Comment by twobitshifter
19 hours 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.
> 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_...
> 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.
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.
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.
Oh they know. They just don't care.
It's a perfect example of a prisoner's dilemma.
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.
Isn't corportate csuite compensation the highest it's ever been? This isn't that great of an argument.
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 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
Dumb maybe question: Why couldn’t the companies with excess profits just pay they employees more in salaries?
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.
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.
> 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)
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.
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.
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.
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)
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.
"real artists ship" - Jobs
Wasn't Apple burning money when he joined?
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.
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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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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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.