Submitted by lilly_kilgore t3_10phz45 in explainlikeimfive
bobjoylove t1_j6kkkal wrote
It means the company has so much cash that it doesn’t even know what to do with it. So they buy back stock.
The stockholders like it because it reduces supply of shares, underpinning the prices.
The staff kinda like it as it means it may form part of a compensation package later on.
The general public doesn’t like it because it means the company is making too much profit.
The strategists are wary of it because it means the board doesn’t have any significant ideas about how to expand the business when it has a glut of cash.
jh937hfiu3hrhv9 t1_j6ktud5 wrote
This is a succinct explanation. It is offensive because it is wealth hoarding. Currency does not provide value to society unless it is in circulation. Hoarding is a disease born from fear.
bobjoylove t1_j6ku3wf wrote
Thanks. I have 3 downvotes though 🤷♂️
jh937hfiu3hrhv9 t1_j6l2y1j wrote
Flashy answers with whistles and bells impress and confuse while the rich laugh all the way to the next hoard, and people don't like to hear economies are simply based on choices made by the people with the money to make the choices. Imagining it based on external forces, complex and mysterious is much more stimulating, and believable as we have been conditioned. Like how a tantalizing conspiracy theory fills the brain with endorphins. It is easier to control the public if you keep them ignorant, sick, poor and constantly move the goal posts. This will insure downvotes.
Algur t1_j6l5ndq wrote
That's because it's not an explanation. It's conjecture based upon the assumption that buy backs only occur when a company has excess cash that they "don't even know what to do with". Buy backs are simply a financial tool and like any tool they can be used properly or improperly.
bobjoylove t1_j6n3f5l wrote
It’s not conjecture, it’s what is happening. Look at the size of the buybacks. It’s tens of billions of dollars. For example Chevron’s latest $75Bn or Google at $70bn last year. That’s a huge sum, and Google’s top 3 biggest acquisitions are Motorola at $12.5bn, Nest at $3.2bn and Doubleclick at $3.1bn.
So it could remake 3 of its biggest acquisitions and still have about $50bn for a buyback. They would then have three huge acquisitions to integrate and manage, which is a lot of work for HR and a pivot for the company to new revenue sources and a risk of being investigated as a monopoly.
They have no better idea to use the vast sums of money other than a buyback.
Algur t1_j6n6wae wrote
No. I actually did a breakdown of the pros and cons of buy backs for someone a couple days ago so I’ll copy paste it here. Some of it was geared toward that conversation so you may lack some of that context. Additionally, I’m on mobile so I apologize for any strange formatting.
Buy backs exist for many reasons, but the primary reason is to return shareholder value. It gets a bit more complicated that though.
Here are a few pros.
Flexibility - As opposed to dividends, which shareholders may expect, companies can buyback stock as needed based on their financial needs and goals. This also give shareholders more flexibility certain shareholders can "cash in", but others may want to hold on to their shares if they think the value will rise. Signaling - This is the idea that a buyback is simply a signal to shareholders that they company thinks their stock is undervalued. From an accounting standpoint, when a company buys back shares they are placed in a contra-equity account. The company will then likely re-issue these shares at a later date when they feel the stock price is at the right level. FYI, this is reason that was most discussed in my accounting courses. Capital Recirculation - Returning cash to shareholders via a buyback allows them to invest in other up and coming businesses. Tax Advantages - This will vary by jurisdiction. Long term capital gains are taxed at preferential rates, while dividends may or may not be taxed at those rates depending whether they are qualified dividends. And here are the cons:
Financial Ratio Manipulation - If executive management has certain EPS goals that are falling short they may perform a buyback artificially reach that objective. To break this down a little bit, if income is falling short of their objective then they may buy back stock to decrease the denominator in the EPS calculation. This is deceptive in my opinion and should be properly disclosed to financial statement users. Insider trading - Honestly, this one is true whether or not buybacks are illegal. As an example, insiders can buy stock in their company shortly before a new product is announced. All buybacks do is change the beneficiary of the insider trade from an individual to the business. Just so we're clear, I believe people who engage in insider trading should be prosecuted to the full extent of the law. Contribution to Income Inequality - You've already little tapped on this above. However, it's worth noting that evidence on this is mixed and should be evaluated in a case by case basis. Poor Timing - this is just the inverse of the Signaling pro above. Basically, management mistimes the market and buys at a peak rather than a trough. This can happen in all investing though and is why investments carry an inherent risk. Leverage - This is essentially the Weighted Average Cost of Capital, which is complex and I haven't worked with in awhile so I don't want to get into it at the moment lest I say something inaccurate. In summary, buybacks are neither magic bullets to increase a company’s earnings per share nor a nefarious means of enriching executives or shareholders. Buybacks are simply a financial tool.
bobjoylove t1_j6n8b91 wrote
This is a discussion about why they choose buybacks over dividends or simply hoarding. All of those scenarios occur after they have decided they can’t use the money for operations.
There’s definitely the paradox that a failing company might have sufficient cash to do a buyback to protect its stock/EPS; as it likely would not be failing if it has billions in excess. The only time that might happen is a windfall such as from the sale of a significant asset.
Algur t1_j6nftv6 wrote
>This is a discussion about why they choose buybacks over dividends or simply hoarding.
No. This is a discussion of "What does it mean when a company buys back stock and why is it frowned upon?" The answer as I detailed above is complex with various pros and cons.
>All of those scenarios occur after they have decided they can’t use the money for operations.
Incorrect. As I said above, buybacks are simply a financial tool that can be used properly or improperly. These discussions occur when management is considering how to best meet goals and objectives. Discussions regarding whether they have the necessary cash for a buyback to meet the objective will happen concurrently.
>There’s definitely the paradox that a failing company might have sufficient cash to do a buyback to protect its stock/EPS; as it likely would not be failing if it has billions in excess. The only time that might happen is a windfall such as from the sale of a significant asset.
Not really. It's incredibly unlikely that a company selling PP&E just to stay afloat is concerned about, or even has the means, to do a stock buyback.
Lemesplain t1_j6l15ng wrote
To add on, occasionally there’s a public money angle that makes it even less appealing to the general public.
A company is failing, but deemed “too big to fail,” so Uncle Sam gives that company a bunch of cash to keep them running.
6 months later, the company is doing well again, has a ton of extra money, and starts doing buybacks. Meanwhile, all of the citizens whose taxes paid for that bailout get nothing.
shaneknysh t1_j6kswtw wrote
>It means the company has so much cash that it doesn’t even know what to do with it. So they buy back stock.
Or the company has so much cash and no incentive to lower prices or improve employee compensation. There only incentive is to improve profit.
In the before time the highest tax brackets meant that at some point a company made enough then the company could pay 10000 in taxes or raise compensation by 8000. The company could then choose to pay their employees or pay the government.
The companies still made huge profits but there was incentive beyond just rewarding shareholders.
bobjoylove t1_j6ktn4g wrote
This is true but many companies include stock as compensation, releasing it over the years to retain staff using ‘golden handcuffs’. So it does have a way to may it back to the staff
Rishfee t1_j6kuwrd wrote
It may be common in certain fields, but on the whole, stock options are not what I would consider a common component of employee compensation, at least here in the US.
shaneknysh t1_j6kw73p wrote
As a recipient of stock rewards as an employee they are not a great reward. Like company scrip the stock rewards to staff are a cheap way to reward staff costing the company pennies on the dollar. And every single one I've received the stock was non voting and diluted.
bobjoylove t1_j6kwcoo wrote
In tech companies stock awards can more that double the amount you get paid every year. Often triple you base salary.
shaneknysh t1_j6l6334 wrote
What tech companies did you work for? My stock options never came close to 25% of my base salary.
bobjoylove t1_j6n3wup wrote
Not revealing any personal data, but both Fintech and Silicon Valley is paying staff this way. The annual stock award is performance based, and except for the last 2 years there has been a bull market that also swells the award granted 4 years ago.
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