Has the US bull become addicted to corporate buybacks?

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Ron Scott
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Has the US bull become addicted to corporate buybacks?

Post by Ron Scott » Sun Oct 14, 2018 8:40 am

CNN had an interesting piece on the how the markets have fared this year with the huge uptick in buyback programs.

1. Corporate buybacks now account for the largest share of trading in US stocks, surpassing individual and institutional buying.
2. This year corporations will buy back more than $1 trillion in stock, a record.
3. The hiatus on buybacks during corporate blackout periods appear to contribute to short-term downdrafts in the US market, i.e., buybacks support the market while blackout periods allow at least a brief freefall.
4. Q418 looks to be HUGE for buybacks, so some will recommend you buckle-up.

While something tells me this doesn't have a happy ending, the only long-term downside I'm concerned so far is a trend to support short-term share growth at the expense of real business investments that will drive value going forward. (But that's ALWAYS a concern with unimaginative leadership...)

Thoughts?
Retirement is a game best played by those prepared for more volatility in the future than has been seen in the past. The solution is not to predict investment losses but to prepare for them.

petulant
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Re: Has the US bull become addicted to corporate buybacks?

Post by petulant » Sun Oct 14, 2018 8:43 am

Link the article?

marcopolo
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Re: Has the US bull become addicted to corporate buybacks?

Post by marcopolo » Sun Oct 14, 2018 8:49 am

Ron Scott wrote:
Sun Oct 14, 2018 8:40 am
CNN had an interesting piece on the how the markets have fared this year with the huge uptick in buyback programs.

1. Corporate buybacks now account for the largest share of trading in US stocks, surpassing individual and institutional buying.
2. This year corporations will buy back more than $1 trillion in stock, a record.
3. The hiatus on buybacks during corporate blackout periods appear to contribute to short-term downdrafts in the US market, i.e., buybacks support the market while blackout periods allow at least a brief freefall.
4. Q418 looks to be HUGE for buybacks, so some will recommend you buckle-up.

While something tells me this doesn't have a happy ending, the only long-term downside I'm concerned so far is a trend to support short-term share growth at the expense of real business investments that will drive value going forward. (But that's ALWAYS a concern with unimaginative leadership...)

Thoughts?
I do find it a bit troublesome that companies do not see more productive ways to invest thise dollars (research, new business investments). But, I think a lot of the growth in buybacks has come from what used to be paid out in higher dividend rates than we see today. This makes sense if you think about how incentives are aligned. First, it can be more tax efficient for the recipient. Second, stock options reward share price growth, but typically not dividends.
Once in a while you get shown the light, in the strangest of places if you look at it right.

Ron Scott
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Re: Has the US bull become addicted to corporate buybacks?

Post by Ron Scott » Sun Oct 14, 2018 9:06 am

petulant wrote:
Sun Oct 14, 2018 8:43 am
Link the article?
Much of what they write is excerpted from video, but...
https://www.cnn.com/2018/10/14/investi ... index.html
Retirement is a game best played by those prepared for more volatility in the future than has been seen in the past. The solution is not to predict investment losses but to prepare for them.

Valuethinker
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Re: Has the US bull become addicted to corporate buybacks?

Post by Valuethinker » Sun Oct 14, 2018 9:12 am

Ron Scott wrote:
Sun Oct 14, 2018 8:40 am
CNN had an interesting piece on the how the markets have fared this year with the huge uptick in buyback programs.

1. Corporate buybacks now account for the largest share of trading in US stocks, surpassing individual and institutional buying.
2. This year corporations will buy back more than $1 trillion in stock, a record.
3. The hiatus on buybacks during corporate blackout periods appear to contribute to short-term downdrafts in the US market, i.e., buybacks support the market while blackout periods allow at least a brief freefall.
4. Q418 looks to be HUGE for buybacks, so some will recommend you buckle-up.

While something tells me this doesn't have a happy ending, the only long-term downside I'm concerned so far is a trend to support short-term share growth at the expense of real business investments that will drive value going forward. (But that's ALWAYS a concern with unimaginative leadership...)

Thoughts?
The empirical evidence is that companies that buy back stock create more shareholder value than those that don't. Remember all the tech companies buy back stock, pretty much.

This is all in the work of Michael Jensen of Harvard Business School, if you google his work. In particular the 1976 paper. And it's what Buffett does - he only makes an investment/ buys another business if he sees it as a good use of capital, otherwise he buys back shares (in place of ever paying a dividend). Managers fear hostile takeovers, so they buy back stock to keep the stock price up - benefiting shareholders. An LBO is nothing more than the extreme version of it (a public company buys back 100% of its stock from its shareholders - see "Barbarians at the Gate").

BUT, and Aswarth Damodaran (NYU prof) has some stuff on his site, there's also a problem about alignment of interests.

Stock related incentives have encouraged managers to favour buybacks (over dividends, or wasteful corporate investments and acquisitions). Those incentives for senior management have become almost universal.

And I think the balance of evidence is that companies don't buy back stock when the price is low (Berkshire Hathaway might be an exception). They tend to buy it back when it's high. Thus in 2009 net stock buybacks were negative (more equity was issued in aggregate than was bought back). Now? Cos are buying back lots of stock.

it may be that by incentivizing managements in this shareholder-friendly way, things have now reached the point that good investments are not made by companies. Certainly Amazon is now famous for taking a long term, loss-leading, view of new investment opportunities. And they don't fear a hostile takeover nor does Bezos demand a dividend. In addition, management are incentivized to buy back stock even if they think it is overvalued.

A related problem is that cheap corporate debt means companies can borrow money to buy back stock. Possibly leaving them financially over extended with high debt loads in the next downturn.

My gut is this problem will come home to roost, but not until the next recession and corporate cash flow starts to fall - whenever that is.

KlangFool
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Re: Has the US bull become addicted to corporate buybacks?

Post by KlangFool » Sun Oct 14, 2018 9:50 am

OP,

Do you believe what was posted in the article? Aka, the market is not necessarily efficient. It is subject to manipulation like stock buyback. If you do, what are you going to do about this?

The logical conclusion would be 100% passive index investing may not be the right way to go. Then, you need some form of active management.

In my case, the answer is very simple:

A) Warren Buffett -> BRK.A or BRK.B

Just go with the best. But, I do not like the no dividend policy.

B) Wellington Fund or Wellesley Fund.

I decide to go with Wellington fund.

My portfolio is

1) 40% active managed via Wellington Fund

2) 40% passive index via the 3 funds portfolio

3) 20% Larry -> 10% small cap value + 10% Intermediate Term Treasury

KlangFool

ignition
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Re: Has the US bull become addicted to corporate buybacks?

Post by ignition » Sun Oct 14, 2018 9:54 am

Valuethinker wrote:
Sun Oct 14, 2018 9:12 am
Ron Scott wrote:
Sun Oct 14, 2018 8:40 am
CNN had an interesting piece on the how the markets have fared this year with the huge uptick in buyback programs.

1. Corporate buybacks now account for the largest share of trading in US stocks, surpassing individual and institutional buying.
2. This year corporations will buy back more than $1 trillion in stock, a record.
3. The hiatus on buybacks during corporate blackout periods appear to contribute to short-term downdrafts in the US market, i.e., buybacks support the market while blackout periods allow at least a brief freefall.
4. Q418 looks to be HUGE for buybacks, so some will recommend you buckle-up.

While something tells me this doesn't have a happy ending, the only long-term downside I'm concerned so far is a trend to support short-term share growth at the expense of real business investments that will drive value going forward. (But that's ALWAYS a concern with unimaginative leadership...)

Thoughts?
The empirical evidence is that companies that buy back stock create more shareholder value than those that don't. Remember all the tech companies buy back stock, pretty much.

This is all in the work of Michael Jensen of Harvard Business School, if you google his work. In particular the 1976 paper. And it's what Buffett does - he only makes an investment/ buys another business if he sees it as a good use of capital, otherwise he buys back shares (in place of ever paying a dividend). Managers fear hostile takeovers, so they buy back stock to keep the stock price up - benefiting shareholders. An LBO is nothing more than the extreme version of it (a public company buys back 100% of its stock from its shareholders - see "Barbarians at the Gate").

BUT, and Aswarth Damodaran (NYU prof) has some stuff on his site, there's also a problem about alignment of interests.

Stock related incentives have encouraged managers to favour buybacks (over dividends, or wasteful corporate investments and acquisitions). Those incentives for senior management have become almost universal.

And I think the balance of evidence is that companies don't buy back stock when the price is low (Berkshire Hathaway might be an exception). They tend to buy it back when it's high. Thus in 2009 net stock buybacks were negative (more equity was issued in aggregate than was bought back). Now? Cos are buying back lots of stock.

it may be that by incentivizing managements in this shareholder-friendly way, things have now reached the point that good investments are not made by companies. Certainly Amazon is now famous for taking a long term, loss-leading, view of new investment opportunities. And they don't fear a hostile takeover nor does Bezos demand a dividend. In addition, management are incentivized to buy back stock even if they think it is overvalued.

A related problem is that cheap corporate debt means companies can borrow money to buy back stock. Possibly leaving them financially over extended with high debt loads in the next downturn.

My gut is this problem will come home to roost, but not until the next recession and corporate cash flow starts to fall - whenever that is.
I thought amazon hasn't done a stock buyback for over 6 years.

Valuethinker
Posts: 36385
Joined: Fri May 11, 2007 11:07 am

Re: Has the US bull become addicted to corporate buybacks?

Post by Valuethinker » Sun Oct 14, 2018 10:22 am

ignition wrote:
Sun Oct 14, 2018 9:54 am
Valuethinker wrote:
Sun Oct 14, 2018 9:12 am
Ron Scott wrote:
Sun Oct 14, 2018 8:40 am
CNN had an interesting piece on the how the markets have fared this year with the huge uptick in buyback programs.

1. Corporate buybacks now account for the largest share of trading in US stocks, surpassing individual and institutional buying.
2. This year corporations will buy back more than $1 trillion in stock, a record.
3. The hiatus on buybacks during corporate blackout periods appear to contribute to short-term downdrafts in the US market, i.e., buybacks support the market while blackout periods allow at least a brief freefall.
4. Q418 looks to be HUGE for buybacks, so some will recommend you buckle-up.

While something tells me this doesn't have a happy ending, the only long-term downside I'm concerned so far is a trend to support short-term share growth at the expense of real business investments that will drive value going forward. (But that's ALWAYS a concern with unimaginative leadership...)

Thoughts?
The empirical evidence is that companies that buy back stock create more shareholder value than those that don't. Remember all the tech companies buy back stock, pretty much.

This is all in the work of Michael Jensen of Harvard Business School, if you google his work. In particular the 1976 paper. And it's what Buffett does - he only makes an investment/ buys another business if he sees it as a good use of capital, otherwise he buys back shares (in place of ever paying a dividend). Managers fear hostile takeovers, so they buy back stock to keep the stock price up - benefiting shareholders. An LBO is nothing more than the extreme version of it (a public company buys back 100% of its stock from its shareholders - see "Barbarians at the Gate").

BUT, and Aswarth Damodaran (NYU prof) has some stuff on his site, there's also a problem about alignment of interests.

Stock related incentives have encouraged managers to favour buybacks (over dividends, or wasteful corporate investments and acquisitions). Those incentives for senior management have become almost universal.

And I think the balance of evidence is that companies don't buy back stock when the price is low (Berkshire Hathaway might be an exception). They tend to buy it back when it's high. Thus in 2009 net stock buybacks were negative (more equity was issued in aggregate than was bought back). Now? Cos are buying back lots of stock.

it may be that by incentivizing managements in this shareholder-friendly way, things have now reached the point that good investments are not made by companies. Certainly Amazon is now famous for taking a long term, loss-leading, view of new investment opportunities. And they don't fear a hostile takeover nor does Bezos demand a dividend. In addition, management are incentivized to buy back stock even if they think it is overvalued.

A related problem is that cheap corporate debt means companies can borrow money to buy back stock. Possibly leaving them financially over extended with high debt loads in the next downturn.

My gut is this problem will come home to roost, but not until the next recession and corporate cash flow starts to fall - whenever that is.
I thought amazon hasn't done a stock buyback for over 6 years.
First and last sentence of that paragraph refer to company managements in general.

Amazon is an exception because it is controlled by its largest shareholder who does not require cash distributions.

I imagine they buy back enough shares to offset the dilution from exercise of stock options. Almost every company does.

Ron Scott
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Re: Has the US bull become addicted to corporate buybacks?

Post by Ron Scott » Sun Oct 14, 2018 11:58 am

KlangFool wrote:
Sun Oct 14, 2018 9:50 am
OP,

Do you believe what was posted in the article? Aka, the market is not necessarily efficient. It is subject to manipulation like stock buyback. If you do, what are you going to do about this?
I do not believe in the EMH or in my ability to beat the market. There is no contradiction here.

I'm going to continue my ~40-60 without rebalancing and with just a bit too much in one stock (previous employer that's the bomb) and head out to the beach. I "predict" it's going to rain tomorrow and I'm jonsing for a long walk.
Retirement is a game best played by those prepared for more volatility in the future than has been seen in the past. The solution is not to predict investment losses but to prepare for them.

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David Jay
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Re: Has the US bull become addicted to corporate buybacks?

Post by David Jay » Sun Oct 14, 2018 1:05 pm

Ron Scott wrote:
Sun Oct 14, 2018 8:40 am
1. Corporate buybacks now account for the largest share of trading in US stocks, surpassing individual and institutional buying.
2. This year corporations will buy back more than $1 trillion in stock, a record.
Something is wrong with the assertion in Item 1 above. It is not believable that “buybacks account for the largest share of trading in US stocks”. There must be some additional qualifier that was not included when the item was transcribed.

This is clarified by Item 2, one trillion a year, or about 4 billion a day, isn’t even close to the level of institutional trading in US stocks. A quick check shows that there was $196 billion trades on the Nasdaq on Friday, October 11. That is just the Nasdaq. Then we have the NYSE, Amex and all the other exchanges. I suspect that the total volume of all trades of US stock approaches a Trillion a day. Buybacks are a trillion a year. Some thing is off.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

bhsince87
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Re: Has the US bull become addicted to corporate buybacks?

Post by bhsince87 » Sun Oct 14, 2018 1:29 pm

In the big picture, "wasting" money on buybacks is no different than "wasting" money on dividends.

But for many shareholders, the buy backs offer a tax advantage.

And what exactly does this mean?: "4. Q418 looks to be HUGE for buybacks, so some will recommend you buckle-up."

If it's going to be huge, we should be buying more stocks, right?
Retirement: When you reach a point where you have enough. Or when you've had enough.

drk
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Re: Has the US bull become addicted to corporate buybacks?

Post by drk » Sun Oct 14, 2018 1:39 pm

I don't think that buybacks are the problem so much as debt-financed buybacks. Companies have taken full advantage of high debt ratings and low interest rates.

Ron Scott
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Re: Has the US bull become addicted to corporate buybacks?

Post by Ron Scott » Sun Oct 14, 2018 2:09 pm

David Jay wrote:
Sun Oct 14, 2018 1:05 pm
Ron Scott wrote:
Sun Oct 14, 2018 8:40 am
1. Corporate buybacks now account for the largest share of trading in US stocks, surpassing individual and institutional buying.
2. This year corporations will buy back more than $1 trillion in stock, a record.
Something is wrong with the assertion in Item 1 above. It is not believable that “buybacks account for the largest share of trading in US stocks”. There must be some additional qualifier that was not included when the item was transcribed.

This is clarified by Item 2, one trillion a year, or about 4 billion a day, isn’t even close to the level of institutional trading in US stocks. A quick check shows that there was $196 billion trades on the Nasdaq on Friday, October 11. That is just the Nasdaq. Then we have the NYSE, Amex and all the other exchanges. I suspect that the total volume of all trades of US stock approaches a Trillion a day. Buybacks are a trillion a year. Some thing is off.
It does seem off... Here's the quote, which does quality my original working as "buying" vs. "trading". The link is above.

Here's a little-known fact: The biggest buyer of shares during the bull market hasn't been individual investors nor large institutions. It's been Corporate America itself.

Encouraged by low rates and record profits, US companies have bought back $4.3 trillion of their own stock since 2009, according to Yardeni Research. That enormous source of demand has helped the S&P 500 to quadruple off its financial crisis low.

...and continues...

Buybacks have been especially powerful lately. Flush with excess cash from tax cuts and the strong economy, US companies are on track to repurchase $1 trillion of stock this year for the first time ever, according to Goldman Sachs. Last month Goldman Sachs even warned that the looming blackout period posed a "near-term risk" to the market.
Retirement is a game best played by those prepared for more volatility in the future than has been seen in the past. The solution is not to predict investment losses but to prepare for them.

jminv
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Re: Has the US bull become addicted to corporate buybacks?

Post by jminv » Sun Oct 14, 2018 2:21 pm

Ron Scott wrote:
Sun Oct 14, 2018 2:09 pm
David Jay wrote:
Sun Oct 14, 2018 1:05 pm
Ron Scott wrote:
Sun Oct 14, 2018 8:40 am
1. Corporate buybacks now account for the largest share of trading in US stocks, surpassing individual and institutional buying.
2. This year corporations will buy back more than $1 trillion in stock, a record.
Something is wrong with the assertion in Item 1 above. It is not believable that “buybacks account for the largest share of trading in US stocks”. There must be some additional qualifier that was not included when the item was transcribed.

This is clarified by Item 2, one trillion a year, or about 4 billion a day, isn’t even close to the level of institutional trading in US stocks. A quick check shows that there was $196 billion trades on the Nasdaq on Friday, October 11. That is just the Nasdaq. Then we have the NYSE, Amex and all the other exchanges. I suspect that the total volume of all trades of US stock approaches a Trillion a day. Buybacks are a trillion a year. Some thing is off.
It does seem off... Here's the quote, which does quality my original working as "buying" vs. "trading". The link is above.

Here's a little-known fact: The biggest buyer of shares during the bull market hasn't been individual investors nor large institutions. It's been Corporate America itself.

Encouraged by low rates and record profits, US companies have bought back $4.3 trillion of their own stock since 2009, according to Yardeni Research. That enormous source of demand has helped the S&P 500 to quadruple off its financial crisis low.

...and continues...

Buybacks have been especially powerful lately. Flush with excess cash from tax cuts and the strong economy, US companies are on track to repurchase $1 trillion of stock this year for the first time ever, according to Goldman Sachs. Last month Goldman Sachs even warned that the looming blackout period posed a "near-term risk" to the market.
Almost $40 trillion in stocks were traded in the USA last year (what I see from a quick search on world banks data tool). It’s interesting how a mere drop in the bucket (4.3 trillion in the last 9 years or averaged out to a little more than 1% of annual trades) is spun as an ‘enormous source of demand’ for headlines. Of course it’s a one way trip, they buy it and that’s it so you could argue it’s different, I suppose but it’s still not some huge source of demand on the buy side.

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JoMoney
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Re: Has the US bull become addicted to corporate buybacks?

Post by JoMoney » Sun Oct 14, 2018 2:41 pm

I would rather see things tied to growing the business intrinsically, more R&D, more stores/factories, more employees. Although, massive investments in new technology booms have been problematic as well.

If the companies are sitting on cash without clearly better internal investment options, paying it out to investors through dividends and buybacks makes sense. I'm relatively agnostic on what price level is acceptable for share repurchases, I'm still accumulating stocks, and would just be re-investing dividends anyway.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Re: Has the US bull become addicted to corporate buybacks?

Post by boglerdude » Mon Oct 15, 2018 12:23 am

Do buybacks put a floor on the share price? With the company always there to buy at X price

garlandwhizzer
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Re: Has the US bull become addicted to corporate buybacks?

Post by garlandwhizzer » Mon Oct 15, 2018 12:32 pm

boglerdude wrote:

Do buybacks put a floor on the share price? With the company always there to buy at X price
No. In order for buybacks to occur, corporations have to have excess cash on the balance sheet or be able to borrow it cheaply. Bear markets are generally associated with recessions, a time when corporate finances are stressed, excess cash on the balance sheet disappears along with corporate profits and credit availability decreases. At such times few corporations buyback their own shares even though they are one sale. The historical market timing record of corporate buybacks is actually quite poor. Corporations, like individuals, tend not to buy stock when it goes on sale but rather to increase purchases when they are flush with money and stock is expensive. Buybacks tend to raise stock prices in an ongoing bull market like ours, but they do not provide a floor on price declines when you need it most in a bear market.

Garland Whizzer

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