Comment by twobitshifter
4 months ago
Not why it can’t be done so much as why it isn’t done. Share buybacks allow companies to reward executives directly as their compensation is tied to stock price. If we started not doing that, the priorities might shift, but those executives like things the way they are.
Before Tim Cook Apple had never done a buyback - Jobs was always thinking Apple could do better with the money in R&D than paying off shareholders. Wall Street did not approve of this position, but Jobs wasn’t one to listen to anybody, so it did not matter. Most CEOs are not going to take such a strong position when they, the stockholders, and every other executive can be guaranteed a financial reward through a buyback.
> Share buybacks allow companies to reward executives directly as their compensation is tied to stock price. If we started not doing that, the priorities might shift, but those executives like things the way they are.
This isn't right but it's adjacent.
Executives don't need buybacks to get whatever compensation. Their compensation is negotiated and you can write the contract to make it whatever.
However, paying dividends is a taxable event, which means shareholders don't like it. You have to pay the tax on the dividend immediately instead of when you sell the shares, even if you just use the money to buy more shares. Buybacks don't work like that unless you're the one who sells your shares in the buyback. Which you can be if you'd rather have the money immediately (and pay the tax) than de facto increase your holdings in the company.
If transferring money to shareholders as dividends forces them to realize taxable gains before they want to then they'd prefer the company keep the money and invest it in something internally instead. Buybacks give them away around that.
But that's not necessarily bad. The shareholders (the ones who sold their shares) get the money instead and then invest it in something else, ideally a different company so that the existing large company doesn't get even bigger.
Also, when the company keeps the money, it doesn't have to use it for R&D at all. Companies often use it to acquire other companies, which is the worst.
You don't really want a tax incentive to make big companies bigger.
> Companies often use it to acquire other companies, which is the worst.
We also used to enforce antitrust law.
> We also used to enforce antitrust law.
I've been reading the Chernow biography of Rockefeller, and this simply isn't true. We've almost never enforced "anti-trust law", and it's basically never been particularly effective.
The Sherman Act was widely considered a failure (even after passage in 1890). It did little/nothing to affect the fate of Standard Oil, which actually grew for a decade after passage, to over 90% control of the market by 1904. This is despite the state of Ohio engaging in a much more successful legal attack, based on technicalities of the trust charter, having nothing to do with the federal law.
The thing that actually brought down Standard Oil was...competition. By the time the company was actually broken up in under the Sherman Act in 1911, it had declined to ~60% market share. The overall story is essentially the same as today: the law ends up being used to punish declining companies for prior bad behavior.
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Chicago school assholes backed by economic-right postwar "think tanks" managed to radically shift our standard for "harm" in anti trust enforcement, back in the '70s, though a combo of lobbying and positioning their folks in the right places. The result was that it became nearly impossible to take anti-trust action. That's why it seems like we suddenly stopped enforcing it—we did. This was followed shortly by a shift way to the right by Democrats on economic issues (among other things—listen to Clinton in the '90s talk about crime or schools or lots of other topics some time, he sounds exactly like a Republican) after Reagan's landslide, which put any hope of reversing that bad course on hold indefinitely.
The first notable push-back on that state of affairs was Lina Khan under Biden, who ever so slightly course-corrected us back toward healthy market competition in the tiniest of ways, and every business bro reacted like she was committing mass murder. Meanwhile, we need that times ten for at least a decade just to get us back to something resembling functioning markets. At this point I doubt we'll see a shift back toward reasonable market regulation... ever. Plutocrat capture of the levers of power is so complete that the only way I expect the US to see serious anti-trust action ever again is as a tool of corruption.
> However, paying dividends is a taxable event, which means shareholders don't like it.
Shareholders love dividends because it is taxed as capital gains ( long-term capital gains if you own the stock longer than 1 year ). It's why most of the publicly listed stock ( of profitable companies ) pay dividends - because shareholders want dividends. Apple was forced to pay dividends by investors. So was Meta. As was Alphabet. All under shareholder pressure because dividends get tax as capital gains. Any company sitting on a pile of cash will get pressure to pay it out as dividends by shareholders.
Hm. Not quite right. Regular shareholders don't like dividends. It means you have an immediate tax liability so you are paying taxes twice. The company paid taxes, and now you have to pay taxes. Then that money has to be invested elsewhere eventually incurring another tax event.
It's much better to have the company buy shares back. That way the stock price goes up. You then only face the tax event once you sell the stock later in the future. So you just avoided a tax event.
The reason for dividends is that pension funds and the like do like dividends for whatever reasons.
Individual investors and people who have a long term approach like Warren Buffet are against dividends.
I like having a dividend. A company like NVDA forces shareholder returns to the whim of the market price, but dividends stabilize things because the stock is actually tangibly worth something. It also forces a certain discipline in the company, since shareholders don't like dividends getting cut. It also limits empire-building, di-worsification, and "good ideas" that have questionable ROI.
> A company like NVDA forces shareholder returns to the whim of the market price, but dividends stabilize things because the stock is actually tangibly worth something.
All of the whims that go into the market price are still there. If you're a shareholder who doesn't care about the share price you're going to have a bad time.
> It also forces a certain discipline in the company, since shareholders don't like dividends getting cut.
Which usually leads to mismanagement more than anything because the company gets into a situation where they should lower the dividend but is under pressure not to and then starts eating their seed corn so they can still pay the dividend.
> It also limits empire-building, di-worsification, and "good ideas" that have questionable ROI.
Buybacks do the same thing.
To be pedantic, NVIDIA shares have a dividend yield
> Share buybacks allow companies to reward executives directly as their compensation is tied to stock price.
To be fair share owners also like the stock price to go higher, they also like dividends (and higher dividends would tend to drive the stock price higher too), but an X% increase in share price caused by buybacks is favoured over an X% dividend because it isn’t immediately taxed.
My understanding is that executives prefer buybacks because they mostly are compensated with stock options, which don't pay dividends (until exercised) but which appreciate disproportionately from buybacks.
Dividends actually directly lower the stock price. Keep an eye on your portfolio when your holdings go ex-div -- the price falls because it no longer includes that cashflow.
It does not lower it in any long-term sense, because, unless it's a one-time dividend, there's another dividend next quarter, and generally assumed to be continuing payments for the foreseeable future if the company is healthy.
This doesn't sound correct. Giving out an expected dividend lowers a stock price since otherwise one could arbitrage it, but this is evidence that the dividend raised the price when it got priced in
Also, I believe in the US ordinary dividends are taxed at the income tax rate which is much higher than the capital gains rate.
No, most dividends are "qualified" and taxed at the long term capital gains rate, assuming you've held the underlying for a decent amount of time.
Still, they're taxed, whereas buybacks allow the shareholders to control exactly when they take income.
Also buybacks will tend to select for frequently traded shares with high cost basis, further reducing total taxes and selecting for longer term shareholders. They really are just better than dividends in every way.
It doesn’t make sense to compare ordinary dividends to capital gains - either compare ordinary to short term gains or qualified to long term gains.
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with everything at record highs we'll see if we continue to prefer inflated share price over reinvestment in the business or increased dividends.
Maybe some of these 2-brain cell executives should consider that their "buybacks" will be worthless when US throughput starts to be equally worthless compared to the rest of the world...
Of course, I'm being a bit pejorative, they aren't thinking big picture at all, just concerned with what happens tomorrow not the day after...
However, they are in part responsible for the nonsense happening at the moment wrt to American policy, it seems like a game who can light cash on fire the fastest ..
It's a prisoner's dilemma, but with a large number of prisoners.
Defect-defect isn't a winning strategy in a continual setting, it's only a winning strategy in a fixed-iterations setting.
Tragedy of the commons
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Oh they know. They just don't care.
I don't think they do know. Nor do I think most of the shareholders know. If they did they would know that they can make way more money with forward thinking and planning beyond a quarter. The lack of that is the clearest indication I can imagine that they do not know.
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It's a perfect example of a prisoner's dilemma.
> Jobs was always thinking Apple could do better with the money in R&D
Turns out Jobs was right, relevant article from 2006:
https://appleinsider.com/articles/06/01/16/apples_jobs_says_...
Scale matters.
From TFA:
> pushed the company's market capitalization to $72.13 billion
This, on annual revenue of ~$19B.
Apple today is closing in on 2x that revenue every month now. Quarterly net profit exceeds annual revenue in 2006. The Apple Watch group is roughly half the size of the whole company in 2006.
At some point, it became clear that the business throws off vastly more cash than can be productively used in R&D (here I will note that Apple's recent profit gusher is already net of investments in things like the Titan car project, Vision, and all the other stuff they work on but never release).
Share buybacks are are at least nominally a financially neutral exercise - it generally does not benefit either shareholders or executives.
They can however signal 'strength' in stock price by creating more demand and signalling to the market that the company itself which has 'insider information' believes the stock price is worth less than the price they're bought for.
It's a fair point about Jobs - but - Jobs was never sitting on more money than the economies of most nations.
Jobs Apple was a consumer product company, Tim Cook Apple is a Private Equity Operating Entity in a way. Their financial operations dictate as much about their valuation as anything else.
> Jobs was always thinking Apple could do better with the money in R&D
> Jobs wasn’t one to listen to anybody, so it did not matter.
It did matter. Jobs was wrong. Apple indeed couldn't do better. It's not even that Apple couldn't produce R&D results worth all this money. Apple couldn't even manage to spend at that pace. Steve Jobs' projects could and did use a lot of money but nowhere near that pace. And the pace of earnings got better still after Jobs.
Jobs was right on another aspect which was that this pile of money provided Apple solid, safe ground. Apple was safe from any risk of a few years of bad earnings. That was very costly safety.
It took a different CEO to finally work to reverse the damage. That project has taken many years and (arguably) isn't finished yet. And that's in parallel to massive increases in R&D.
It doesn't do a lot of basic science - I expect. But it does or funds a lot of engineering and applied science. that's the point of the article, that in the up-to-recently US system, corporations even with lots of earnings didn't have to.
But dividends also result in a concrete financial reward for all shareholders, yes?
> all shareholders
That's the key phrase, they benefit all shareholders. Buybacks on the other hand only benefit the following shareholders:
1. those with regularly vesting stock options and stock grants - basically employees. For non-tech companies especially, this only means high-ranking employees
2. those who intend to sell - that is, soon-to-be-ex shareholders
3. those who borrow against their stock - typically high-net-worth individuals who own a lot of the stock
Stock buybacks are thus a non-egalitarian way to return profits. To reward all shareholders equally, pay dividends.
Can you make this argument more rigorous?
I’m just not following the connections here.
It seems like your assumption is that a stock buyback is a short term gain.
One of your arguments is that the strike price for options is set based on a certain amount of stock in circulation, and decreasing that amount will “artificially” raise the stock price, making the options more valuable. I agree that higher stock price benefits those with options, and I would even agree that it is possible that when those strike prices were valued, the valuation did not take into account the possible global change in the amount of stock (although a market would have included this valuation).
I suppose the other part of the argument could be that R&D is good for the stock in the long term in a way that stock buybacks are not… the buybacks pumping up the price of the stock before it is driven into the dirt by competitors who do invest in R&D.
There, I’ve done my best for your argument but I still don’t really believe that increased stock prices for everyone is not benefiting everyone more or less equally.
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4. Those who intend to re-invest all returns in to the stock, who avoid a taxable event when their ownership of the company goes up without having to first pay tax for the dividend.
A stock buyback rewards all stockholders equally. Those who sell, get their reward in cash. Those who do not sell, get their reward in the proportion of their ownership of the company going up.
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Actually no, they have the same benefits as a dividend except they don't create a forced tax liability.
Stock grants can actually include dividends.
Even if you don't sell or borrow against it you benefit because you don't have that tax liability, and the money you woulda paid in taxes can continue to be invested.
Can't group #2 sell 4% of their holdings, thereby remaining shareholders, and delivering to themselves the tax-advantaged equivalent of a 4% dividend?
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What is your definition of "benefit"? Assuming a buyback increases share prices, why would shareholders in general be indifferent?
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This is simply untrue in every detail. All common stock is pari passu. A buyback of common benefits all common stock holders pro rata with their holdings. Similarly, vesting grants without buybacks harms the common holders by dilution. A buyback of the amount of vested is the least that is required to keep the common holders whole.
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This is just nonsense. Anyone can sell the stock if they wish, there is no privilege for the high-net worth. Additionally, shareholders benefit from reduced share count because it increases their claim on future profits thereby increasing compounding.
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> But dividends also result in a concrete financial reward for all shareholders, yes?
Yes, but less because in many countries dividends are taxed more than selling shares after a share price increase.
dividends and capital gains are taxed differently
Not in the US.
The reality seems to be that only the genius founder is allowed to do any unorthodox moves as the CEO. Once he's out, the board selects a CEO that will basically continue business as usual without rocking the boat. The new CEO essentially won't have a mandate to use any controversial or original approach.
Dumb maybe question: Why couldn’t the companies with excess profits just pay they employees more in salaries?
Companies are controlled by shareholders who appoint the board who appoint the CEO. If the CEO decides to pay employees more, the board will change him because shareholder put money to get money out, not to give to employees.
Companies can give "shares" to employees, which means excess profits can be made dividends out of which employees "touch a bit".
If you would have your own company (privately own and full control) you are of course free to share the excess profit as you see fit.
Edit: and of course, share buy back avoids some taxes that you must pay, which in other schemes would have to be paid.
buyback defers tax incidence, but it doesn't avoid it, no?
also boards rarely change CEOs for paying employees well, they change CEOs if the company is not growing
labor's share of income usually falls during periods of growing output and rises otherwise (but apparently tech booms/bubbles are an exception, check the graph -- https://en.wikipedia.org/wiki/Labor_share#/media/File:FRED_g... )
an unexpected but welcome change is that real wages of low-income workers increased too during the recent years, but the historic trend obviously shows the enormous disparity (check figure C 1979-2019)
https://www.epi.org/publication/strong-wage-growth-for-low-w...
...
and for interesting context let's not forget that during this time a lot of immigrants started to work
https://cis.org/Report/ForeignBorn-Number-and-Share-US-Popul...
and for context on the context, the size of the active population also increased - so fewer people age out of the workforce than how many started working
https://tradingeconomics.com/united-states/active-population...
> Why couldn’t the companies with excess profits just pay they employees more in salaries?
They could, but why should they? Which advantage get the shareholders from this?
The only reason why a company with excess profits "should" pay the employees more is if
i) for a given role, the expected results of potential applicants varies a lot (i.e. the company has an incentive "to hire the best of the best")
ii) the market for these exceptional talents is tough (i.e. if the company does not hire the best, someone else will; additionally, if the company does not pay the employees really well, they will be poached)
Different markets. Companies are created to allow investors to create profits selling something (things, services, etc). Companies compete with other companies to attract capital. Companies which offer higher expected returns for comparable levels of risk will attract more capital. This reflects supply and demand for capital.
Employees are part of a labor market. Supply and demand in the labor market drives compensation levels. When you have a rare skill that is perceived to be valuable, you can get higher compensation - e.g. Meta AI researchers getting $100M contracts or Juan Soto getting a $750M baseball contract.
As mentioned elsewhere, some companies give stock to employees. In my experience this is for one of two reasons. 1) Employee retention - stock grants tend to have multiyear vesting periods designed to keep the employee at the company. 2) Start up companies that do not have the cash to pay employees.
None of these explanations would lead to simply paying employees more with excess cash (unless the cash was created by a group of employees that you were trying to retain).
You're thinking of companies as teams where employees are members, but c-staff just see their employees as expensive suppliers.
Have you ever been a c-staff? C-staff are employees as well. Usually more expensive employees. Well run companies are trying to figure out how to win in the marketplace. To do this they hire the employees they need to win. Investors do this with CEOs.
I agree that it is much more difficult for a CEO to get fired than a line employee as CEOs have significant influence in picking their boarda. However, the consequences to a company of replacing a CEO are generally more significant as well.
1. They don't have to 2. If employees want to be exposed to excess profit (and loss) they can buy shares like everyone else. (Not a super strong argument tbh) 3. It's impossible to measure how much any given employee/department really contributed and they don't want to create a culture of chasing fat bonus checks. 4. To some extent they do tend to. Profit sharing plans and ESOPs aren't that uncommon
> 2. If employees want to be exposed to excess profit (and loss)
It's funny that people tell me they want this because they'll see some of the sales outliers. But then I explain that 1/2 or more of their salary will be dependent on some type of performance metric and most clam up.
> couldn’t the companies with excess profits just pay they employees more
Would that improve productivity (for that company)? Do most people refuse to work for Apple because it doesn't pay enough? Is apple limited by lack of productivity? Is Apple limited by lack of R&D budget? Would Apple release on the world more, better stuff if it paid 10% more?
Then too, most US Apple employees own a lot of Apple shares - they do get paid more when Apple pays dividends, buys back, increases the share price (/ shrinks the number of shares - same thing). Even recent Apple employees who did buy/ get the shares they could really did very well! They are shareholders.
As it is, Apple has a large number of employees in the most expensive areas of the world. It's not exactly that it's desperately skimping on employee compensation.
My impression is that Apple, still now, has a hard time finding worthwhile things to do with its profit. It generates a lot of cash, uses everything it can manage, and releases the rest productively.
The same reason you don't give a store $2 for something priced at $1 or write anything other than a zero in the box on your tax form that lets you pay more if you like.
That would not make the share price number go up, which in turn means it doesn't make the leadership's net worth number go up, which means the leadership won't make that choice.
The leadership’s net worth is going up based on their compensation plan including stock options, regardless. If you are more explicit about your assumptions it might be easier to believe or refute the argument.
Why would they do that when they could pay shareholders and themselves?
Right now, in the US, we've given them no reason. But that's not a law of nature. For example a country might have an industrial policy.
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The only people who matter are shareholders. Employees are a means to the end of making money for the owners of the company whether through stocks or other kinds of ownership.
That would set a precedent they don’t want. Investors and the Federal government have little interest in labor gaining power.
For businesses, employees are a necessary evil and not company's beneficiaries.
they don't want to
the purpose of a company is to deliver maximum return to shareholders; if they're not doing that, then they're failing their fiduciary duty and the shareholders might try to force the company to change its ways
the shareholders want the money coming to them, not to the employees
(this is why the Public Benefit Corporation, "B-Corp" structure was invented, so that the company's stated purpose can be something other than simply generating value for its shareholders)
They could, but then they'd have to report lower profits by the same amount. I want to actually defend this though: Corporate profit is a very narrow measure, by design. It was never intended to capture how well the nation is doing.
Isn't corportate csuite compensation the highest it's ever been? This isn't that great of an argument.
The train of thought here is that product people innovate and launch companies, but operations & finance people have no idea how to innovate or create new products.
Putting in a finance/ops person as the CEO will stagnate a company from a product standpoint.
And yet when Jobs returned to Apple he blew up ATG (the Advanced Technology Group) that gave us Quicktime, etc. He also shutdown Apple's research library (and gave all the books to Stanford, I believe).
He seemed to have little patience for "scientists" — preferred engineers that shipped shit.
I think that at best he saw research as expensive, at worst he saw it as elitist.
Wasn't Apple burning money when he joined?
Apple was giving away the Keys to the Kingdom by way of licensing Macintosh clones, among other things. If ATG were responsible for hemorrhaging cash I am not sure why they did not re-appear then when Apple was firing on all cylinders. Only Jony was crowned.
And there's no way the library and its books were a cost — unless perhaps it was attracting snooty engineers who were reading Foley and van Dam when they should have been fixing bugs. ;-) (That actually might have been me.)
"real artists ship" - Jobs
And yet, he went to Xerox PARC and copied their research.
He also didn’t seem to have an issue borrowing Unix, which obviously has a rich history of research and academia.
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If companies want to reward executives directly they can cut out shareholders entirely and pay salaries and bonuses. If companies want to reward shareholders (including executives) they can pay dividends (which Apple did do under Jobs). Nothing about the priorities of companies changed with share buybacks.
As others have mentioned that isn't comparable because salaries are taxed. The tax rate on unrealized gains in the US is zero percent from what I understand.
Not correct. Capital Gains taxes depend on the holding period. Short term capital gains (stock held less than a year) are taxed at the same rate as salaries (ordinary income rate). Long term capital gains (stock held at least a year), are taxed on a reduced level that peaks out at 20% (depends on total taxable income) with a possible additional 3.8% Obama Net Investment Tax.
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For one thing, buybacks aren't charged against profits. Compensation is.
What does that even mean? Both stock buybacks and dividends are the distribution of profit.
Compensation expenses (such as stock options, RSUs, etc) are accounted as expenses, which of course reduces profit.
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The whole point of owning shares is to share in a company’s profits. In simple terms, you make money through dividends or buybacks. Without that, there’s really no reason to own the stock. Sure, prices go up and down, and you can try to profit from that, but if a company never plans to return money to shareholders, there’s nothing real behind the price. Eventually you’d just be holding on until the company fades away or goes bankrupt.
Buybacks are just another way of giving profits back to shareholders—an alternative to dividends with different tax implications. Their purpose isn't to "allow companies to reward executives directly", they are just an alternative way for shareholders to share in the profits.
A company could tie executives compensation to the amount of dividend if it wanted. That might be a good idea.
Share buybacks is not some weird loophole that allows executives to get paid.
Companies are always allowed to reward their executives and other employees by giving them money, stock options, or other rewards.
Unfortunately CEOs have to do buybacks at every opportunity, because otherwise shareholders will sue them for failing to maximize shareholder value.
> Jobs was always thinking Apple could do better with the money in R&D than paying off shareholders. Wall Street did not approve of this position, but Jobs wasn’t one to listen to anybody, so it did not matter.
(Head spins) wait what?! No! You’re not supposed to do that! If you fail to always maximize short term profits, people might start thinking CEOs actually have agency, and they won’t be able to hide behind the “maximizing shareholder value” excuse!
> shareholders will sue them for failing to maximize shareholder value
That's quite a bold claim. Do you have an example in which a company/CEO/board was sued specifically for not doing enough buybacks?
I don't think it's typically this explicit or direct, but it can definitely flow more like 1. company is not doing buybacks, 2. performance is judged against comparables in the short (quarterly) term using metrics that prioritize the affects of buybacks, 3. major stakeholders (big stock holders, institutions, funds, etc) put pressure on the board, 4. CEO pushes back and is dismissed for performance or "not hitting targets". Functionally a lot of players in power positions prefer buy backs, optics are better for a surging stock vs. modest increase in dividends, and it favours short-term metrics.
A lot of this comes back to Dodge v Ford. The Dodge brothers sued the Ford Motor Company because Ford wanted to cut prices and invest in the company while removing dividends to shareholders. The Dodges disagreed with this and sued. The courts found in favor of them.
https://en.wikipedia.org/wiki/Dodge_v._Ford_Motor_Co.
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