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

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

#61

Post by bjacokes »

y96V89C668e7Q74 wrote: post #30

I was taught in economics classes that buybacks make sense when there is nothing the company believes it can spend the money on instead to increase its profit. If this is true, should we be concerned that this is a market signal that the economy as a whole is running out of opportunities to invest in new technologies and instead just trying to hold onto its own value? If that is the case, I imagine that buybacks coul…

Dividends and buybacks both indicate that the company is willing to return cash to shareholders. One big difference is that dividends are typically a long-term commitment to returning cash (unless it's a "special dividend"), whereas buybacks are more ad-hoc. The other difference is that buybacks imply an opinion that the stock is undervalued, whereas dividends are agnostic about valuation. In most cases, buybacks seem to be motivated by the former difference more than the latter. However, some companies like Berkshire are more principled about valuation driving buyback decisions.

I would disagree with your point about stock issuance suggesting belief in the company. Issuing stock is usually a negative signal that not only is your company struggling with cash flow, but it can't issue debt at a reasonable cost. (Startups issue equity because it is difficult to borrow at such a risky stage of the company, but more established companies like Tesla issuing equity is usually a sign of difficulties with cash flow.) Read up on cost of equity vs cost of debt for more info.

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

#63

Post by povertyworld »

sonnyblarney wrote: post #43
povertyworld wrote: post #37

Earlier quoted context omitted.

Yeah, it was so less goofy they had to unload it on Softbank, the goofy investment kings.

Softbank is not making goofy investments (hover skatebaords), they are making ROI investments (real estate leasing). Google dumped the robots for strategic reasons, moreover, it's going to be a while before payoff.

Softbank going all in on ARM at this late stage of the game seemed a little on the goofy side. I didn't know they were into real estate. Isn't it kind of a bad idea to buy real estate, but not be structured like a REIT since you'd lose tax advantages? Then again, I don't know how it works in Japan. I just know I've been suspicious of Softbank ever since they put a ton of money into Yahoo, and I haven't seen any evidence countering this admitted bias.

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

#64

Post by djakjxnanjak »

lovich wrote: post #12
__blockcipher__ wrote: post #9

Earlier quoted context omitted.

Once a company has no need for more cash, there is no point to sell shares. The whole point of a IPO is to fund growth / give founders and early employees a payout. Share buybacks aren’t about propping up the price (when done correctly). They’re about tax efficiently increasing your ownership share. Or you can think of it as paying money now to reduce the amount you need to pay in dividends, all else equal. Share rep…

Because it's difficult to distinguish between executive leadership trying to efficiently return money to shareholders vs propping up the share price so that they see a personal benefit via their own shares increasing or via contractual bonuses. Given that there's an incentive to spend other peoples money(shareholders who bought shares) to increase their own(via bonuses, salary, or granted shares) it's fairly safe to…

“Spend other people’s money” is a really weird way to put it IMO - people chose to invest in the company because they thought it was a good investment. Investors would rather have the stock than the cash they paid for it. When the company does a buyback, the shareholder investment in the company becomes more concentrated. Each share represents more stock and less cash, making it possible to construct a higher-equity lower-cash portfolio. This more purely fulfills the investor’s revealed preference of owning the stock. If they change their mind, they can always sell.

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

#65

Post by dorchadas »

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.

Wasn't there that Michigan Supreme Court decision that states that was precisely the purpose of a company -- to maximize shareholder value?

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

#66

Post by darawk »

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.

It is true. The company is owned by its shareholders, collectively.

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

#67

Post by pishpash »

rat_1234 wrote: post #31
SilasX wrote: post #21

Earlier quoted context omitted.

If they don't know high(-enough)-RoR uses of the money, then paying it out as a dividend is exactly what they should do as good stewards of the investors' capital. And share buybacks are just a tax-efficient version of dividends (since they don't trigger a taxable event for the investors that don't want to convert shares to cash yet).

Agreed! It's easy to say 'you should be investing that capital into projects.' But I think people don't realize how much money is actually generated by some of these companies. I know AAPL is the strongest possible case for my argument, but bear with me. Their operating cash flow net of CAPEX is ~$65B as of their 2018 year ending in September. I.e., after paying for all of the investments they want to make, they stil…

There's no problem with returning capital to shareholders. There is a problem when shareholders just plow it back into index funds. Does Apple have a better use of money than shareholders? Well, there are investments available to Apple that aren't even available to shareholders, so on the face of it, how could they not?

Therefore the issue isn't so much Apple not being able to find better opportunities than shareholders, but that it can't find better opportunities than Apple -- making those actually good investments would look bad for Apple because of how absurdly profitable it is. That's not a good reason to return capital, if you think about it carefully.

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

#68

Post by darawk »

mantasm wrote: post #48
guelo wrote: post #36

Earlier quoted context omitted.

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?

The company becomes equally less valuable after a buyback. Consider a company with value of $1000, with 100 shares outstanding. Each share is $10. Buying back 10 shares, the company spent $100, so the company is now worth $900 and has 90 shares outstanding. Each share is still $10. This is the basic model that shows share price should be unaffected by buybacks, but there are other effects. The buyback could signal to…

I think you may be confusing market cap with share price. Market cap does not generally increase with buybacks, only share price does.

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

#69

Post by bluecalm »

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)?

Even if the companies never expand and the stocks are priced perfectly the market is not zero-sum. It's still an asset that produces value and pays back every year. There are people for whom it makes sense to own something that gives steady returns and there are people who for whom it makes sense to have cash on hand. Trading might be zero-sum which is great for everyone but owning stocks isn't.

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

#70

Post by rchaud »

mantasm wrote: post #48
guelo wrote: post #36

Earlier quoted context omitted.

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?

The company becomes equally less valuable after a buyback. Consider a company with value of $1000, with 100 shares outstanding. Each share is $10. Buying back 10 shares, the company spent $100, so the company is now worth $900 and has 90 shares outstanding. Each share is still $10. This is the basic model that shows share price should be unaffected by buybacks, but there are other effects. The buyback could signal to…

> Consider a company with value of $1000, with 100 shares outstanding. Each share is $10. Buying back 10 shares, the company spent $100

How would you buy 10% of the outstanding stock of a real company and pay exactly the market price for the entire block? On a public exchange, you'd need to bid higher than the market price for someone to sell you a block that big (otherwise it wouldn't be worth their while to sell).

If you're buying in the public market, other sellers will see that some party is willing to pay above the market price for this stock. They'll raise their own ask price as a result. In private, off-exchange sales, you'll be dealing with seasoned investors (family offices, hedge funds etc) where they're likely to know your situation, and you'll almost definitely pay a premium to acquire that stock.

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