Stock buybacks are reaching dangerous levels

NWRatCon · Aug 1, 2019

This is going to be a complicated post/thread (lots of links, two parts), so bear with me. The gist: Stock buybacks are reaching dangerous levels (CNN)

S&P 500 companies are on track to buy back another $940 billion of stock in 2019, according to Goldman Sachs. That would easily surpass the record buyback boom set off last year by President Donald Trump's corporate tax cut.
But Corporate America's rush to pay out shareholders could be getting out of hand.
"Payout ratios are elevated, cash balances have declined and leverage has risen to a new all-time high," David Kostin, chief US equity strategist at Goldman Sachs, wrote in a recent note to clients.

Over the last two years alone, US Inc. has spent nearly $2 trillion buying back its own stock (compared to $3 trillion over the last 7 years, already considered excessive). Some have referred to this buyback frenzy as a bubble, akin to other financial bubbles that cause stock market and economic volatility. When they burst...

Debt-funded stock buybacks have been one of the major drivers of the U.S. stock market boom since the Great Recession. Ironically, 2018 was the most active year on record for buyback activity, yet the stock market faltered and experienced its first annual loss since 2008. If the stock market performed as poorly as it did in 2018 with record amounts of buybacks to prop it up, just imagine how much worse it would be if buybacks were to slow down significantly or grind to a halt?

When The Stock Buybacks Go Bye-Bye (Forbes). Indeed, just prior to The Great Tax Cut Scam of 2017", it had been predicted that the "buyback boom" that followed the 2008 crash was coming to an end: After the Buyback Binge (Barron's, Nov 2017).

The Golden Age of Buybacks is over. As The Wall Street Journal noted last week, companies in the S&P 500 are on pace to repurchase just $500 billion in shares this year, the lowest amount since 2012, according to INTL FCStone data. With some observers attributing a good chunk of the market’s post-financial crisis gains to buybacks, that could be a sign of trouble ahead.

Why repurchase stocks? And when buybacks are a bad idea. When a company is doing well, it sometimes makes sense for it to reduce its excess cash-on-hand by buying back its stock. It can signal that the company is doing well financially. But, the second-order consequence is that this artificially raises its "Earnings Per Share" (EPS) ratio of a company. It is that aspect that inspires bad investments.

Buying back, or repurchasing shares can be a sensible way for companies to use their extra cash on hand to reward shareholders and earn a better return than bank interest on those funds. However, in many cases, share buybacks are seen as just a ploy to boost reported earnings—since there are fewer shares outstanding for calculating earnings per share. Even worse, it could be a signal that the company has run out of good ideas with which to use its cash for other purposes.

6 Bad Stock Buyback Scenarios (Investopedia). A CEO who wants to artificially boost the value of company stock can engineer a stock buyback scheme to paper over other deficiencies and boost the value of his own portfolio (especially if his incentive package is based upon EPS). But, increasing EPS doesn't increase fundamental value. Instead it may destabilize an otherwise solid stock (e.g., when the stock becomes overvalued, or the company is overleveraged).

NWRatCon · Aug 1, 2019

part 2:
Fuel on the Fire - The 2017 Tax Cut. Just when it appeared that the buyback frenzy had abated, however, the 2017 Tax Cut supercharged the process. Instead of investing the windfall in capital investments and higher wages (as promised by proponents), corporations went on a buying binge. 2018 and 2019 thus obliterated previous records for buyback activities.

The underlying logic for the TCJA was that allowing companies to keep a greater share of profits, would stimulate investments in long term growth. Instead, the dominant company response to the TCJA was stock buybacks. For the first three quarters of 2018, buybacks were $583.4 billion (up 52.6% from 2017). In contrast, aggregate capital investment increased 8.8% over 2017, while R&D investment growth at US public companies increased 12.5% over 2017 growth.

Why The Tax Cuts And Jobs Act (TCJA) Led To Buybacks Rather Than Investment (Forbes). How much did wages go up? "Real average hourly earnings increased 1.5 percent, seasonally adjusted, from June 2018 to June 2019." (BLS)

the August jobs report showed a 2.8% annual increase in average hourly earnings for “Production and Nonsupervisory Employees,” i.e., regular workers.

The media reported it was the fastest wage growth since 2009.

That was correct in a narrow, technical sense. But not in real life.
....
In the same period in which average hourly earnings rose 2.8%, the CPI rose 2.7%. That’s how much the cost of living went up, on average.

Real Wage Growth Is Actually Falling (Forbes).

The 2017 Tax Cuts substantially increased wealth inequality in two ways: First, it reduced taxes on the wealthiest far more than for any other group; then it artificially increased stock values because of the $2 trillion stock buyback binge, increasing the value of that wealth (82% of stocks are held by the top 10% class) and allowing it to be realized at a lower tax rate. To add insult to injury, inflation ate up the already meager wage increases the tax cuts were supposed to foster.

Storm clouds on the horizon. The expansion that started during Obama's tenure is likely nearing its end. A Recession Is Coming (Eventually). Here’s Where You’ll See It First. (NYT, Subscription). The 2017 tax cut papered over the warning signs that were flashing at the end of 2017, but despite that, the economy flattened in 2018. Several recession indicators are already flashing, and the sugar high of the tax cut is fading. When that happens, corporations that have spent their cash on buybacks are going to be the hardest hit.

Thoreau72 · Aug 1, 2019

I've read this talk before.

I am no economist and no investor these days, but it seems most plausible to me.

Helix · Aug 1, 2019

Don't worry, guys, it will actually trickle down this time.

Obscurity · Aug 1, 2019

What a ****ing farce. There it is, America. Your foul mouthed, insane president's tax breaks have been exposed as a total fraud. The lies of the right wing about tax breaks are now exposed.

A complete disaster.

What a joke the right wing is.

Geoist · Aug 1, 2019

The Second Gilded Age?

3leftsdoo · Aug 1, 2019

Geoist said:
The Second Gilded Age?

To be sure.

But the first never really ended.

JustHanging · Aug 1, 2019

NWRatCon said:
This is going to be a complicated post/thread (lots of links, two parts), so bear with me. The gist: Stock buybacks are reaching dangerous levels (CNN)

Over the last two years alone, US Inc. has spent nearly $2 trillion buying back its own stock (compared to $3 trillion over the last 7 years, already considered excessive). Some have referred to this buyback frenzy as a bubble, akin to other financial bubbles that cause stock market and economic volatility. When they burst...When The Stock Buybacks Go Bye-Bye (Forbes). Indeed, just prior to The Great Tax Cut Scam of 2017", it had been predicted that the "buyback boom" that followed the 2008 crash was coming to an end: After the Buyback Binge (Barron's, Nov 2017).

Why repurchase stocks? And when buybacks are a bad idea. When a company is doing well, it sometimes makes sense for it to reduce its excess cash-on-hand by buying back its stock. It can signal that the company is doing well financially. But, the second-order consequence is that this artificially raises its "Earnings Per Share" (EPS) ratio of a company. It is that aspect that inspires bad investments. 6 Bad Stock Buyback Scenarios (Investopedia). A CEO who wants to artificially boost the value of company stock can engineer a stock buyback scheme to paper over other deficiencies and boost the value of his own portfolio (especially if his incentive package is based upon EPS). But, increasing EPS doesn't increase fundamental value. Instead it may destabilize an otherwise solid stock (e.g., when the stock becomes overvalued, or the company is overleveraged).

So the tax cuts did what the tax cuts were expected to do.

Trump will personally save up to $15m/year under tax bill, analysis finds
Jared Kushner will save up to $12m, while five other members of Trump’s inner circle will also see benefits worth millions of dollars

justabubba · Aug 1, 2019

strikes me as rational behavior
investing in oneself ... possible since the corporation is a 'person'
where else would one invest if there were no better places to park one's cash?

JustHanging · Aug 1, 2019

Helix said:
Don't worry, guys, it will actually trickle down this time.

I tried googling to see if Trump gave his employees a raise, and couldn't find anything. Do you know if he did?

chuckiechan · Aug 1, 2019

JustHanging said:
I tried googling to see if Trump gave his employees a raise, and couldn't find anything. Do you know if he did?

”The Great Tax Cut Scam of 2017"

all of that blather to avoid the obvious:
A- We dont have a constitutional way to direct private companies how to spend their money. That is what China does.
B- what else are they going to do with it? I suppose they could just leave it there.

There are tax policies and tax goals.

Sampson Simpson · Aug 1, 2019

Obscurity said:
What a ****ing farce. There it is, America. Your foul mouthed, insane president's tax breaks have been exposed as a total fraud. The lies of the right wing about tax breaks are now exposed.

A complete disaster.

What a joke the right wing is.

Sad thing, they are so brainwashed by Fox new and just worship anything they say that they will ignore this, or their favorite, somehow find a way to blame democrats. THese people are truly sick and truly lost. Facts don't matter when they can just make up whatever they want

TU Curmudgeon · Aug 1, 2019

justabubba said:
strikes me as rational behavior

Indeed it IS "rational behaviour".

Once the corporate management owns the majority of the issued shares, then the corporate management has full control over the distribution of the profits that the corporation makes and can direct the majority of those profits into payments to the corporate management. Since the number of people involved in the corporate management of the company (which they might not have invested a dime of their own money into) is highly likely to be much smaller than the number of individual shareholders, that means that the people who constitute the corporate management will be in an excellent position to ensure that the people who have actually invested their own money into the corporation don't receive a proportionate share of the profits.

This, of course, would have a tendency to reduce what people would be willing to pay for the shares in the corporation.

This, of course, would make it easier for the people involved in the corporate management to buy back even more shares.

This cycle could well continue until the corporation owned ALL of the issued shares and became a self-perpetuating income earner for the members of corporate management.

justabubba said:
investing in oneself ... possible since the corporation is a 'person'

Indeed, "investing in oneself" - except that not a dime of the personal money of the people who stand the greatest chance of reaping the benefits of that "investment" would be spent on that "investment".

justabubba said:
where else would one invest if there were no better places to park one's cash?

Indeed, except that it is NOT "one's cash" it is the profits which should be being paid out in dividends that are being used to reduce the liability that the corporation has to pay dividends.

TU Curmudgeon · Aug 1, 2019

chuckiechan said:
B- what else are they going to do with it? I suppose they could just leave it there.

Did you for get the possibility that the corporations could have used the money to actually improve their competitive positions?

chuckiechan said:
There are tax policies and tax goals.

Indeed there are.

Of course there are "announced tax policies and tax goals", "actually intended tax policies and tax goals", "actually achieved results from announced tax policies and tax goals", and "actually achieved results from actually intended tax polities and tax goals".

Anyone who confuses "announced tax policies and tax goals" with "actually achieved results fro actually intended tax policies and tax goals" should have their day passes from "The Home" revoked.

Helix · Aug 1, 2019

JustHanging said:
I tried googling to see if Trump gave his employees a raise, and couldn't find anything. Do you know if he did?

I have no idea. Judging by his past business dealings, they're probably lucky if they got paid at all.

vanceen · Aug 1, 2019

TU Curmudgeon said:
Indeed it IS "rational behaviour".

Once the corporate management owns the majority of the issued shares, then the corporate management has full control over the distribution of the profits that the corporation makes and can direct the majority of those profits into payments to the corporate management. Since the number of people involved in the corporate management of the company (which they might not have invested a dime of their own money into) is highly likely to be much smaller than the number of individual shareholders, that means that the people who constitute the corporate management will be in an excellent position to ensure that the people who have actually invested their own money into the corporation don't receive a proportionate share of the profits.

This, of course, would have a tendency to reduce what people would be willing to pay for the shares in the corporation.

This, of course, would make it easier for the people involved in the corporate management to buy back even more shares.

This cycle could well continue until the corporation owned ALL of the issued shares and became a self-perpetuating income earner for the members of corporate management.

Indeed, "investing in oneself" - except that not a dime of the personal money of the people who stand the greatest chance of reaping the benefits of that "investment" would be spent on that "investment".

Indeed, except that it is NOT "one's cash" it is the profits which should be being paid out in dividends that are being used to reduce the liability that the corporation has to pay dividends.

Share buybacks are not purchases of company shares by management. They are purchases of shares by the corporation.

Shareholders benefit from any share price increases due to buybacks, not management.

I agree that share buybacks can be abused, and are an unimaginative way to spend resources in any case. But they are not an avenue for managers to get more shares. The corporation's shares and the management's shares are entirely separate.

NWRatCon · Aug 1, 2019

vanceen said:
Share buybacks are not purchases of company shares by management. They are purchases of shares by the corporation.

Shareholders benefit from any share price increases due to buybacks, not management.

I agree that share buybacks can be abused, and are an unimaginative way to spend resources in any case. But they are not an avenue for managers to get more shares. The corporation's shares and the management's shares are entirely separate.

You are about half right. About a third of Fortune 500 CEOs have direct ESP clauses and get direct benefits from buybacks, but virtually all of them a) have stock options that will benefit from pushing up the value of the stocks, and b) get "performance" bonuses, directly or indirectly, from the share values. That cannot be discounted.

Zoupish · Aug 1, 2019

chuckiechan said:
all of that blather to avoid the obvious:
A- We dont have a constitutional way to direct private companies how to spend their money. That is what China does.
B- what else are they going to do with it? I suppose they could just leave it there.

There are tax policies and tax goals.

Maybe saying that companies will use significant fractions of tax cuts for increases in hiring and wages is a lie, and has known to be such for a long time.

TU Curmudgeon · Aug 2, 2019

vanceen said:
Share buybacks are not purchases of company shares by management. They are purchases of shares by the corporation.

Quite right, and then the management of the corporation votes the shares that the corporation owns as that management sees fit.

vanceen said:
Shareholders benefit from any share price increases due to buybacks, not management.

Indeed they do. Of course if the management uses the voting control that it has over the shares that the corporation (which they manage) owns then the management is in a really good position manipulate the "profits" that are available for distribution (and thus have a very great influence on the share prices).

vanceen said:
I agree that share buybacks can be abused, and are an unimaginative way to spend resources in any case. But they are not an avenue for managers to get more shares. The corporation's shares and the management's shares are entirely separate.

My argument was not that "management" would - as individuals - OWN more shares, only that "management" - as the administrators of ALL of the corporation's assets - would CONTROL more shares. By the time that the corporation has "bought back" 50% of the issued shares, then the PERSONAL possession of even one share by a member of "management" would give "management" effective control over the whole of the corporation.

Chomsky · Aug 2, 2019

justabubba said:
strikes me as rational behavior
investing in oneself ... possible since the corporation is a 'person'
where else would one invest if there were no better places to park one's cash?

According to Trump & the GOP, the money was supposed to be used to invest in hiring employees.

Threegoofs · Aug 2, 2019

Chomsky said:
According to Trump & the GOP, the money was supposed to be used to invest in hiring employees.

That was obviously just a cover.

One hires as many employees as one needs.

Khayembii Communique · Aug 2, 2019

NWRatCon said:
You are about half right. About a third of Fortune 500 CEOs have direct ESP clauses and get direct benefits from buybacks, but virtually all of them a) have stock options that will benefit from pushing up the value of the stocks, and b) get "performance" bonuses, directly or indirectly, from the share values. That cannot be discounted.

Buybacks don't push up the value of stocks...

Khayembii Communique · Aug 2, 2019

TU Curmudgeon said:
Quite right, and then the management of the corporation votes the shares that the corporation owns as that management sees fit.

Indeed they do. Of course if the management uses the voting control that it has over the shares that the corporation (which they manage) owns then the management is in a really good position manipulate the "profits" that are available for distribution (and thus have a very great influence on the share prices).

My argument was not that "management" would - as individuals - OWN more shares, only that "management" - as the administrators of ALL of the corporation's assets - would CONTROL more shares. By the time that the corporation has "bought back" 50% of the issued shares, then the PERSONAL possession of even one share by a member of "management" would give "management" effective control over the whole of the corporation.

Treasury shares aren't voted.

NWRatCon · Aug 2, 2019

Khayembii Communique said:
Buybacks don't push up the value of stocks...

On what planet?

Phys251 · Aug 2, 2019

NWRatCon said:
This is going to be a complicated post/thread (lots of links, two parts), so bear with me. The gist: Stock buybacks are reaching dangerous levels (CNN)

Over the last two years alone, US Inc. has spent nearly $2 trillion buying back its own stock (compared to $3 trillion over the last 7 years, already considered excessive). Some have referred to this buyback frenzy as a bubble, akin to other financial bubbles that cause stock market and economic volatility. When they burst...When The Stock Buybacks Go Bye-Bye (Forbes). Indeed, just prior to The Great Tax Cut Scam of 2017", it had been predicted that the "buyback boom" that followed the 2008 crash was coming to an end: After the Buyback Binge (Barron's, Nov 2017).

Why repurchase stocks? And when buybacks are a bad idea. When a company is doing well, it sometimes makes sense for it to reduce its excess cash-on-hand by buying back its stock. It can signal that the company is doing well financially. But, the second-order consequence is that this artificially raises its "Earnings Per Share" (EPS) ratio of a company. It is that aspect that inspires bad investments. 6 Bad Stock Buyback Scenarios (Investopedia). A CEO who wants to artificially boost the value of company stock can engineer a stock buyback scheme to paper over other deficiencies and boost the value of his own portfolio (especially if his incentive package is based upon EPS). But, increasing EPS doesn't increase fundamental value. Instead it may destabilize an otherwise solid stock (e.g., when the stock becomes overvalued, or the company is overleveraged).

This is the kind of thing that fuels democratic socialism.

Stock buybacks are reaching dangerous levels

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Stock buybacks are reaching dangerous levels

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