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

#361

Post by sokoloff » Thu, Dec 12, 2019, 4:21 AM UTC

bluecalm wrote: post #231

solatic wrote: post #222

Earlier quoted context omitted.

If the purpose of equity buyback is to more efficiently allocate capital, then individual companies executing equity buyback are doing so because can no longer make efficient use of capital by using it to fuel additional growth and higher returns. If that's the case, then equity buyback is tantamount to admitting that the company has no future potential for growth. As a company's stock price reflects expected value f…

The stock price doesn't reflect growth at least not directly. The price reflects expectation of future earnings. If the company is never going to grow but makes stable 1M per year in profit then that company is worth something. Let's say it's worth around 16M as that's around the break even point at which people prefer to have cash over company stock. If now that company uses 1M in yearly profit to buy back shares it…

The company (therefore remaining shareholders) no longer has that $1M that they spent on the buyback, meaning the total pie is actually smaller as well as having fewer shares/slices outstanding.

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

#362

Post by cellular » Thu, Dec 12, 2019, 4:23 AM UTC

bluecalm wrote: post #231

solatic wrote: post #222

Earlier quoted context omitted.

If the purpose of equity buyback is to more efficiently allocate capital, then individual companies executing equity buyback are doing so because can no longer make efficient use of capital by using it to fuel additional growth and higher returns. If that's the case, then equity buyback is tantamount to admitting that the company has no future potential for growth. As a company's stock price reflects expected value f…

The stock price doesn't reflect growth at least not directly. The price reflects expectation of future earnings. If the company is never going to grow but makes stable 1M per year in profit then that company is worth something. Let's say it's worth around 16M as that's around the break even point at which people prefer to have cash over company stock. If now that company uses 1M in yearly profit to buy back shares it…

Does your analysis hold true if the company never pays out dividends?

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

#363

Post by sokoloff » Thu, Dec 12, 2019, 4:25 AM UTC

beefield wrote: post #166

twoodfin wrote: post #11

Earlier quoted context omitted.

It is taxed the same as dividends, just deferred until the outstanding equity is sold, no?

Not sure why it should be the case that you are allowed to defer these taxes?

The general principle is that unrealized gains are not taxed, but realized gains are.

If you are the seller from whom the company buys back shares, you pay taxes on your gain. If you’re a shareholder who doesn’t sell, you haven’t realized any gain.

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

#364

Post by dehrmann » Thu, Dec 12, 2019, 4:45 AM 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…

I'd rather just have a corporate tax rate of 0% and shift the tax to people. That's who (eventually) gets the profits, anyway. It would also create a level playing field for larger corporations and pass-through entities.

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

#365

Post by dehrmann » Thu, Dec 12, 2019, 4:45 AM UTC

rjkennedy98 wrote: post #6

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…

At the very minimum it should be taxed the same as dividends. Essentially tax buybacks are a tax loophole for giving money back to the shareholder.

At which rate? Dividends are taxed at each shareholder's marginal rate.

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

#366

Post by gimmeThaBeet » Thu, Dec 12, 2019, 4:55 AM UTC

OscarCunningham wrote: post #202

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…

> In reality, executives and directors could very well be authorizing stock buy-backs to keep share prices up so their stock options remain in-the-money for as long as possible. If that's the case, the buybacks are meant more for the benefit of executives and directors than for the benefit of the business or its shareholders. This plan shouldn't work because buybacks shouldn't cause stocks to rise unless the market t…

So the part that this doesn't cover is any sort of earnings multiple/discount. For simplicity assume the $10M was earnings over the last year. Your EPS is $10. After your buyback, assuming all things equal, your same $10M now makes your EPS $11.11.

The point there is the mechanics of buybacks make more sense when you think of how they behave marginally, and what it says about how the company's future earnings are being discounted.

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

#367

Post by cellular » Thu, Dec 12, 2019, 4:56 AM UTC

AnthonyMouse wrote: post #179

nabla9 wrote: post #130

Earlier quoted context omitted.

They are analogous to dividends. Example: You own 10% of company with market cap $100M. You have $10M. Dividend scenario: company pays 3% dividend, you get $300k. You have $10M + $300k = $10.3 million. Buyback scenario: company buys it's own stock for the same amount. You own 10.3% of the company. You have $10.3 million. If you want, you can sell stock to get $300k in cash. The only difference is that in the buyback…

Slight nit: The math you're using is creating money from nothing. You started off with $10M and by dark magic you now have $10.3M. What really happens is that you start off with $10M in stock. With dividends you get $300K in cash, but now the company doesn't have that cash anymore so its value is reduced by $300K, so you end up with $300K in cash and stock which is now only worth $9.7M. With buybacks you sell $300K w…

>> and the $9.7M in shares you didn't sell which are still worth the same amount

"Worth the same amount" as what value? 10 million? If so, then doesn't that also create 10.3M in value (ie created 300k from nothing)?

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

#368

Post by downrightmike » Thu, Dec 12, 2019, 5:00 AM 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…

In reality, that is the only reason IBM is still floating around $100. It isn't worth that, and if they didn't buy back their stock, they'd crash their value.

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

#369

Post by im3w1l » Thu, Dec 12, 2019, 5:11 AM 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…

Retirees cashing out?

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

#370

Post by bluecalm » Thu, Dec 12, 2019, 5:18 AM UTC

CharlesColeman wrote: post #291

bluecalm wrote: post #279

Earlier quoted context omitted.

The point is that purchasing their own stock is not for the purpose of manipulating its price. The price increase is a natural consequence of there being less outstanding shares. Less outstanding share = one share is worth more. >>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…

> The point is that purchasing their own stock is not for the purpose of manipulating its price. The price increase is a natural consequence of there being less outstanding shares. Less outstanding share = one share is worth more. You're literally describing manipulating price by manipulating supply. If companies aren't buying back their stock to make its price go up, why are they buying it? You're contradicting your…

But why? What's the problem with buybacks? Everybody still pay the taxes. They just don't pay the taxes when reinvesting profits into the same company shares until they actually sell the shares. Why would you like to tax those people then? They aren't running away with any cash, they will pay taxes when selling the shares. They just avoid unfair side of the income tax (you pay when you profit but you don't get back or get back very in unfavorable way when you lose money).