Stock BuyBacks Effectiveness

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DTalos
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Stock BuyBacks Effectiveness

Post by DTalos »

If a company announces they are going to be doing stock buybacks over a certain period of time, how effective generally is it in increasing the price of the stock? Why would a company choose this approach vs increasing dividend or other methods to make a stock more attractive for investors?
alex_686
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Re: Stock BuyBacks Effectiveness

Post by alex_686 »

Very effective. In theory the value of a stock is based on the Free Cashflow to Equity. It does not matter if that cash is in dividends or buybacks. This has been more or less shown empirically.

While from first order effects they are the same, there are 2nd order impacts.

Buybacks are more tax efficient.

Investors prefer steady dividends, perhaps irrationally. They constitutionally overvalue of the certainty. Companies are afraid of cutting dividends, taking on debt and forgoing long term profitability projects to keep the cash pumping.
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Scooter57
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Re: Stock BuyBacks Effectiveness

Post by Scooter57 »

Buybacks only work if the company is also growing its sales and profits. Companies that rely on buybacks to raise their stock price when their business is stagnant are throwing away their money.

Check out the history of IBM's many billions of dollars of buybacks and the sorry results for shareholders.
Ocean77
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Re: Stock BuyBacks Effectiveness

Post by Ocean77 »

Warren Buffet has a good way to think about it, which he has explained several times in his meetings: Stock buybacks make sense only if the shares currently trade at less than what he calls the intrinsic value of the business. In that regard, it is not all that different than any other investment decision. If you overpay for the asset, you are going to get a lower return on the investment. Even if you are buying your own stock.

If the criteria is met and the shares retired can be bought at below or at least par value, then a stock buyback can be more effective than a dividend, due to the tax treatment. If not, then not. There have been plenty of examples of companies buying back shares at inflated prices, to boost the share price. Those gains are then usually short lived.
TJSI
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Re: Stock BuyBacks Effectiveness

Post by TJSI »

Buybacks provide significant buying pressure which is one of the prime reasons for increased valuations.

The major drawback for buybacks is that they provide cover for new issuance which is largely given to corporate executives. New issuance is something like 97% of share buybacks. That is why corporation executives like them. New shares and buying pressure-- hard to resist.
7eight9
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Re: Stock BuyBacks Effectiveness

Post by 7eight9 »

Examining Corporate Priorities: The Impact of Stock Buybacks on Workers, Communities and Investors
Stock buybacks are virtually unregulated, even though Congress has recognized their potential for market manipulation. Importantly, there are currently no meaningful limits to stop executives from using corporate money on stock buybacks to raise share prices for their own short-term gain. Executives are not required to disclose that they have conducted a buyback until the next quarter’s filing; meanwhile, there are no substantive limits to stop them from selling their own personal shares in the same quarter as they are conducting buybacks.

Read more at --- https://corpgov.law.harvard.edu/2019/10 ... investors/
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Bulgogi Head
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Re: Stock BuyBacks Effectiveness

Post by Bulgogi Head »

If one has $100 in a company’s stock that pays 2% dividend, that investor’s total would grow to $102. But if the company did a share buyback instead, what would happen to that investor’s total?
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Re: Stock BuyBacks Effectiveness

Post by grabiner »

Bulgogi Head wrote: Thu Jun 10, 2021 9:09 pm If one has $100 in a company’s stock that pays 2% dividend, that investor’s total would grow to $102. But if the company did a share buyback instead, what would happen to that investor’s total?
The first premise is wrong. When a stock pays a dividend, the share price will decrease by the dividend amount (plus or minus any other movements). If you are willing to sell a stock for $100 today and it will pay a $2 dividend, you must expect that the stock will be worth only $98 tomorrow, since you are selling the right to have one share of stock and $2 in cash. Another reason that the share price should decline is that the ex-dividend corporation is less valuable because it has less cash.

Buybacks do not inherently increase or decrease the share price; the corporation has less cash, but also fewer shares. This is the reason for the discussion in this thread; executives with stock options prefer buybacks over dividends.
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WarAdmiral
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Re: Stock BuyBacks Effectiveness

Post by WarAdmiral »

DTalos wrote: Thu Jun 10, 2021 4:18 pm If a company announces they are going to be doing stock buybacks over a certain period of time, how effective generally is it in increasing the price of the stock? Why would a company choose this approach vs increasing dividend or other methods to make a stock more attractive for investors?
The management gets compensated in stocks - so it is in their interest for the stock price to increase. Also, with stock sale - they control the capital gains taxes. Dividends on the other hand are forced upon you and so is their taxation.

Also as mentioned upthread stock buybacks have to happen below intrinsic value otherwise it's value destroying.
E.g. GE bought $10B worth of it's own stock at the wrong time. It stock price still got decimated. End Result - $10B wasted.

Another Reason for Stock Buyback is to reduce the increased dilution of stocks due to buying another company.
alex_686
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Re: Stock BuyBacks Effectiveness

Post by alex_686 »

Scooter57 wrote: Thu Jun 10, 2021 5:41 pm Buybacks only work if the company is also growing its sales and profits. Companies that rely on buybacks to raise their stock price when their business is stagnant are throwing away their money.

Check out the history of IBM's many billions of dollars of buybacks and the sorry results for shareholders.
I think you are missing the point. Why are you singling out the billions of dollars on buybacks but not the billions of dollars on dividends? If a business is stagnant, should they reinvest profits in that stagnant business or distribute the cash to shareholders?
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alex_686
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Re: Stock BuyBacks Effectiveness

Post by alex_686 »

grabiner wrote: Thu Jun 10, 2021 9:27 pm
Bulgogi Head wrote: Thu Jun 10, 2021 9:09 pm If one has $100 in a company’s stock that pays 2% dividend, that investor’s total would grow to $102. But if the company did a share buyback instead, what would happen to that investor’s total?
The first premise is wrong. When a stock pays a dividend, the share price will decrease by the dividend amount (plus or minus any other movements). If you are willing to sell a stock for $100 today and it will pay a $2 dividend, you must expect that the stock will be worth only $98 tomorrow, since you are selling the right to have one share of stock and $2 in cash. Another reason that the share price should decline is that the ex-dividend corporation is less valuable because it has less cash.

Buybacks do not inherently increase or decrease the share price; the corporation has less cash, but also fewer shares.
To extend a bit, dividends and buybacks are almost identical from a accounting standpoint.

Suppose a company has a market capitalization of 100m and it distributes 10m in cash to the share holders. It should now have a market cap of 90m. If it doesn't than the CFO has magicked money out of the air.

Does it matter if the distribution is in the form of dividends or buybacks? No. Dividends will keep the number of shares constant but decrease the price. Buybacks keep the price constant but reduces the number of shares. You can play around with the numbers of shares and the price, but you need to wind up with a market cap of 90.
grabiner wrote: Thu Jun 10, 2021 9:27 pmThis is the reason for the discussion in this thread; executives with stock options prefer buybacks over dividends.
This is somewhat false. This was trueish 20 years ago. Then activist investors and boards caught on. Most compensation contracts are now written so you can't game the system that way.
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Yesterdaysnews
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Re: Stock BuyBacks Effectiveness

Post by Yesterdaysnews »

In 2020, Apple spent something like $7-8B in capex investing in the business and a spent a lot more to buy back stock. Helped the stock price but is it good for the business long term ?

Amazon otoh spent nearly $50B in capex investing in the business.

Imagine a company spending $50 billion dollars in a year building stuff for the business….

I know which company I would bet on for the long term.
Scooter57
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Re: Stock BuyBacks Effectiveness

Post by Scooter57 »

alex_686 wrote: Fri Jun 11, 2021 1:33 pm
Scooter57 wrote: Thu Jun 10, 2021 5:41 pm Buybacks only work if the company is also growing its sales and profits. Companies that rely on buybacks to raise their stock price when their business is stagnant are throwing away their money.

Check out the history of IBM's many billions of dollars of buybacks and the sorry results for shareholders.
I think you are missing the point. Why are you singling out the billions of dollars on buybacks but not the billions of dollars on dividends? If a business is stagnant, should they reinvest profits in that stagnant business or distribute the cash to shareholders?
IBM spent over 140 Billion on stock buybacks between 2000 and the firing of Ginny Rometty. This was far more than what they spent on dividends. They took on a huge debt load to finance those buybacks, too.Then they divested division after division. Those buybacks were of very little use to any stockholder who held the stock as the price did not respond to those buybacks. Only those who sold profited by the artificial, and very temporary boost in price. At least the stockholder who received a dividend had the option to take their share of the company's profits and reinvest them in something more promising.

But the whole idea that it is wise for a stagnant company to use its profits for buybacks is deeply flawed. If a business is stagnant, they should invest their profits into hiring the best and brightest employees, exploring new business opportunities, and moving the company out of stagnancy. Instead, IBM invested in a single, extremely dated publicity stunt (Watson, a cousin of the Master Computer beloved by 1950s SF writers), fired all its brightest long-term employees who took with them the company's culture, ability to innovate, and fine work ethic, and replaced them with mediocre offshored talent They thend relied on those billions of dollars of buybacks to juice the stock price. Foolish.

Imagine if Apple had taken the same path in 1997 when its Mac business was stagnating. But luckily for American stockholders, Apple was smart enough to know it needed an infusion of genius and completely new ideas about where to take the business.

IBM could have taken the same approach, it had the resources. But it had been taken over during the 1980s by guys in suits who had come up from sales and had little understanding of technology and who also had the salesman's attitude of "promise them anything to get the sale and don't worry about what you sell them."

Bottom line: A company that relies on buybacks to boost share price is a company that has run out of ideas and has no interest in finding new ones. Investors should not be applauding this approach as in the long run it is going to damage their returns.
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Re: Stock BuyBacks Effectiveness

Post by TJSI »

I need to correct my statement above. New issuance is not 97% of buyback volume; it is more like 40-50%.

What is true is that the reduction in shares does not contribute greatly to EPS growth. According to JPMorgan share reduction for the 20 years 1999-2019 contributed .4% to EPS growth while the total growth rate was 2.5%.

However new shares issued to company employees are often not sold immediately so the buying pressure of buybacks is considerable. Indeed it is often the leading source of equity demand.

How this all plays out is unknown. Since about 2008 buybacks have grown in importance and have been a significant source of increased demand.
Perhaps it results in a secular increase in valuation with some violent corrections.
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Re: Stock BuyBacks Effectiveness

Post by toast0 »

Scooter57 wrote: Fri Jun 11, 2021 5:25 pmOnly those who sold profited by the artificial, and very temporary boost in price. At least the stockholder who received a dividend had the option to take their share of the company's profits and reinvest them in something more promising.
If you're holding stock, you have the option to sell it at any time (while it's trading anyway); it's just a question of defaults and tax treatment. If you get a dividend and reinvest it, you're in nearly the same place as a buyback, except you owe taxes immediately (so you hold less) and your new holding has a new holding period. There's maybe a difference in transparency or timeliness of information, but if you really wanted to make things equal, you could figure out the cash dividend equivalent when a company does a buy back, and sell that much of your stock in the company and invest it as you choose.
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Re: Stock BuyBacks Effectiveness

Post by phantom0308 »

Buybacks are good for tax efficiency. The video below explains a lot more pros and a couple cons of share buybacks.
https://youtu.be/rVTHRvNpsFs
CuriousTacos
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Re: Stock BuyBacks Effectiveness

Post by CuriousTacos »

There are a handful of hypotheses and anecdotes in this thread that are critical of buybacks. Many of them sound reasonable. If they are generally true and/or widespread, then we should expect to see some under-performance of companies that heavily use buybacks.

S&P released a study looking at that. Here's a link to it, and the full pdf.

Here are some excerpts:
Over a long-term investment horizon, buyback portfolios generated positive excess returns over their benchmark indices in the large-, mid-, and small-cap segments of the U.S. market.

Compared with the S&P 500 Dividend Yield portfolio, the S&P 500 Buyback Index had higher returns [11.5% vs 9.9%] and higher volatility [19.2% vs 18.9%, so only slightly] over the periods examined. Surprisingly, however, the S&P 500 Dividend Yield portfolio recorded a greater maximum drawdown than the S&P 500 Buyback Index. The S&P 500 Shareholder Yield portfolio recorded slightly higher return [12.1%] and lower volatility [18.8%] than the S&P 500 Buyback Index over the same period.

[T]he S&P 500 Buyback Index (which is in the U.S. large-cap space) tends to include more stocks from cyclical than defensive sectors...In contrast to the S&P 500 Buyback Index, the S&P 500 Dividend Yield portfolio was overweight in Utilities and Real Estate and underweight in Information Technology and Health Care for most of the period observed. Sector composition of the S&P 500 Shareholder Yield portfolio is a mix of the two, but it is more tilted toward the S&P 500 Buyback Index.

The historical growth and value composition of the S&P 500 Buyback Index shows that the index had a value tilt before 2003, and it has acquired a balance between growth and value since then. This may result from the increase of Information Technology stocks in the S&P 500 Buyback Index since 2003
I do not present this to suggest anyone should tilt towards some "buyback" index (in fact, their "shareholder yield" portfolio looks even better, which probably means Quality and/or Profitability factors are more important anyway). Their buyback portfolio represents different sectors of the market compared to their dividend portfolio (or the S&P 500), so it's hard to compare directly. My point is that whatever criticisms people may have with buybacks do not appear to be common enough to cause an obvious under-performance in companies that use them heavily. I'm sure some companies use them poorly. I'm sure some companies use dividends poorly. I do like their tax advantages over dividends though.

Again, this study isn't perfect. But to the critics of buybacks, I'd be interested if you know of a better study that supports your point of view.
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Re: Stock BuyBacks Effectiveness

Post by btraven »

All IBM guys wore suits in the 50s, 60s, and 70s, BTW, including engineers. Not sports coats, suits
Scooter57
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Re: Stock BuyBacks Effectiveness

Post by Scooter57 »

btraven wrote: Sat Jun 12, 2021 12:55 am All IBM guys wore suits in the 50s, 60s, and 70s, BTW, including engineers. Not sports coats, suits
It depended on where you were. Big cities, yes. Manufacturing plants in out of the way places like Essex Junction VT, no.
Scooter57
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Re: Stock BuyBacks Effectiveness

Post by Scooter57 »

CuriousTacos wrote: Sat Jun 12, 2021 12:00 am There are a handful of hypotheses and anecdotes in this thread that are critical of buybacks. Many of them sound reasonable. If they are generally true and/or widespread, then we should expect to see some under-performance of companies that heavily use buybacks.

S&P released a study looking at that. Here's a link to it, and the full pdf.

Here are some excerpts:
Over a long-term investment horizon, buyback portfolios generated positive excess returns over their benchmark indices in the large-, mid-, and small-cap segments of the U.S. market.

Compared with the S&P 500 Dividend Yield portfolio, the S&P 500 Buyback Index had higher returns [11.5% vs 9.9%] and higher volatility [19.2% vs 18.9%, so only slightly] over the periods examined. Surprisingly, however, the S&P 500 Dividend Yield portfolio recorded a greater maximum drawdown than the S&P 500 Buyback Index. The S&P 500 Shareholder Yield portfolio recorded slightly higher return [12.1%] and lower volatility [18.8%] than the S&P 500 Buyback Index over the same period.

[T]he S&P 500 Buyback Index (which is in the U.S. large-cap space) tends to include more stocks from cyclical than defensive sectors...In contrast to the S&P 500 Buyback Index, the S&P 500 Dividend Yield portfolio was overweight in Utilities and Real Estate and underweight in Information Technology and Health Care for most of the period observed. Sector composition of the S&P 500 Shareholder Yield portfolio is a mix of the two, but it is more tilted toward the S&P 500 Buyback Index.

The historical growth and value composition of the S&P 500 Buyback Index shows that the index had a value tilt before 2003, and it has acquired a balance between growth and value since then. This may result from the increase of Information Technology stocks in the S&P 500 Buyback Index since 2003
I do not present this to suggest anyone should tilt towards some "buyback" index (in fact, their "shareholder yield" portfolio looks even better, which probably means Quality and/or Profitability factors are more important anyway). Their buyback portfolio represents different sectors of the market compared to their dividend portfolio (or the S&P 500), so it's hard to compare directly. My point is that whatever criticisms people may have with buybacks do not appear to be common enough to cause an obvious under-performance in companies that use them heavily. I'm sure some companies use them poorly. I'm sure some companies use dividends poorly. I do like their tax advantages over dividends though.

Again, this study isn't perfect. But to the critics of buybacks, I'd be interested if you know of a better study that supports your point of view.
This study seems pretty meaningless to me. The impact of the Financial crisis on dividend paying banks and of the issues confronted this decade by he dividend paying huge oil stocks which once dominated the S&P 500 play a huge role in their long-term under-performance that has nothing to do with the fact that these companies were paying dividends. The index has "acquired a balance between growth and value" since 2003 because Apple, Microsoft which alone make up 11% of the S&P 500's value by weight started paying dividends. These companies have become mature companies whose actual earnings growth rate bears no relationship to their prices which are still being valued as if they were still aggressive growth stocks.

This "study" does not seem to distinguish between companies that permanently decreased share count with buybacks and those that did buybacks and then issued more stock (which is common with growth companies that pay execs and skilled employees with stock options.) You would also want to see whether companies that outperformed also raised sales and profits during the same period or whether the outperformance was entirely due to manipulating the share count.

What I would really like to see is a study that looks at what corporationshave done with the huge loans they have taken out during this period of suppressed rates. How much of that borrowed money went into building up the business for the future by hiring talent, investing in R&D, and developing new product lines, and how much was squandered on buybacks to manipulate prices and enrich execs who cashed out their shares. Those loans are still pending and are a huge overhang over the market and the economy as a whole. The execs who enriched themselves selling their options into buybacks will have moved on by the time it is time to refinance those loans, so they don't have to care. But buy and hold shareholders who are saving for retirement may reap the fruits of all that borrowing and reckless spending.
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Re: Stock BuyBacks Effectiveness

Post by CuriousTacos »

Scooter57 wrote: Sat Jun 12, 2021 11:29 am This study seems pretty meaningless to me.
I challenge you to find something better. I'm open to it being wrong, but hypotheses that are contradicted by the data are even more meaningless. As I said before, if your hypotheses are correct, it shouldn't be hard to find under-performance among stocks that use buybacks.
Scooter57 wrote: Sat Jun 12, 2021 11:29 am ...long-term under-performance that has nothing to do with the fact that these companies were paying dividends.
But that's exactly my point- whether a company uses dividends or buybacks is not likely to matter (to pre-tax returns). I've never said that a company should do worse because they pay dividends, or that a company should do better because they use buybacks. I've simply argued that there's a burden of proof to suggest that companies that use buybacks have done or will do worse.
Scooter57 wrote: Sat Jun 12, 2021 11:29 am This "study" does not seem to distinguish between companies that permanently decreased share count with buybacks and those that did buybacks and then issued more stock (which is common with growth companies that pay execs and skilled employees with stock options.) You would also want to see whether companies that outperformed also raised sales and profits during the same period or whether the outperformance was entirely due to manipulating the share count.
If enough companies did the things you are concerned about and/or if these companies performed poorly enough, then they would have dragged down the performance of the group, but that was not evident (at least not to a degree worth worrying about).
Scooter57 wrote: Sat Jun 12, 2021 11:29 am What I would really like to see is a study that looks at what corporations have done with the huge loans they have taken out during this period of suppressed rates. How much of that borrowed money went into building up the business for the future by hiring talent, investing in R&D, and developing new product lines, and how much was squandered on buybacks to manipulate prices and enrich execs who cashed out their shares. Those loans are still pending and are a huge overhang over the market and the economy as a whole. The execs who enriched themselves selling their options into buybacks will have moved on by the time it is time to refinance those loans, so they don't have to care. But buy and hold shareholders who are saving for retirement may reap the fruits of all that borrowing and reckless spending.
It sounds like your argument has shifted from claiming that buyback companies (like IBM) have performed poorly in the past, to the hypothesis that buyback companies may have performed just fine, but they are set to collapse. You are free to do what you want, but since this is the bogleheads forum, the assumption here is that we buy the haystack (and to suggest otherwise requires something very convincing).

So, can you clarify what you are trying to say? Is it that people shouldn't invest in companies that use buybacks? Is it that people should screen out the few companies that use them poorly? Is it that people should invest in companies that pay dividends? Is it just a complaint that there are probably some companies out there that use them poorly even though there's nothing actionable since we don't know which in advance?
Scooter57
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Re: Stock BuyBacks Effectiveness

Post by Scooter57 »

CuriousTacos wrote: Sat Jun 12, 2021 2:12 pm
It sounds like your argument has shifted from claiming that buyback companies (like IBM) have performed poorly in the past, to the hypothesis that buyback companies may have performed just fine, but they are set to collapse. You are free to do what you want, but since this is the bogleheads forum, the assumption here is that we buy the haystack (and to suggest otherwise requires something very convincing).
Since this is Bogleheads it is important that some people challenge cult-like beliefs that are stated as absolute facts and might not be true. Bogle was not an ideologue or a cult leader. His emphasis on investing with low expenses was a lot more important back in the 1980s when I started investing with Vanguard. Back then ERs were well above 1% for most funds and trading costs for buying individual stocks were extremely high. In a world where most ETFs now trade at ERs well below .5% and even more under .06% the emphasis on costs no longer has the same impact on an investor's results.

Bogle also invented the index fund, which when it appeared was a wonderful invention for retail investors. He hated ETFs seeing, rightly, that they would lead to frenzied trading, which is exactly what has happened. Bogle's bond funds have only existed during the long period when interest rates declined and during much of which longer bond funds dependably were capable of yielding more than stocks. He isn't here to tell us what he thinks of the current situation.

Some Bogleheads buy the entire haystack. Far more slice and dice, pursue the latest academic fad (take Factors, puleeze), and since they post here on a daily basis seem to obsess about investing in a way that is completely counter to the whole idea of simplifying investing and using the time that frees up for something else.
So, can you clarify what you are trying to say? Is it that people shouldn't invest in companies that use buybacks? Is it that people should screen out the few companies that use them poorly? Is it that people should invest in companies that pay dividends? Is it just a complaint that there are probably some companies out there that use them poorly even though there's nothing actionable since we don't know which in advance?
What I'm trying to say is that there is a belief often repeated on this forum that buybacks are far better for shareholders than dividends or putting that money to work improving the business. I would like to make people think a bit about the subtleties involved with the current overuse of buybacks and the relationship of buybacks to ever increasing debt, because it is very possible the long term result of companies taking on enormous amounts of debt use to fund buybacks to produce short term market price increases will damage long term investor returns when refinancing that debt becomes a burden.

People who invest following ideologies they haven't carefully thought out have great difficulty sticking to their theses when things get rough. So I like to question what "everyone" believes and introduce ideas that might not have been considered.
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Re: Stock BuyBacks Effectiveness

Post by Da5id »

Scooter57 wrote: Sun Jun 13, 2021 5:54 pm What I'm trying to say is that there is a belief often repeated on this forum that buybacks are far better for shareholders than dividends or putting that money to work improving the business.
Where is this stated? Feels a bit straw man to me. Can you give some of the "often repeated" examples of people stating that "buybacks are far better for shareholders than dividends or putting that money to work improving the business"? I think people here don't often express strong opinions on whether a business should invest the money internally or return it to the investors. That obviously depends on the industry, the maturity of the company, and opportunities that the company sees to productively use the money. If a company is returning capital to investors, I think the most common sentiment is that dividends and buybacks are equivalent in tax sheltered accounts, buybacks are modestly (not far) better in taxable due to the tax drag. But that trying hard to avoid dividends is not a productive idea.

And, all that said, you didn't answer his question. He had a study saying that buybacks don't appear to damage companies returns. He was wondering if you had any study suggesting that they in fact hurt returns, particularly in any way that is exploitable by investors. Do you know of such a study? I prefer arguments that are backed by some sort of data myself.
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Re: Stock BuyBacks Effectiveness

Post by Scooter57 »

Da5id wrote: Sun Jun 13, 2021 7:53 pm
Scooter57 wrote: Sun Jun 13, 2021 5:54 pm What I'm trying to say is that there is a belief often repeated on this forum that buybacks are far better for shareholders than dividends or putting that money to work improving the business.
Where is this stated? Feels a bit straw man to me. Can you give some of the "often repeated" examples of people stating that "buybacks are far better for shareholders than dividends or putting that money to work improving the business"? I think people here don't often express strong opinions on whether a business should invest the money internally or return it to the investors. That obviously depends on the industry, the maturity of the company, and opportunities that the company sees to productively use the money. If a company is returning capital to investors, I think the most common sentiment is that dividends and buybacks are equivalent in tax sheltered accounts, buybacks are modestly (not far) better in taxable due to the tax drag. But that trying hard to avoid dividends is not a productive idea.
Google is your friend. Use the Google site search atop this page for "Buybacks better than dividends" and you will see dozens of threads where people argue precisely this.
Da5id wrote: Sun Jun 13, 2021 7:53 pm And, all that said, you didn't answer his question. He had a study saying that buybacks don't appear to damage companies returns. He was wondering if you had any study suggesting that they in fact hurt returns, particularly in any way that is exploitable by investors. Do you know of such a study? I prefer arguments that are backed by some sort of data myself.
The kinds of studies you are looking for are back testing. As I pointed out earlier, there are severe methodological flaws that make it impossible to account for variables that have major impact on outcomes and correlate with buy backs and or dividends. If you tilt your investing based on academic back testing you are going to leave a lot of money on the table. They do a great job of describing the past but you have to use your head looking forward. The companies dominating the markets today are not those of years ago and business practices are not the same either.
Da5id
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Re: Stock BuyBacks Effectiveness

Post by Da5id »

Scooter57 wrote: Mon Jun 14, 2021 3:19 pm
Da5id wrote: Sun Jun 13, 2021 7:53 pm
Scooter57 wrote: Sun Jun 13, 2021 5:54 pm What I'm trying to say is that there is a belief often repeated on this forum that buybacks are far better for shareholders than dividends or putting that money to work improving the business.
Where is this stated? Feels a bit straw man to me. Can you give some of the "often repeated" examples of people stating that "buybacks are far better for shareholders than dividends or putting that money to work improving the business"? I think people here don't often express strong opinions on whether a business should invest the money internally or return it to the investors. That obviously depends on the industry, the maturity of the company, and opportunities that the company sees to productively use the money. If a company is returning capital to investors, I think the most common sentiment is that dividends and buybacks are equivalent in tax sheltered accounts, buybacks are modestly (not far) better in taxable due to the tax drag. But that trying hard to avoid dividends is not a productive idea.
Google is your friend. Use the Google site search atop this page for "Buybacks better than dividends" and you will see dozens of threads where people argue precisely this.
I read many of those threads on an ongoing basis. I believe you will have trouble finding many (any?) who make the claim " that buybacks are far better for shareholders than dividends or putting that money to work improving the business". If you wish to defend your claim, sounds good. If not, guess it is rather straw man as I said.
Scooter57 wrote: Mon Jun 14, 2021 3:19 pm The kinds of studies you are looking for are back testing. As I pointed out earlier, there are severe methodological flaws that make it impossible to account for variables that have major impact on outcomes and correlate with buy backs and or dividends. If you tilt your investing based on academic back testing you are going to leave a lot of money on the table. They do a great job of describing the past but you have to use your head looking forward. The companies dominating the markets today are not those of years ago and business practices are not the same either.
So trust your assertion? Look, somebody posted a study that seemed plausible to me that buybacks don't hurt returns taken as a whole. Given that buybacks have long since eclipsed dividends as a way to return capital, I'd have expected the damage you are claiming is being done would have shown up and could be demonstrated by some analysis. "use your head looking forward" seems pretty weak to me.
MAKsdad
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Re: Stock BuyBacks Effectiveness

Post by MAKsdad »

As a shareholder, I always want buybacks over dividends. I like to control when I'm taxed as much as possible.
alex_686
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Re: Stock BuyBacks Effectiveness

Post by alex_686 »

Da5id wrote: Sun Jun 13, 2021 7:53 pm
Scooter57 wrote: Sun Jun 13, 2021 5:54 pm What I'm trying to say is that there is a belief often repeated on this forum that buybacks are far better for shareholders than dividends or putting that money to work improving the business.
Where is this stated? Feels a bit straw man to me. Can you give some of the "often repeated" examples of people stating that "buybacks are far better for shareholders than dividends or putting that money to work improving the business"? I think people here don't often express strong opinions on whether a business should invest the money internally or return it to the investors. That obviously depends on the industry, the maturity of the company, and opportunities that the company sees to productively use the money. If a company is returning capital to investors, I think the most common sentiment is that dividends and buybacks are equivalent in tax sheltered accounts, buybacks are modestly (not far) better in taxable due to the tax drag. But that trying hard to avoid dividends is not a productive idea.

And, all that said, you didn't answer his question. He had a study saying that buybacks don't appear to damage companies returns. He was wondering if you had any study suggesting that they in fact hurt returns, particularly in any way that is exploitable by investors. Do you know of such a study? I prefer arguments that are backed by some sort of data myself.
I will take a stab at this. I have never said this, but I have said things adjacent.

Modigliani-Miller published their landmark Capital Structure Theory back in the 50s. Won them a Nobel, basic foundational stuff for finance & investment theory. Empirically this has largely been born out.

One of the conclusions was that dividends were irrelevant. Now, they make a fair number of highly restrictive assumptions. Things become more interesting when you start relaxing these assumptions.

They ignored taxes. If you consider tax drag, stock buy backs have a much lower drag than dividends. Buy backs are a clear winner here.

They also simplified investor's risk tolerance. A rational investor should be indifferent to a steady dividend rate, a chaotic dividend rate, or a large lump sum dividend down the pike. Examples. a company borrowing money to pay a steady dividend rate even if they have a recent string of negative earnings. A company paying out a steady percentage of their dividends. A company not paying dividends and instead investing in new projects or paying down debt.

Here the empirical evidence is more mixed. There is a chicken-and-egg problem. Stock prices and dividends go up together. Is it because the dividend increased so the stock is more valuable? Or does the increase in dividends a signal by management that they are highly confident in the company's future, so the perceived risk decreases, implying a falling Equity Risk Premium, and thus a higher stock? It is hard to detangle the 2, but it looks like many investors but a very high informational value on dividends.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
Da5id
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Re: Stock BuyBacks Effectiveness

Post by Da5id »

alex_686 wrote: Mon Jun 14, 2021 3:47 pm I will take a stab at this. I have never said this, but I have said things adjacent.

Modigliani-Miller published their landmark Capital Structure Theory back in the 50s. Won them a Nobel, basic foundational stuff for finance & investment theory. Empirically this has largely been born out.

One of the conclusions was that dividends were irrelevant. Now, they make a fair number of highly restrictive assumptions. Things become more interesting when you start relaxing these assumptions.

They ignored taxes. If you consider tax drag, stock buy backs have a much lower drag than dividends. Buy backs are a clear winner here.

They also simplified investor's risk tolerance. A rational investor should be indifferent to a steady dividend rate, a chaotic dividend rate, or a large lump sum dividend down the pike. Examples. a company borrowing money to pay a steady dividend rate even if they have a recent string of negative earnings. A company paying out a steady percentage of their dividends. A company not paying dividends and instead investing in new projects or paying down debt.

Here the empirical evidence is more mixed. There is a chicken-and-egg problem. Stock prices and dividends go up together. Is it because the dividend increased so the stock is more valuable? Or does the increase in dividends a signal by management that they are highly confident in the company's future, so the perceived risk decreases, implying a falling Equity Risk Premium, and thus a higher stock? It is hard to detangle the 2, but it looks like many investors but a very high informational value on dividends.
I guess it depends on the meaning of "buybacks are far better"? If dividends were really bad (compared to buybacks), presumably many bogleheads would/should advocate taking active steps to avoid dividends in taxable (even to the point of disliking VTI, which does throw off modest dividends). Dividends aren't *that* bad for most people though. Qualified dividends are taxed modestly (and for some income levels, not taxed at all). You'd have thought if the difference were so stark there would be more buyback focused funds etc to address the "serious issue" that dividends present?

I modestly prefer buybacks in my taxable account. Don't care at all in my tax sheltered accounts, which is where most of my money lies. Are dividends really "far worse"? I guess that is a quantitative question and again depends on the meaning of "far" to you.
sureshoe
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Re: Stock BuyBacks Effectiveness

Post by sureshoe »

Since the beginning of time, companies have been trying to find ways to signal to investors "I'm worth more than you think".

If you're asking, "does a company buying stocks signal that a company's shares are going to overperform", then the simple answer is "no". For some companies it's a good use of excess cash. For others, it's just another bad decision in a series of bad decisions by bad management.

Companies do the same thing with dividends, debt pay down, whatever. They're constantly trying to signal strength.

To any extent that buybacks are a "good signal", it's already priced in by a company having excess cash/etc.
alex_686
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Joined: Mon Feb 09, 2015 2:39 pm

Re: Stock BuyBacks Effectiveness

Post by alex_686 »

Da5id wrote: Mon Jun 14, 2021 4:04 pm I guess it depends on the meaning of "buybacks are far better"? If dividends were really bad (compared to buybacks), presumably many bogleheads would/should advocate taking active steps to avoid dividends in taxable (even to the point of disliking VTI, which does throw off modest dividends). Dividends aren't *that* bad for most people though. Qualified dividends are taxed modestly (and for some income levels, not taxed at all). You'd have thought if the difference were so stark there would be more buyback focused funds etc to address the "serious issue" that dividends present?
Well, generally you are looking at the impact on price and volatility.

You can compare the impact in different tax regimes. Different time periods, different countries or some combination of the 2.

Obviously you are looking at the relative differences, and since we are talking about second order stuff it is going to be relatively minor.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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