Stock buybacks discussion

[Moriarte]

President Biden brands all those who engage in stock buybacks, rather than investing in operations, “wealthy tax cheats”.

Warren Buffett, the investor, begs to differ. In his opinion, (paraphrasing a bit) “Anyone who’ll tell you all buybacks are bad is either economically illiterate or silver-tongued demagogue.”

As of January 2023 there is a brand new buyback tax, 1%. Biden administration plans a push to quadruple this tax. For reference, year 2022 saw American corps. spend $1.2 trillion on buying back their own shares from the open market, a record figure. Year 2023 is currently on track to beat that record.

These events reinvigorated discussions on whether corporate America’s long standing tradition of buybacks are moral and efficient allocation of capital. It stretches far beyond the States, of course - buyback tradition can be said to exist worldwide, probably as long as stock markets exist.

The critics say it’s a waste of precious resources, a way to avoid taxes and market manipulation technique.
Proponents argue that buybacks are an integral element of a free market economy and a nuanced resource allocation mechanism.

Which way do you lean on the issue, as far as both morality and efficiency are concerned?

(Poll available, above)

 

[mdl5000]

as I understand it, a company pays a shareholder to get their shares back. and presumably the government can tax this transaction however they want. my question is why? what will the tax revenue seek to redress?

 

[El_Machinae]

Given how many CEOs get paid in stock rather than cash (which should be mostly fungible with each other), you can tell that there's a tax advantage that needs to be nipped.
Here's the problem with stock buybacks - it concentrates wealth upwards.

There are two options, dividends or buyback. But the retiree who has wealth they need to tap must sell the stock to tap that wealth during retirement. He's going to sell to the people with money. If he wants to pass on an inheritance, he's going to pass on less than he saved.

Dividends are cash. If you want more stock after you get a dividend, buy the stock. The important thing is, a dividend doesn't concentrate ownership of the company upwards. Sure, there will still be concentration based on propensity to save, but not directly so.
We don't want companies concentrating wealth upwards, overall. We want them either distributing cash or re-investing.


If too many companies are focusing on buy-backs, you know there's an imbalance. Not dissimilar to if too much of an economy is 'fixing up their house' as their major savings instrument - it means there's a bubble that needs pricking.

 

[Gorbles]

Warren Buffet the massive tax dodger? Who makes himself look good by donating to charity, while still never running out of money?

Yeah okay I really don't have a horse in this race but I'll back Biden over him I guess.

 

[Moriarte]

Well, he claims to have facilitated $35 billion in taxes from Berkshire Hathaway to the Public during 2012-2022. Or do you specifically mean Warren with his taxpayer hat on?

 

[warpus]

President Biden brands all those who engage in stock buybacks, rather than investing in operations, “wealthy tax cheats”.

I mean, you can't be a cheat if you follow the law to the letter.

If there's loopholes, people are going to use them. Duh

 

[El_Machinae]

The 'good thing' about buybacks is that it allows management to support the company when they disagree with the stock market, but even this is a distortion unless buybacks are the most effective re-investment dollar. If a company is prefering buybacks to other re-investment, it's either a systemic problem that's being highlighted or a lack of creativity for management. This is super-duper aggravated when companies are borrowing to buy back stock .. it means something is up. So, Buffet is correct that sometimes a buyback is a perfectly good choice. It's just rare, unless the tax structure is distorting things.

This was useful

America's most painless tax

The new federal tax on stock buybacks hasn't dulled Warren Buffett's fondness for buybacks, according to his new annual shareholder letter.

www.axios.com

Where it stands: Shareholders expect to receive corporate profits one way or another — which is to say, either through buybacks or via dividends.

• Investors who pay taxes generally prefer buybacks, because dividends are taxable as income. Buybacks, on the other hand, generate no tax bill for any non-selling shareholder — and even selling shareholders generally only pay the lower long-term capital gains tax.
• The new tax on buybacks is not a so-called Pigovian tax on something the government disapproves of and wants less of, so much as it's a way to try to even out distortions in the difference between how dividends and buybacks are taxed.

Executives also have good reasons for preferring buybacks to dividends.

• For one, when employees are granted options, buybacks effectively increase the proportion of the company that they're entitled to purchase at a fixed price, making the options more valuable. Dividends, by contrast, just reduce the amount of money in the company, making options less valuable.

It really highlights how the treatment for executives is broken.

 

[Birdjaguar]

Buybacks tend to push the stock prices up. So, if I sell a bunch of shares in the buyback offer, I get both cash now for some other purpose and I am likely to get an increase in the value of the shares I still hold. There is a reasonable chance of "doubling my money" over the long term.

 

[Moriarte]

We don't want companies concentrating wealth upwards, overall. We want them either distributing cash or re-investing.

If there’s a pressing opportunity to re-invest, then yes, we do. But do we want them to re-invest if there’s little opportunity to do so? Lets take Apple the company - it is operating with $50 bn in cash. At this point, post covid, economic downturn, market is saturated with their goods, so they don’t need an extra factory, new logistics network, land plots, etc. Further investment won’t yield meaningful return right now, due to Apple’s size and their position on long term economic curve. Maybe in a couple years market situation will command rapid expansion, but right now they’d rather sit on a pile of cash and wait till someone else makes a move. What’s the next best thing they can do with the cash? One logical way would be to reinvest cash into something that tends to generate good annual aggregate return. Like shares of Apple company! So, they’re all kind of falling into the honeypot of being forced buying own shares instead of physical expansion.

 

[El_Machinae]

I don't want to downplay that there's a benefit, there is. The problem is that if the tool is overused because of bad incentives or back structure. I point out (above) how executives prefer buybacks. This would be 'useful' if we could use that payment for to reduce their salaries - but obviously we don't. And another obvious issue is when companies are borrowing to do buy-backs.

A buyback doesn't strengthen 'the company' like having savings would, it rewards shareholders. In this way, it's not a classic 'investment' but a profit distribution scheme. And yeah, the entire point of the system is to distribute profits. But if the choice between 'dividends or buybacks?' is getting increasingly biases - you know there's a problem.

At the macro level is just a problem, because it doesn't evenly distribute cash through the system. It puts cash in the hands of people who sell. In some ways, they're the people who most prefer to have cash over stock, but it's also a mechanism by which wealth is concentrated. Even with dividends, people who need to sell can still sell, after all.

 

[Moriarte]

A buyback doesn't strengthen 'the company' like having savings would, it rewards shareholders.

Buyback does strengthen the company, indirectly, through market capitalisation metric and stock price manipulation opportunities. A large company, which sets aside billions for buybacks, can “activate” a buyback campaign at the most favourable moment, of which they have perfect knowledge. Lets say a company Knows it’s about to publish very favourable profit/revenue figures on 1st of March. A “surprise beat”, a “record revenue”. That’s exactly the day they’ll be pouring extra buyback-cash into their own shares in order to significantly amplify (and thus, manipulate) their stock market price. One can work in reverse too - by acting as a major buyer of own shares on the day when the next catastrophe will strike broader sectors of the economy.

The bigger the company, the stronger this “leverage” becomes, as big company’s pile of cash can manipulate stock price in preferred direction for way longer, as the market for sellers of their own stock becomes smaller than company’s “buyback stash”.

There’s also market cap metric, which I mentioned above in this post. Higher place in the capitalisation hierarchy has benefits - more favourable loans, being considered “the biggest in the industry”, things like that. There’s indirect, but significant value for company to engage in buyback activity.

Whether buybacks are fair play is an open question for me. It’s obvious buybacks are a legalised market manipulation tool set. But how do you limit this activity without severe market restrictions? Well, Joe Biden says “why limit it, when we can tax it” (not a direct quote)

 

[Nick723]

As someone who has some (small) investments, I find stock buybacks immensely frustrating. In theory, they should push up the share price, but do they actually? I’d like to see some evidence of whether this is the case! (Perhaps someone here has this).

As an investor I’d much prefer a dividend. As an employee of a company who engages in large stock buyback programmes, I’d rather they increased my salary 😀

 

[Moriarte]

Yes, buybacks absolutely push up the price. But only if they are significantly bigger in value than the resisting selling pressure. In other words, a huge company’s buyback will be noticeable. A small company’s buyback? Not necessarily.

 

[El_Machinae]

A proper system wouldn't allow buybacks on Insider information, and would actually only allow them with declared buybacks in the future. But yes, if management is more optimistic than the regular Market, buybacks would be one way of expressing that. And they could get a better deal than if they saved the cash, if they are correct. This is a bit of a rephrasing of something I've already said.

Again, what you're looking for is if there is an overwhelming preference towards stock buyback or dividends, because that signals an underlying imbalance in the incentives.

 

[Gorbles]

Well, he claims to have facilitated $35 billion in taxes from Berkshire Hathaway to the Public during 2012-2022. Or do you specifically mean Warren with his taxpayer hat on?

Well, both really. The thing is, he's incredibly generous on paper (pun not intended). He's credited with a ton of stuff, and regardless of my opinion on him the man seriously knows investments. I could think he was Satan's advocate on this Earth and I wouldn't be able to deny that (I don't, not least because I'm not religious).

However.

He's on-record as wanting to reduce the gap between the super-rich and the not super-rich. So why is he opposing something that really only impacts how the super-rich do business? On top of that, he may want to redistribute wealth, and he may be famous for being personally frugal with his wealth, but he's still been hoarding it. His company made the papers back in 2014 for record profits. You don't get record profits (to the tune of billions) by a) succeeding at any form of redistribution or b) paying workers fairly. If workers are not involved, and it's just compound investments, or whatever, then it's still aiding the pyramid he sits at-or-near the top of.

Now, the argument I've come up against before is that "at least he's doing something", and alternatively / additionally that he still has time to fulfill his pledges. But his pledges are essentially charity (and he is incredibly old - time is a matter for him, something I'm very sure he's aware of). Hoarding his wealth to ensure he can redistribute it is a band-aid feature. And it hinges upon that actually happening. So if people (not referring to you or this thread) want me to view him favourably for this, my answer would be "when he's done it, maybe".

But it doesn't change the fact that his actions don't redefine the system - they uphold it. And this is made worse by his opposition to one of the first actual things that could help redefine the system I've seen in the news in some time.

 

[Birdjaguar]

You don't get record profits (to the tune of billions) by a) succeeding at any form of redistribution or b) paying workers fairly.

Berkshire Hathaway is a huge international conglomerate. It wholly owns about 70 significant companies and 1-12% of another 50 or so companies. BH does not micro manage the ongoing activities of those companies. Its subsidiaries make or lose money on their own (mostly make) BH makes money when its companies make money or it buys or sells its asset companies. Warren buffet has no control and probably little interest in the wages of Dairy Queen employees unless the company itself shows signs of trouble.

List of assets owned by Berkshire Hathaway - Wikipedia

en.wikipedia.org

 

[Gorbles]

Berkshire Hathaway is a huge international conglomerate. It wholly owns about 70 significant companies and 1-12% of another 50 or so companies. BH does not micro manage the ongoing activities of those companies. Its subsidiaries make or lose money on their own (mostly make) BH makes money when its companies make money or it buys or sells its asset companies. Warren buffet has no control and probably little interest in the wages of Dairy Queen employees unless the company itself shows signs of trouble.

List of assets owned by Berkshire Hathaway - Wikipedia

en.wikipedia.org

This is why I followed the quoted line up immediately with this!

If workers are not involved, and it's just compound investments, or whatever, then it's still aiding the pyramid he sits at-or-near the top of.

 

[Moriarte]

Well, both really. The thing is, he's incredibly generous on paper (pun not intended). He's credited with a ton of stuff, and regardless of my opinion on him the man seriously knows investments.

Funny you should say that. He considers himself a so-so investor, as he briefly mentions in recent letter to shareholders, that is in regard to the quality of his stock picks. It’s just that the strategy he inherits and employs is so sound, one doesn’t need exceptional investment acumen in order to achieve results comparable with his. Holding stuff for 30, 40, 50 years, never selling, buying more over time. 99% of other people do the opposite, try to guess short-term swings and fail. His solution is simple, elegant and fool proof, bar the nuclear holocaust. Never sell. (or almost never) That, and a bit of solid accounting analysis.

Anyway, I invite you to read his latest letter if you feel like digging deeper into his character. It’s not very long, entertaining and sheds light on the origins of his philosophical conflict with buyback taxation.

https://www.berkshirehathaway.com/letters/2022ltr.pdf

So why is he opposing something that really only impacts how the super-rich do business?

Class interest, obviously. Today they want 4% tax on buyback, tomorrow they’ll want 14%. Not a favourable dynamic for old Warren!!! I suppose no one is honestly expecting a ultra-rich capitalist shark to suddenly become a dolphin in our set of coordinates?

 

[Birdjaguar]

Anyway, I invite you to read his latest letter if you feel like digging deeper into his character. It’s not very long, entertaining and sheds light on the origins of his philosophical conflict with buyback taxation.

https://www.berkshirehathaway.com/letters/2022ltr.pdf

Awesome letter. I should probably buy a share.

 

[Gorbles]

Class interest, obviously. Today they want 4% tax on buyback, tomorrow they’ll want 14%. Not a favourable dynamic for old Warren!!! I suppose no one is honestly expecting a ultra-rich capitalist shark to suddenly become a dolphin in our set of coordinates?

Of course not! But that's what I mean about his public image, is all