The math here doesn't really work out for a couple reasons.
First... sure, if you spend $500,000 on buybacks instead of paying dividends, then large shareholders might make trillions of dollars. But individual investors make money also. In fact, every shareholder will make money in proportion to how much stock they own! The little guy isn't really getting screwed here.
Second, the stock price is determined by supply and demand. Stock buybacks increase the price by reducing supply. But, if we take the example mentioned where the company blows its entire bank account on stock buybacks (thus, harming the actual business)... the stock becomes less valuable, demand goes, and the price goes down.
Stock buybacks are functionally the same as if the company pays a dividend, and then every shareholder decides to reinvest. Except doing it as a buyback is (I believe) more tax efficient since the investor doesn't get hit with income tax before the reinvestment.
Completely moronic take. Stock buybacks are just a more tax efficient form of dividend. If the author's argument is that companies should never return any money to investors, either as dividend or stock buybacks, then what is the point of owning a share in the first place.
Well, there are voting rights. This way you should have influence on the development of the company and therefore influence on the stock price. Which gives a shareholder money back if he/she sells.
The only driver of the price at that point is the price that the company would buy shares back for, because that's the only vehicle to return cash.
If the company gave preferences to shareholders (like discounts on the trucks it makes, flights it makes, rides it shares, etc.) or only sells to them, there could be other sources of value.
> The company has made its shares more valuable while making itself less valuable.
Share value going up doesn’t equate to the value of the company going up, but that’s what is implied by the quote.
Edit to add: the whole article is saying that there is something nonsensical happening to the proves, by implying that the company should be worth less, not more. Well, maybe it should be worth less, or maybe it indicates they make so much cash that they don’t know what to do with it so I want to own it more. Anyway, without an evaluation of what happens to the value of the companies when buybacks happen, there isn’t even a point to this article.
I'm as red as they come in economic matters, but I never saw any reason to doubt the frequent assertion that stock buybacks and dividends are functionally the same.
Nor do I, in principle, see any problem with paying dividends: it's precisely because nothing grows into heaven. There should come in any company a time where it's grown enough that it doesn't have room to grow as much anymore, and can pay back its investors. Those investors these days will pretty much always reinvest in something else (because they are so rich, actually eating the dividend just isn't feasible). It's just reallocation from a venture which says "I can't grow as much as I used to" to other ventures.
(In theory, at least. I do see e.g. the notoriously fabulously capital intensive semiconductor manufacturers paying dividends/doing buybacks at the same time as begging governments for money, which makes me wonder if their actual business is what they say their business is. But never mind).
I also had no problem with the related concept that a business should usually have plenty of loans, and should not repay them. As a greedy investor, I think it's great that my company gets most of its money for expansion from the bank, because the bank in theory only demands to be repaid once, and in any case only demands a fixed %, whereas me and my greedy investor colleagues demand more money the more profit the company makes, and demand to be paid in perpetuity. Clearly, I prefer that the company is mostly financed by the comparatively less greedy bank, and only by my rival super-greedy investors as much as it absolutely has to.
On the one hand, buybacks do allow a company in decline to paper over their failings. The post discusses that kind of thing.
On the other hand, a private company provides more actual value to the public than a public company. Public companies suffer from investor capture and face enormous pressure to think short term. So they 'enshittify' (to use the author's word). So, in theory, buying back shares is a step in the right direction.
Those two aspects have been banging around my head for some time, and I'm still unsure how to reconcile them.
Amazing that someone so acclaimed can write something so foolish. Buybacks can be good, buybacks can also be bad, like any other financial management decision. The same buyback can be good for some people, and less advantageous for others.
Instead of labeling it “Trump oligarchy shit” (?) just don’t own shares of whatever company you are upset about.
I remember many decades ago while in a Business Class, we were talking about equity and the Stock market.
I asked "Why can't the company buy back stock to increase equity/price ?".
The professor said that that is a very bad thing to do and is probably illegal. I believe I heard later on some change occurred during Reagan's administration that allowed this.
So here we are, grifts are allowed and many businesses seem to be into scams.
DigitalOcean is a great example, they have repurchased $1.6e9 in shares since their IPO and all the price has done is sink. They could have built their own datacenter for that much money.
The math here doesn't really work out for a couple reasons.
First... sure, if you spend $500,000 on buybacks instead of paying dividends, then large shareholders might make trillions of dollars. But individual investors make money also. In fact, every shareholder will make money in proportion to how much stock they own! The little guy isn't really getting screwed here.
Second, the stock price is determined by supply and demand. Stock buybacks increase the price by reducing supply. But, if we take the example mentioned where the company blows its entire bank account on stock buybacks (thus, harming the actual business)... the stock becomes less valuable, demand goes, and the price goes down.
Stock buybacks are functionally the same as if the company pays a dividend, and then every shareholder decides to reinvest. Except doing it as a buyback is (I believe) more tax efficient since the investor doesn't get hit with income tax before the reinvestment.
Completely moronic take. Stock buybacks are just a more tax efficient form of dividend. If the author's argument is that companies should never return any money to investors, either as dividend or stock buybacks, then what is the point of owning a share in the first place.
Well, there are voting rights. This way you should have influence on the development of the company and therefore influence on the stock price. Which gives a shareholder money back if he/she sells.
The only driver of the price at that point is the price that the company would buy shares back for, because that's the only vehicle to return cash.
If the company gave preferences to shareholders (like discounts on the trucks it makes, flights it makes, rides it shares, etc.) or only sells to them, there could be other sources of value.
It's a very odd take. Not sure on what basis the author's blaming Trump for it either (and I'm no fan of the orange guy).
I was open to being convinced, but this is dumb:
> The company has made its shares more valuable while making itself less valuable.
Share value going up doesn’t equate to the value of the company going up, but that’s what is implied by the quote.
Edit to add: the whole article is saying that there is something nonsensical happening to the proves, by implying that the company should be worth less, not more. Well, maybe it should be worth less, or maybe it indicates they make so much cash that they don’t know what to do with it so I want to own it more. Anyway, without an evaluation of what happens to the value of the companies when buybacks happen, there isn’t even a point to this article.
I'm as red as they come in economic matters, but I never saw any reason to doubt the frequent assertion that stock buybacks and dividends are functionally the same.
Nor do I, in principle, see any problem with paying dividends: it's precisely because nothing grows into heaven. There should come in any company a time where it's grown enough that it doesn't have room to grow as much anymore, and can pay back its investors. Those investors these days will pretty much always reinvest in something else (because they are so rich, actually eating the dividend just isn't feasible). It's just reallocation from a venture which says "I can't grow as much as I used to" to other ventures.
(In theory, at least. I do see e.g. the notoriously fabulously capital intensive semiconductor manufacturers paying dividends/doing buybacks at the same time as begging governments for money, which makes me wonder if their actual business is what they say their business is. But never mind).
I also had no problem with the related concept that a business should usually have plenty of loans, and should not repay them. As a greedy investor, I think it's great that my company gets most of its money for expansion from the bank, because the bank in theory only demands to be repaid once, and in any case only demands a fixed %, whereas me and my greedy investor colleagues demand more money the more profit the company makes, and demand to be paid in perpetuity. Clearly, I prefer that the company is mostly financed by the comparatively less greedy bank, and only by my rival super-greedy investors as much as it absolutely has to.
this guy has no idea what he's talking about. if you spend 500k on shares, it's now only a 500k company (1m - 500k)
On the one hand, buybacks do allow a company in decline to paper over their failings. The post discusses that kind of thing.
On the other hand, a private company provides more actual value to the public than a public company. Public companies suffer from investor capture and face enormous pressure to think short term. So they 'enshittify' (to use the author's word). So, in theory, buying back shares is a step in the right direction.
Those two aspects have been banging around my head for some time, and I'm still unsure how to reconcile them.
Amazing that someone so acclaimed can write something so foolish. Buybacks can be good, buybacks can also be bad, like any other financial management decision. The same buyback can be good for some people, and less advantageous for others.
Instead of labeling it “Trump oligarchy shit” (?) just don’t own shares of whatever company you are upset about.
This guy clearly just has a bone to pick.
I remember many decades ago while in a Business Class, we were talking about equity and the Stock market.
I asked "Why can't the company buy back stock to increase equity/price ?".
The professor said that that is a very bad thing to do and is probably illegal. I believe I heard later on some change occurred during Reagan's administration that allowed this.
So here we are, grifts are allowed and many businesses seem to be into scams.
We need the old restrictions back :)
DigitalOcean is a great example, they have repurchased $1.6e9 in shares since their IPO and all the price has done is sink. They could have built their own datacenter for that much money.