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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

#71

Post by kgwgk »

djakjxnanjak wrote: post #50
dustinmoorenet wrote: post #38

Earlier quoted context omitted.

But they aren't just using their earnings. They are borrowing too.

Our tax policy encourages this. You can write off the interest you pay to bondholders, but you can’t write off the dividends you pay to shareholders. Everyone involved (except for the government) is better off if you sell bonds and buy back stock.

The recent reform puts some limits on deductibility of interest expenses, but I don’t know what is the practical impact of that cap (30% of adjusted taxable income = earnings before interest, depreciation, amortization, and taxes).

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

#72

Post by sonnyblarney »

povertyworld wrote: post #63
sonnyblarney wrote: post #43

Earlier quoted context omitted.

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 evide…

Softbank is not making 'goofy' investments along the lines of Google's 'loon' projects, like putting Wifi in air balloons.

They are making 'real' investments in late stage companies with actual business models, or things that have obvious potential upsides.

Softbank is basically where companies go for D and E rounds instead of going public. So there is some risk, but way less risk than left-field, early stage investments.

Their 'real estate' investment is in WeWork, which probably will make them a lot of money as long as interest rates don't flinch higher, and as long as there is no real-estate crash.

Sprint, ARM, Yahoo, Uber, Slack - these are not 'crazy' investments, especially depending on price. Yahoo might actually have some 'decent fundamentals' on some level, and be worth something at some price. They have a gigantic audience, and some small changes might make them be profitable at some level, and they could very well be worth something, at some price.

It's a cross between classic private equity and late stage venture capital, all of their investments make sense in that context.

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

#73

Post by MarkPNeyer »

nostrademons wrote: post #49
dustinmoorenet wrote: post #38

Earlier quoted context omitted.

But they aren't just using their earnings. They are borrowing too.

That just means that at current interest rates, the stock's forward P/E exceeds the rate of interest. It's rational to borrow money to buy stock if the earnings spun off by the stock exceed the rate of interest. You're basically arbitraging against the bank: the bank gives you money to buy out people who think the stock is overvalued, you give them a set amount of interest for the money, and if it turns out you're ri…

> If you're wrong and earnings are less than the interest rate, it's reflected in net income, the stock drops, and you (and the rest of the shareholders) eat the difference, often in a dramatic fashion.

Or you’ve already moved on, and the next CEO eats the difference. The incentives between those two vary wildly.

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

#74

Post by kgwgk »

nostrademons wrote: post #49
dustinmoorenet wrote: post #38

Earlier quoted context omitted.

But they aren't just using their earnings. They are borrowing too.

That just means that at current interest rates, the stock's forward P/E exceeds the rate of interest. It's rational to borrow money to buy stock if the earnings spun off by the stock exceed the rate of interest. You're basically arbitraging against the bank: the bank gives you money to buy out people who think the stock is overvalued, you give them a set amount of interest for the money, and if it turns out you're ri…

> it's a way to lever up the capital structure to the benefit of existing shareholders, as long as profits remain high and interest rates remain low

It’s only rational up to some level of indebtness (and often companies go too far). If you take on debt just because you can, how are you going to delever the balance sheet when earnings go down and interest rates go up?

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

#75

Post by vonmoltke »

dustinmoorenet wrote: post #38
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…

But they aren't just using their earnings. They are borrowing too.

The S&P Global source data[1] has a list of the top 20 Q4 buyback totals, as well as their buyback numbers for selected historical periods. It would be interesting to see how much debt those companies took on during those periods. The top company over the past 5 years, Apple, has been notorious for sitting on a massive cash reserve.

[1] http://press.spglobal.com/2019-03-25-S-P-500-Q4-2018-Buyback...

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

#76

Post by y96V89C668e7Q74 »

nostrademons wrote: post #54
y96V89C668e7Q74 wrote: post #35

Earlier quoted context omitted.

> 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)?

The public market isn't really expanding and has essentially become zero-sum. This doesn't preclude the existence of other capital markets that might actually be taking share away from publicly-traded companies - for example, late-stage VC/PE financing (a la Uber, Lyft, and most other Silicon Valley unicorns), crowdfunding, or cryptocurrency ICOs & STOs. Nature usually abhors a steady-state: when you think you've rea…

Good distinction, thank you. I wonder if there are stats somewhere to see what percent of capital is in public markets vs private.

Also, now that so many of the unicorns like Uber and Lyft are going public, I wonder how much of the market is currently still private. Not to mention, many of the unicorns are horribly unprofitable and potential a net negative for the market.

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

#77

Post by mathattack »

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…

Good point. And this is why value stocks (that return money to shareholders) outperform growth stocks over time.

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

#78

Post by y96V89C668e7Q74 »

bluecalm wrote: post #69
y96V89C668e7Q74 wrote: post #35

Earlier quoted context omitted.

> 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.

Fair point, stocks do have inherent value even if they are just paying dividends. I guess that in that case it's market growth that is zero sum (eg, one company growing must mean that another company is shrinking).

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

#79

Post by mathattack »

djakjxnanjak wrote: post #50
dustinmoorenet wrote: post #38

Earlier quoted context omitted.

But they aren't just using their earnings. They are borrowing too.

Our tax policy encourages this. You can write off the interest you pay to bondholders, but you can’t write off the dividends you pay to shareholders. Everyone involved (except for the government) is better off if you sell bonds and buy back stock.

Prior debt holders get punished as companies lever up. (But they usually don’t get a say in the matter unless they have strong covenants)

Heavily indebted companies struggle to survive distress too.

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

#80

Post by y96V89C668e7Q74 »

bjacokes wrote: post #61
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 see…

Interesting. Would it be fair to say that startups issuing stock is a positive or at least neutral signal whereas a public company issuing stock is a negative signal?
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