> IBM did 140 billion in stock buy backs in the last decade.

And? What is the alternative, and is it any better?

> IBM has effectively been dead money for the last decade. They’re up 20%, including dividends, versus 315% for the tech index (XLK). IBM currently has a market cap of ~$100 billion, so when people hear they spent $45 billion on buybacks while their share price went down 38%, people get angry. I get it, it’s an easy argument to make.

> But a better argument, which Jake made recently is that poorly managed companies like IBM are doing the right thing by returning cash to shareholders. That’s $45 billion into the hands of investors who can then take that money and actually invest it in companies that are, you know, not terrible. Would the anti-buyback crowd be happier if IBM invested that $45 billion and had a negative ROI? And what about the $76 billion they “wasted” on dividends? Why does this return of capital to shareholders escape criticism? More on this in a minute.

* https://theirrelevantinvestor.com/2020/04/22/returning-cash-...

If IBM invested the money into actual research and product development - that would mean the money still enters the economy via the workers doing the research and development. I feel like this point isn't emphasised well enough in the quote above - and I wonder if the "anti buyback crowd" would have anything to say against that.

Sure, but that would be research done by IBM. That would still be money spent - the researchers still get paid - but it might be less likely to result in usable technology and sellable products than if someone else did it.

The point isn't just to give people money to spend. IBM is not a basic income operation. The point is to develop and make stuff that people want to buy, and IBM arguably has been doing less well at that than others. So letting the money go to the others who are doing better seems like a reasonable plan.

(I doubt that IBM was thinking of it in this way, though...)

That presumes that IBM knows how to create something of value with its R&D department. If the R&D department is just finding faster ways to answer Jeopardy questions, real resources are going to waste. Those smart people could be doing important work somewhere else.

> that would mean the money still enters the economy via the workers doing the research and development.

How much is it IBM's job to have more money 'enter the economy' versus for it to make money for its owners at a good ROI?

Bingo. Would you rather have a poorly managed company hold on to their cash and spend it internally, or return it to shareholders?

> Bingo. Would you rather have a poorly managed company hold on to their cash and spend it internally, or return it to shareholders?

It's not an either/or. A poorly managed company can make itself more dysfunctional by neglecting investment and returning too much cash to shareholders.

A poorly managed company can spend money internally on inappropriate things as well. It's not like IBM doesn't spend on R&D:

* https://www.macrotrends.net/stocks/charts/IBM/ibm/research-d...

AAPL spends on R&D, and dividends, and buybacks.

>Bingo. Would you rather have a poorly managed company hold on to their cash and spend it internally, or return it to shareholders?

I think it's a bunch of bs the way you are wording this. I know these are not your words alone, it's what people say.. but it's so misleading!

You say "return it to shareholders". Well, no. A dividend is returning to shareholders.. that's what a dividend is.

A stock repurchase is basically nothing more than the company buying back stock, and giving holders the option to sell theirs to the company..

The investor can sell the damn stock any time they want... this is NOT "returning it to shareholders".

It is a completely convoluted way to arbitrarily do a bunch of fancy things to both use cash, get stock, prop up the price even more since there is a buy pressure..

> A stock repurchase is basically nothing more than the company buying back stock, and giving holders the option to sell theirs to the company.

The point of a stock repurchase program is to decrease the number of shares on issue and therefore increase the value of each share. Theoretically share price = market cap / shares on issue.

Market cap equals share price times number of shares. But that equation can't be rearranged. Share price equals what the last person was willing to buy the stock at.

Buying back stock does raise the price. But only because it clears out the sellers that are willing to sell at lower prices and leaves the higher ask prices.

You're not giving the whole picture if you don't mention that IBM's market cap has seen very significant decline over that time period.

IBM has been producing insane cash-flow over this period and their strategy was to pay out dividends/buybacks rather than to invest in new markets

Is IBM even getting bailout money? What does IBM have to do with the bailouts?

IBM may or may not be a good example, but I think the overall critique holds here.

Stock buy backs weren't a thing until a SEC rule change in the 80's, this is a relatively new phenomenon and not intrinsic to a functioning market.

Home Depot could have given their employees massive raises with the amount they've spent on buybacks (15 billion in buybacks in February 2019 alone). With ~400,000 employees, that could be a $37,500 bonus to every employee for the year...

The scale of that is breathtaking - and instead of spreading the love around, it goes to the shareholders and C level alone.

>Stock buy backs weren't a thing until a SEC rule change in the 80's, this is a relatively new phenomenon and not intrinsic to a functioning market.

Buybacks and dividends are essentially equivalent. This comment shows a distinct lack of understanding. Of course home depot could return their profits to employees, but then it wouldn't be a business. Home depot's sole reason for existing is to return money to shareholders. If they don't do that leadership would be fired.

Ahh the old "shareholders are the only thing that matters" argument.

Buybacks and dividends are not equivalent, buybacks are tax advantaged in ways that dividends are not.

We've allowed numerous companies to get to a size where they are "too big to fail". They know they are too big to fail, and they get to take advantage of this position. They get to go into near unlimited amounts of debt to finance buybacks to enrich shareholders and C levels, and when times are good this all works out. When the economy enters a downturn and they don't have cash on hand to weather the storm, they know the Fed will be there to bail them out.

Something is fundamentally broken here. You can reasonably argue whether it is with the buybacks, or the bailout, but this system is fucked.

For more in depth reporting on this, I highly recommend checking out Matt Taibbi. https://taibbi.substack.com/p/resetting-the-bomb

Companies like Home Depot and IBM aren't usually considered 'too big to fail', so these aren't really great examples for the point you're trying to make.

Its not that buybacks have a tax advantage, dividendes rather have a tax disadvantage

> Buybacks and dividends are not equivalent, buybacks are tax advantaged in ways that dividends are not.

[citation needed; location specific]

Here in Canada both capital gains and dividends of Canadian companies have special tax treatments.

Also remember: in both cases the money leaving the company are profits, which are (should be?) taxed at the corporate tax rate. So the government should be/is getting a cut already. The recipient of the money (either buyback or dividend) is then getting taxed again(?) potentially.

I still don't get how a stock buyback is functionally any different from a dividend.

Replace dividend with buyback or v versa and everything else is true, except for forced dividend tax.

> Home Depot could have given their employees massive raises with the amount they've spent on buybacks

Each company can decide how they pay their employees. If Home Depot had wanted to pay their employees with stock options, they would have been free to do so.

It turns out it usually works out best for both the company and the employees to receive a fixed amount of cash. If the employee wants to use the cash to buy shares or options, that's up to them.

And dividends/buybacks are a reasonable choice. It moves the choice of whether to invest into new markets to the investors instead of dictating it from above. Companies like Google are blown out of proportion in comparison to the part that actually makes the money, all in order to find the next toothbrush product that may never come. The core Google products barely changed in the last 5 years, yet the employee count almost doubled. Great for the engineers who get the cushy 200k comp jobs, but not great for investors.

Even if we take at face value the idea that the products have barely changed, which I completely disagree with, this explanation vastly underestimates how many engineers it takes to scale the infrastructure it takes to run Google Search, Google Cloud, YouTube, etc.

Saying "Google hasnt changed" is somewhat of a disservice to what Alphabet is. Its an investment firm / publicly traded venture capital stock, and one of their main holdings is Google. Their future growth potential is much more than just Google, despite Google being their current source of revenue. I would hope, over time, Google Ads being 80% of Alphabets revenue drops and drops, and if I were investing in Alphabet that would be the reason, not to buy into Ad Words ownership.

https://www.forbes.com/sites/oliviergarret/2019/09/27/if-you...

> The core Google products barely changed in the last 5 years

Frontend development and UI updates are not the only way progress is made on the technical infrastructure in technology companies. How do we know that Google isn't battling an adversarial web with 1000s of engineers just to keep the search quality where it is? It must be quite an arms race to behold between Google teams and the coordinated and well motivated spammers, scammers and other bad actors (who also might be leveraging automation, AI and more!)

Google annual revenue in billions of dollars[1]:

        Revenue
  2019: 160.74    
  2018: 136.36
  2017: 110.55
  2016:  89.98
  2015:  74.54

Google's stock price is well over double today compared to five years ago--and that's even after the recent volatility. It is quite far ahead of the S&P 500 over those five years.

If you think that's "not great for investors", then I don't know what to tell you.

It's a little hard to eyeball, but profits per employee has been on a long upward trend too, except for 2019, where it fell substantially, but note the revenue gains above--that didn't just magically appear [2].

[1] https://www.statista.com/statistics/266206/googles-annual-gl... [2] https://www.theinformation.com/articles/after-hiring-binges-...

Also great for all the managers and VPs who get to put on their CV that they managed a team of n engineers that worked on X to increase Y key metric by an insignificant amount or that they created a new product that will get the can in 9 months

Part of what allows a company to have insane cashflow is issuing corporate bonds at artificially low prices because the Treasury is manipulated by the Fed.

That doesn't inherently follow at all. It very much depends on the company in question. IBM has a very profitable business and has for the past decade.

They're paying around mid 2.x% interest on their debt ($1.3b interest expense last fiscal year). You can double that rate, and IBM can safely handle the cost. They can afford to pay far higher interest rates on their debt while still producing excellent profitability.

The interest on their debt would be 6-8% if the US Treasury yield wasn't artificially manipulated by the Fed to ~0%.

They'd be paying 3-4x that on interest. That's a decent chunk of their profits / buybacks.

Not sure I follow. What does the US Treasury have to do with private debt issuances? Did you mean that interest rates are manipulated by the Fed?

New Fed programs have been stood up in the last month that directly buy corporate debt.

That’s a Fed program. Fed != Treasury.

What does this have to do with the Treasury?

I think he mis-spoke by typing the Treasury.

I have the impression that onlyrealcuzzo was referring to something longer term than the last month, though.

US Bonds are usually referred to as Treasury bonds, which the Fed buys, to manipulate the yield.

A stock buyback is theoretically the same as a dividend, in that it should reduce market cap by roughly the amount of the buyback.

I do agree with your sentiment though. I feel like the wealthy in this country have developed the perfect scheme for leeching the wealth from this country. We will only know how bad it was after the postmortem, at which point, we will be (figuratively) dead.

Is it too jaded to say that it most likely has always been, for all time? And that we are simply more aware of it these days?

I think it's more subtle now, though, and harder to be aware of.

Back in the day, robber-barons simply exploited the working class through substandard working conditions, and outright theft of money or property [citation needed].

Now, though, you need a deep understanding of global monetary policy, tax law, and labor laws to be able to connect the dots.

So I would argue that now is different from earlier times in history, because those who are exploiting the system have finally figured out how to a) hide it well enough, and b) co-op members of the classes being exploited to fight for those doing the exploiting through misdirection and propaganda.

That's the craziest part of all of this. The exploited actively support the politicians who cause maximum exploitation and vilify those who would actually help them. It's insane.

Isn't that why they are politicians though? Because they were able to promise one thing to the masses and deliver another to their funders? If they were bad at that, they wouldnt get propped up.

Honestly, it just doesn't make sense. And my experience, when you sit down with, and I'm going to say extremely conservative people because they are the ones I would put in this category, and explain it to them using facts, they just dig in their heels and ignore you. Humans. What weird things.

Source: I talk politics with family all the time; I'm vilified as the weirdo, brainwashed, college liberal in a family of conservatives.

Only it isn’t the same. Dividends are taxable, capital gains are only taxable upon closing a position.

Ok, so it's even better than a dividend. That would explain why it's used.

Yes. The reason I say theoretically is because, from a business perspective, they aren't different. Whether you buy your own stock or distribute a dividend shouldn't matter from a market cap perspective. It's still cash the company used to have, but no longer does and the market cap will reflect both equally.

Now some investors prefer buybacks for tax reasons, others may not. It depends entirely upon how they invest. If you're a buy-and-hold, then it's favorable due to lack of taxes, but if you rebalance a lot (which most mutual funds do), then it doesn't matter.

>A stock buyback is theoretically the same as a dividend

I don't think that is true at all.

A dividend is literally "We are paying out some amount of cash. If our stock price is $40 and we give $5 to each shareholder the shares should immediately go down to $35". Although since the stock price should be a NPV of the company's cash flow, they technically have even less working capital to create returns over the years, so I think the price should go down by even more than $5.. but that's a different discussion...

In a stock buyback.. let's say the price is $40 and they buy the equivalent of $5 back from the market. Well.. yes they gave away $5 but they also gained $5 of value because they are now holding the shares. It's a net zero transaction if their stock price doesn't change from it. Which.. it shouldn't unless you think it's a signal of something. Yes there's a bit more details, but value is not "given away" in the same sense.

In the dividend example, the company gave away money.

In a stock repurchase, they gave away money in return for shares of (almost) equal value.

When companies do buybacks they don't control the shares they buyback, the shares disappear. The market cap of the company decreases because they know have less assets but the stock price doesn't because the cap is split over less shares. Either way, the market cap theoretically decreases by the amount paid out.

21st century IBM is effectively a labor arbitrage firm. They buy labor in low cost countries and sell it in high cost countries. They are not the platform tech company they were in the 60s to the 80s. Labor arbitrage can be a good business, but there is much more competition than in platform technology. The competition constrains both profits and growth.

I’m not sure what your last paragraph has to do with the first three.

A main purpose of buying a stock is to receive dividend payments. Buybacks are just a tax efficient dividend.

The latest craze to make paying dividends sound evil is just strange.

Paying dividends is fine if you aren't firing workers or taking bailouts.

Why is firing workers inconsistent with paying dividends? They kind of feel like two sides of the same coin: a company can't find a better return on its capital so it divests itself of the resource (labor or cash).

It's not. It's just that these companies shouldn't get handouts.

Buy back stocks in the good times, issue new stock when the going gets rough.

Right now it's "buy back stocks in the good times, get bailouts then the bad times come".

One strategy is dividends.

Another is to buy a stock at X, sell later at Y and hope Y > X

Both are valid. Oddly they are taxed differently.

> Oddly they are taxed differently.

Most dividends are treated as 'qualified,' meaning that they are taxes as LT cap gains. So in that respect, the tax treatment is the same as selling the appreciated stock at a profit.

The big difference is that you're forced to pay taxes on a dividend the year you receive it, while you can theoretically defer capital gains taxes forever in a reinvestment scenario. Practically speaking though, most people own mutual funds that rebalance every year or so (think, S&P500 index fund), and pay out LT Cap Gains quarterly/yearly. So for most investors, there's not a huge difference between the two.

Additionally, there are schemes to allow for different tax treatment on dividends, such as capital dividends or stock dividends.

However this saves us from inflation, since the money circulates among the wealthy and corporations rather than among the common person.

It also puts assets with positive rates of return out of the hands of the common person. Kind of like how an overheated housing market makes it so you'll never own a home and are stuck paying rent forever. If you ever wanted to own a piece of America's economy and get dividends in the future, now it's priced out of reach. This inflation in investment assets further cements the division between those that have to work 9-5 for a living, and those that have enough investments to live off their returns and not worry about becoming destitute. Jumping that gap between renter and owner is harder than ever.

Precisely right.

That's why printing cash (whether in the form of UBI or any other cash printing social program) is not a sustainable solution for lifting people out of poverty or building a healthy economy. There are always negative long term effects that end up hurting the poor and middle classes even more. Even if there's not inflation of consumer goods, there's inflation of investment grade assets.

I don't think this is a sound argument for further enriching the rich and leaving the common person to struggle. An oligarchy is not a desirable model any more than a monarchy is.

it doesn't save us from inflation, it just changes the path it takes. Rich people buy stuff too, which employee us peasants. But by the time us peasants see the money, its already inflated so we don't get the benefits.

Yes.... they have a small market cap because they are returning cash to shareholders. That is literally the idea of a buyback - to shrink the market cap.

Wouldn't a stock buyback reduce the number of outstanding shares, but keep market capitalization roughly constant? The company has less cash, but it has bought an asset of equal value with it (the shares).

Companies aren't allowed to hold shares in themselves. Once the shares are purchased the company cancels them.

Hard to disentangle monetary policy from political policy. They are strongly interlinked.

Sure but what does it matter if it's "monetary policy" or "political policy"? They work hand in glove and as @mywittyname aptly states above:

"...I feel like the wealthy in this country have developed the perfect scheme for leeching the wealth from this country."

The perfect scheme involves a bailout mechanisms without question. And too many Americans are falling for the scheme with hands out for a piece of welfare from the wealthy. They are selling out the future of their country in exchange for a pittance in the process.

The scheme doesn't stop, it only exacerbates as long as the bailouts continue...bailouts for wall street, bailouts for mains street, bailouts for every day individuals = all part the scheme by design.

I'm in constant awe of how many otherwise intelligent people can't grasp the role that these "bailouts" play in perpetuating the inequality gap. That, or they happen to be on a certain side of things and don't want to know what it's like to be on the other when the gravy-train stops flowing...

Oh I agree with all your conclusions. However, I think politicians have leveraged monetary policy to gain political points for decades. Rather than tell people we have to cut programs and we have to live within our means, we've got an endless series of wars and unsustainable social programs that don't work in a world where a large chunk of the population is old (boomers), while the young population have inherited a consumption-based economy that is currently eating itself. Other countries are failing, too. It's not a unique feature of the U.S. We're going to see a lot of nation-states struggle under the weight of their existing programs when the debt-fueled growth stops. People have lost all sense of sustainable fiscal and monetary policy.

Spot on

I watched an interview on YouTube with Stephen A. Schwarzman from 'The Blackstone Group' which was really eye opening. There is a part where he explains how to multiply ROI on any investment using bank loans https://www.youtube.com/watch?v=7kThTbLUQdU

When you take into account that the credit is printed by banks out of thin air (and more so given the latest 0% reserve requirement), it's not difficult to see why the ROI surplus derived from this 'magic trick' (as Schwarzmam refers to it) is basically free money.

Corporations and financial firms with a lot of capital have access to huge loans on favorable terms; this puts them on a different playing field than small companies which don't have much capital and can't use this 'magic trick' to multiply their earnings in the same way. Earning 30% ROI is simply not possible for most individuals and small businesses.

I suspect this is the same trick which Renaissance Technologies uses for their 'Medallion fund' to hit 66% ROI per year on average... Maybe they're able to take loans against collateral owned by their other mainstream funds.

If I have $1K in cash and I can find a bank to loan me an additional $5K... If I invest that in an asset which returns just 10% per year, given the 0% interest rate environment, I can make $600 per year in pure profit on my investment... Which is 60% ROI! Anyone can be a legendary investor... You just need to find a bank which can give you 5x leverage.

These leveraged loans which yield free surplus ROI are impossible for small businesses to access. This is why they're fundamentally unfair. The efficiency advantages of economies of scale are greatly exaggerated. The real advantage is mostly financial.

And remember, that 'leverage' credit was printed out of thin air by the bank... So any extra profit which can be derived from it by an individual or company is by definition also 'printed out of thin air'... Especially when you know you're going to get bailed out every 10 years when things go wrong - There is no risk.

If you want to take the risk of losing a multiple of sectors losses, its incredibly easy to invest in leveraged etfs. They take out loans at 2x their value, and buy 2 more shares of everything inside. So they sit on 3x stock and 2x debt.

http://www.direxion.com/leveraged-inverse-etfs

https://www.proshares.com/3xetfs/

https://www.investopedia.com/articles/investing/020816/top-1...

Look at something like TQQQ, which is 50% FAAAMIN stocks 3x. Was a 488% return in the last 5 years till the crash, now its at 330%. Regular QQQ is only up 192%.