And the machine that keeps the whole thing moving along is the Stock Buyback.

REFERENCE: https://web.archive.org/web/20070106223644/https://www.eaton...

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

#262

Post by corebit »

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…

Meh, seems like a straightforward effect of ultra low interest rate that's been well-known for years.

See https://seekingalpha.com/article/3672916-buyback-arbitrage-i... for several examples of how smart this is. The TLDR is that this is just a company unable/unwilling to lower its dividend yield and arbitraging that yield against low interest rates. Every share it buys back represents a dividend it never has to pay again. A ~2% loan for 30 years in present-value terms is cheaper than a 3% dividend yield into perpetuity for some number of shares it can buy.

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

#263

Post by Negitivefrags »

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…

I highly doubt that compensation for executives is based on the value of a single share, not taking into account outstanding shares. That’s a blindly obvious loophole.

Their compensation would be based on market cap, which you can’t increase by doing a buyback.

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

#265

Post by sigstoat »

loourr wrote: post #140
Bostonian wrote: post #113

Earlier quoted context omitted.

It's no such thing. As a shareholder I am happy for companies to buy back shares and thereby increase the value of the remaining shares.

Sure as a shareholder I also like stock buybacks. For instance, when Berkshire Hatheway does it, it's almost certainly a good thing. I don't think that's what we're seeing in the vast majority of cases though. I think what we're seeing is managers personally enriching themselves by taking on corporate debt and doing so in a very tax-advantaged way. Keep in mind they're not buying the stock they own in the first place…

> Keep in mind they're not buying the stock they own in the first place, they're being given it via stock options at crazy discounts.

...is your salary received from the company at a "crazy discount"? the equity is part of the agreed upon compensation for the manager's work.

this is easily the most absurd statement on this entire page.

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

#266

Post by sigstoat »

bullen wrote: post #232

All change requires energy, and we're going to have less energy, so the speed of change inevitably has to go down. Because the only energy added to the planet comes from the sun and the only viable option to collect that energy are trees and plants.

and the only energy that comes into the sun-earth system is weak background radiation! it's not enough for _anything_! we're doomed.

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

#267

Post by beaner »

aczerepinski wrote: post #104
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…

Buying back stock only creates value for shareholders if the stock is trading for less than its intrinsic value. Above that price buybacks destroy shareholder value. Executives are doing this to meet performance targets and get bonuses. Not to allocate capital efficiently.

Capital allocation doesn't have to be the goal for them to actually be doing that in effect.

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

#268

Post by sigstoat »

jcims wrote: post #52

Every time i read these threads i feel criminally incompetent in finance. You would think that putting your money to work for you would be incentive enough to dig deep, but i don’t seem to have the mental stamina to figure it all out. There’s probably a latent fear that I’ll also realize just how much money i haven’t made and regret that too. I need a course or something that i can walk into with $20k or whatever and…

bogleheads. https://www.bogleheads.org/wiki/Main_Page

not flawless, but way better than anything else you're going to get without effort.

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

#269

Post by CharlesColeman »

bluecalm wrote: post #239
CharlesColeman wrote: post #186

Earlier quoted context omitted.

> Read an idea in American Affairs in support of taxing buybacks. Honestly, at their most supportable, share buybacks seem to be just dividends in all but name with different tax consequences (i.e. they're a tax dodge). I'd support a law that declared the only legal way to intentionally return cash to shareholders is via dividends, to close the loophole and increase tax revenues. In other cases, they just seem like f…

But why do that? We accept that if I hope a stock or any other asset which value increases I am not liable to pay the tax until I actually realize that profit by selling. It makes sense to do it this way as well as otherwise you would be losing money to taxes just because the price fluctuates (one year it increase, another it decreases). When the company buy backs stock it actually triggers the tax event: people who…

> It makes sense to do it this way as well as otherwise you would be losing money to taxes just because the price fluctuates

I'm unsure how you're reaching this conclusion. I said nothing about eliminating capital gains and moving to some kind of system where investors are taxed on yearly stock price fluctuations. All I proposed was to forbid companies from purchasing their own stock for the purpose of manipulating its price upward.

Dividends exist and have a long history as being the the way of returning cash to shareholders. Forcing their use for that purpose would make it easier to make and enforce policies on that activity.

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

#270

Post by rumanator »

voxic11 wrote: post #132
jcfrei wrote: post #125

Earlier quoted context omitted.

I don't think I can follow your argument. What's intrinsic value? The market is supposed to arrive at a fair value for a stock (and there's no reason to assume it doesn't because that would create arbitrage opportunities). If you buyback at the fair value no shareholder value is created or destroyed, the only change is in the ownership of the assets and future dividends.

Don't stock buybacks basically transfer wealth from the company to the shareholders? The major advantage this has over other means of transferring wealth is that shareholders get to realize their gains with only capital gains tax applied, rather then the much higher dividend tax rate.

> Don't stock buybacks basically transfer wealth from the company to the shareholders?

There's some confusion in your comment. The company is already property of the shareholder. The shareholder holds shares of the company. Thus, the assertion that stock buybacks transfer wealth from the company to the shareholder is a tautology because the wealth from the company is already the wealth of the shareholder.

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