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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

#91

Post by AnthonyMouse »

lovich wrote: post #81
AnthonyMouse wrote: post #23

Earlier quoted context omitted.

> via their own shares increasing This isn't any more true for the executives than any other shareholder, and doesn't really work that way anyway. Buybacks don't increase the value of shares unless the company was undervalued or making less efficient use of the cash than their other capital, and in that case they're smart to have done it. > via contractual bonuses The way to solve this is to do accounting for buyback…

>Buybacks don't increase the value of shares There was a price at the current supply and demand. Buybacks increase the demand which increases the price. The buybacks may be a bad idea and lower the demand from the marketplace but that information takes more time to disseminate and is harder to actually determine where as someone buying up millions of shares is a piece of information that is immediatley known. >You ob…

> There was a price at the current supply and demand. Buybacks increase the demand which increases the price.

The company has a value. If the P/E ratio gets worse because the share price went up with the same earnings, more investors will find it profitable to cash out and invest in something with a better ROI. That doesn't happen instantly, but it happens quickly, because cash-flush investment banks realize they can front-run the correction for a profit, which makes it happen.

But the buyback itself often actually improves the ROI of the company and legitimately makes it worth more, because the company itself was getting high returns on its productive capital and low returns on its cash, and now less of its share value is represented by the low productivity cash.

> That is what people who have problems with buybacks but not dividends, would like to see happen

Except that then the perverse incentive for managers becomes to boost the stock price by not issuing dividends, since dividends reduce the stock price. The only real way to fix it is to fix their incentives, and once you do that you're back to preferring buybacks due to the tax treatment.

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

#92

Post by kgwgk »

EliRivers wrote: post #90
kgwgk wrote: post #89

Earlier quoted context omitted.

You are right at least in part, strictly speaking the owner(s) of a company do(es) own its assets only in an indirect way. But I don't get the "shareholders do not own business corporations" bit. Would a sole owner "own" a business corporation? Do real estate owners "own" real estate or do they own "bundles of intangible rights"?

But I don't get the "shareholders do not own business corporations" bit. Well, why would they? At risk of horrifically simplifying things, I have a company, I decide I want some more money. I sell you the right to vote in some things that concern the company, and I sell you a share of any dividends that get paid out in the future. That's what you get. Do you now own the company? Do you own the company assets? I didn'…

> I have a company

What does that mean? You don’t “own” the company, do you?

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

#93

Post by EliRivers »

kgwgk wrote: post #92
EliRivers wrote: post #90

Earlier quoted context omitted.

But I don't get the "shareholders do not own business corporations" bit. Well, why would they? At risk of horrifically simplifying things, I have a company, I decide I want some more money. I sell you the right to vote in some things that concern the company, and I sell you a share of any dividends that get paid out in the future. That's what you get. Do you now own the company? Do you own the company assets? I didn'…

> I have a company What does that mean? You don’t “own” the company, do you?

Certainly not in the same way that I can own a pen or a nice wristwatch. Now we're getting somewhere! So what does it mean to "own" a company?

If the company is just me and a bag of tools, fixing people's cars on their driveway, do I own that company? What does it even mean for me to "own" it?

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

#94

Post by MrRadar »

JohnJamesRambo wrote: post #29
povertyworld wrote: post #13

Earlier quoted context omitted.

Right. Wouldn't it be great if Google would start paying a dividend instead of throwing away money on goofy acquisitions like Boston Dynamics? How the hell is a robot dog that does flips or whatever supposed to improve their advertising business exactly? Give me a break.

The unceasing robot dog terminator hunts you down, pins you, and shows you ads on its visor/eyes.

This comment reminds me of one of my favorite pieces of Internet fiction titled Attention Deficit Disorder[1]. The original context was a thread where the OP was arguing for a literal "attention economy" and the story is meant to extrapolate their arguments into absurdity.

[1]: https://pastebin.com/KCbP6rbr

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

#95

Post by [deleted] »

CydeWeys wrote: post #33
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…

I was taught in economics classes that buybacks shouldn't increase the stock price at all, which clearly isn't true in practice. It ends up being more complicated than the simple models would suggest.

[deleted]

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

#96

Post by lrem »

mathattack wrote: post #77
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.

Naive question: istn't the idea of "growth stocks" to become value stocks at some point?

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

#97

Post by darawk »

EliRivers wrote: post #85
darawk wrote: post #66

Earlier quoted context omitted.

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

Even if they did "own" the company (which they don't, unless you choose to define the terms identically - "owner" and "shareholder" are not synonymous), just owning a company doesn't mean all the earnings belong to you. Here's some legal people on the subject; https://www.lawschool.cornell.edu/academics/clarke_business_... Key phrases include "shareholders do not own business corporations, nor do they own the assets…

They do, collectively, own most companies. It is possible to create shares that do not represent an ownership interest, but most companies are structured such that they do. Shareholders are generally able to reconstitute the board, which can appoint a CEO, who is in control over the assets of that company. They may then appoint a board, who would appoint a CEO who would liquidate the assets and return them as a dividend to the shareholders. That is the sense in which they own the company.

Now, some companies sell shares that don't have voting rights (e.g. Google, Facebook). Those are a bit more nuanced. Though even in those cases, there are voting shares, they're just not traded in the public markets. So, the statement that the company is owned/controlled by its shareholders remains correct.

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

#98

Post by mikhailfranco »

Surely it ends when the corporate Credit Default Swap (CDS) rate rises, and credit rating drops, so the interest rate paid by the company rises when they have to refinance their bonds. Eventually, interest on bonds exceeds cashflow, and they have to borrow more to pay interest (Ponzi phase).

At the margin, the lowest investment-grade BBB company drops one notch and becomes High Yield 'junk'. Then insurance companies and pension funds with fiduciary obligations must divest themselves of the bonds, so they sell and force the yield (interest rate) even higher.

Companies have borrowed too much to perpetuate buybacks, jack up the share price, and reward executives with profits on share options. Half of all bonds are at BBB, just one downgrade from junk [1]. This situation is highly unstable, just one snowflake will create an avalanche of downgrades, and a true Black Swan will bankrupt many companies [2].

These companies have run off the cliff, and if they look down into the abyss, they will fall (e.g. GE [3], IBM). As with sub-prime mortgages, CDOs and MBSs during the Great Financial Crisis, pulling the trigger depends on the ratings agencies. Last time they were asleep, or perhaps complicit (euphemism for corrupt). Let's see what they do this time.

[1] https://www.marketwatch.com/story/half-of-investment-grade-b...

[2] https://www.zerohedge.com/news/2019-03-05/bis-warns-market-c...

[3] https://www.zerohedge.com/news/2018-11-13/collapse-has-begun...

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

#99

Post by mikhailfranco »

Credit is attractive for two reasons:

1. Interest rates have been held artificially low by the Fed and other Central Banks, which have also flooded the financial markets with trillions of new dollars/euros/yen.

2. Interest payments are tax deductible, but dividends are not. Debt and equity should be treated equally.

Also, there are now many weak corporate bonds (CoCo, convenant-light), which mean that bondholders have fewer rights and priorities in the line of creditors, should the company get into financial difficulties. So the debts are treated as bonds for the purposes of taxation, but the rights of the bondholders are little more than shareholders - a double whammy for the company makes it a simple decision.

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