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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

#371

Post by bluecalm »

cellular wrote: post #362
bluecalm wrote: post #231

Earlier quoted context omitted.

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?

Yes, what dividends have to do with it? The company has value no matter if it pays the dividends or not. Controlling it has value for example as it may be worth something when bought by another company. You can also always dissolve it and pay the cash back to shareholders or you can buy back the stock which is a form of dividend (one when you're automatically reinvesting into the company stock).

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

#372

Post by Qworg »

hippich wrote: post #360
take_a_breath wrote: post #296

Earlier quoted context omitted.

There are lots of IRA accounts with far more money in them. We have the data (from 2011) which shows it. ==As of 2011, 314 multi-millionaires had more than $25 million saved in their IRA, with average holdings of $258 million, the GAO reported. About 9,000 taxpayers had at least $5 million in their IRA, with average holdings of $16 million.== ==All told, 630,000 millionaires — about 1% of all IRA savers — cumulativel…

Thank you for sharing this link. Not sure what to think about it tho... "In essence, Bain would value the special, riskier shares at pennies on the dollar. In one deal, employees invested about $23,000 in their IRAs. When the takeover target went public, those shares were worth about $14 million, and were worth about $23 million they finally sold the shares. That’s a 100,000% return." Meaning, someone was risking the…

One legal (AFAIK) method: The company had low/no valuation, and it was private. Those shares were sold to the employees (likely of the vehicle containing the company) at the stated valuation. Once they went public, there was a valuation event. Roughly, they snuck through the 409a before it had to be reported.

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

#373

Post by beefield »

sokoloff wrote: post #363
beefield wrote: post #166

Earlier quoted context omitted.

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.

Of course I understand that. But why it should be allowed to pay accumulated profits out from the company in a way that the taxes for share owners are deferred? What is the societal good of that?

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

#374

Post by SmartJerry »

Sohcahtoa82 wrote: post #309
drelihan wrote: post #141

Earlier quoted context omitted.

Buybacks are effectively taxed at the same rate as dividends, at least qualified dividends, just timing differs: Simple case with a corporation worth $200 with two equal shareholders, who each paid $100 for their half of the company and are in 20% capital gains tax bracket, ignoring net investment tax of 3.8%: Dividends: Corporation pays $100 in qualified dividends, $50 to each shareholder. Each shareholder pays thei…

> Corporation buys back $100 of shares from 1 shareholder. No taxes were due there as there were no capital gains for shareholder 1. Shareholder 2 now owns 100% of the corporation, so their investment is now, all other thing equal, worth $200. Maybe I don't understand how stock works, but wouldn't shareholder 2 still own only 50%, with the corporation still owning 50% of itself?

There is a disconnect here that needs to be clarified but you are actually part correct. The 'corporation' owns the shares, but shareholder 1 owns the corporation and thus it is his now. Shareholder 1 now owns 100% of the company but the company is worth 50% less because it spent half it's money on buybacks. So shareholder 1's value of ownership did not increase at all, only shareholder 1's % of ownership. Stock buybacks do not add value to a company and are not like a dividend at all. All they are is an indicator that the board thinks the shares are undervalued.

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

#375

Post by SmartJerry »

kgwgk wrote: post #246
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…

> 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.

I think it is mostly psychology via ratios. For example a number of institutional investors go by EPS. If shares in this industry are trading at a 20 x multiple and your companies shares are trading at a 10x multiple, you can try to buy back shares to get your multiple higher. Again, just one example but I'm sure the boards of directors, who are elected mainly by the institutional investors determine what will multiples and ratios they need to hit to be in the magic zone for algorithms and also investor psychology.

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

#376

Post by kgwgk »

SmartJerry wrote: post #375
kgwgk wrote: post #246

Earlier quoted context omitted.

> 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.

I think it is mostly psychology via ratios. For example a number of institutional investors go by EPS. If shares in this industry are trading at a 20 x multiple and your companies shares are trading at a 10x multiple, you can try to buy back shares to get your multiple higher. Again, just one example but I'm sure the boards of directors, who are elected mainly by the institutional investors determine what will multip…

Buybacks get you a higher EPS number, I don’t see why would you expect the multiple to increase. But it’s true that there are many effects in play: signaling, offer/demand of shares, apparent improvement in ratios vs peers...

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

#377

Post by SmartJerry »

kgwgk wrote: post #376
SmartJerry wrote: post #375

Earlier quoted context omitted.

I think it is mostly psychology via ratios. For example a number of institutional investors go by EPS. If shares in this industry are trading at a 20 x multiple and your companies shares are trading at a 10x multiple, you can try to buy back shares to get your multiple higher. Again, just one example but I'm sure the boards of directors, who are elected mainly by the institutional investors determine what will multip…

Buybacks get you a higher EPS number, I don’t see why would you expect the multiple to increase. But it’s true that there are many effects in play: signaling, offer/demand of shares, apparent improvement in ratios vs peers...

yea thanks. Got my wires crossed there

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

#378

Post by dodobirdlord »

ethbro wrote: post #328
rumanator wrote: post #270

Earlier quoted context omitted.

> 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.

In the individual case, some number of shares in the company is property of the shareholder. Perhaps more accurate would be to say they liquidate part of a company's wealth (the broader value of all assets owned by the company) into stock price (the value at which a share can be sold on the open market). From this perspective it seems fair to say that they transfer wealth from company control to shareholder control.

I think it is best to characterize it as being an opportunity for shareholders to part ways with the company, taking their share of ownership as cash and moving on.

Of course, all of these characterizations are the same and describe the same event, but I find this one the least inflammatory. It makes it clear that no transfer of wealth is happening, that buybacks don't meaningfully effect share price, etc.

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

#379

Post by dodobirdlord »

cellular wrote: post #359
AnthonyMouse wrote: post #159

Earlier quoted context omitted.

> 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. That's assuming the value of the cash is the same in the hands of the corporation as the shareholders. But if the corporation has nothing it needs the money for internally then the cash is nothing but a liability that it has to waste resources trying t…

But what if there is no ROI, like high tech companies that pay no dividends?!

Investors then try to model what the future dividends of the company will look like once it establishes a dividend, or what price it is likely to eventually get acquired for as a lump-sum payment.

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

#380

Post by dodobirdlord »

boomboomsubban wrote: post #322
crazygringo wrote: post #156

Earlier quoted context omitted.

1) Because buybacks and dividends are what produce the entire value of stock at the end of the day. 2) Buybacks don't need to be reinvested, they already are by definition. 3) Rebalancing your portfolio due to buybacks is done automatically by your fund that you already pay a small maintenance fee for. There's nothing unhealthy about buybacks, that's a total misconception that needs to die. They're just treated diffe…

1)The value of the stock is based on the value of the company, a better performing company produces more value than a buyback. 2) I'll admit I'm not too knowledgeable about every kind of buyback, but surely some involve buying back stocks. For some kinds, you're probably right. 3) I would be surprised if many funds existed where there weren't transaction fees or a percentage based fee, giving them reasons to prefer b…

At the end of the day it's not much of a tax loophole. The same total amount of money ends up getting taxed, it's just that shareholders can decide whether they want to opt-in to realizing their capital gains. Some choose to sell back fewer shares (frequently none) and some choose to sell back more shares (especially stock-receiving employees, who may feel a need to diversify). Hardly something to get upset about.
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