#5 borrow to buyback stock

Company buying back stock should increase the price of the stock. In some cases executives in company may take advantage of inflated price to cash in stock options at a higher price which isn't good for other stock holders. Beyond that I don't know but I don't see much of an upside otherwise. When a company does something that doesn't have a transparent upside I start to wonder.

We seem to be seeing a decoupling of stock price from intrinsic value of companies which doesn't seem to be a good thing. I suspect index funds for instance may contribute to this. Stock buy backs may do the same thing?

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They constantly try to escape from the darkness outside and within
Dreaming of systems so perfect that no one will need to be good T.S. Eliot

6. give employees a bonus
7. give executives a bonus

1. give executives a bonus

There are two situations where it gets demonized.

The first was mentioned, loading up the company with debt to buy back stock in order for a specific group of people to suck money out of the company to the long term detriment of the company.

The second is when the sequence goes like this:

1 - Targeted tax cuts or deregulation sold as necessary to boost wages or create jobs
2 - Profit
3 - Stock buybacks
4 - Stock price boosted to create a short term increase in the value of stock options for a very small group of people
5 - Layoffs

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I'm beginning to think that we are much more fucked than I thought.

^This

4 - Stock price boosted to create a short term increase in the value of stock options for a very small group of people


Though this sounds like it could easily happen, reality is the small group would have to wait for the large group to pass on the short term increase in order to harvest the gain.

As a former executive in a publicly traded company, there were about 6 weeks a year that I could freely trade the stock I owned. They all began 3 days after we reported quarterly earnings and ran for about a week and a half. The rest of the time, I was locked out of any trade. An announcement of a stock buyback couldn't happen and occur in this short window, and if it was tried would result in a shareholder investigation and likely an SEC investigation.


Now executives may do a buyback in the hopes of selling and making money, but any current stock holder would have a head start.

The problem is that most most corporate buybacks are being funded with debt at the moment. If the money were coming exclusively out of free cash flow I might be inclined to agree with you. Off the top of my head, the only two companies capable of funding their buybacks with cash or cashflow are Apple and Chipotle. In the case of the latter, they're buying back stock at an implied rate of return of <2% while they're negotiating leases where the annual rental premium they're paying to get TI from the landlord is on the order of 30%. IMO that's irresponsible but it's far less irresponsible than the (many) already over-indebted companies borrowing to buy back their own stock.

This is the result of a bad incentive structure in corporate governance and over-saturated credit markets.

On the corporate governance side, it's very common for executive pay to be tied to the performance of the stock price. What's the easiest way to goose a stock's price? Buy it! Buy a lot of it! So corporate executives are, by and large, doing what's best for their own personal bottom line not necessarily the longterm interests of shareholders.

It takes two to tango and the other party in this is a credit market that's saturated for cash hunting for yield. Specifically, U.S. pensions have been lending either directly or indirectly to the corporations buying back their own stock. They're doing this in an attempt to chase yield and maybe some of the more clever managers realize they're temporarily goosing the value of equities they already own but I doubt many of them have thought about how this plays out in the long run. All they're focused on is returning 7.5% and having the right "balance" of assets, long-term risks be damned.

Right, but if it's a sustained program you've got a pretty good idea as to how it will affect your compensation. IMO, Disney's program of paying executives based on ROIC is a far better model than paying on stock price performance.

8. Take company private.
9. Build company to #1 in sector.
10. Take company public...again...because you have a MASSIVE estate problem.

Yes, and its mostly the second, as far as I can tell, and its not management who should be demonised (they are responsible to their shareholders) but policy makers.

Traditional economic theory would say that, the US economy being highly responsive to domestic demand, a great way to boost economic activity is to get more money in the hands of the (relatively) poor who have a high propensity to spend.

That's anathema to GOP dogma, which holds that jobs are created by rich people and companies, so that's where tax cuts and benefits are directed. There is plenty of evidence that much of the recent corporate tax cuts went into buybacks - further benefiting the relatively wealthy, hence the criticism.

Turns out that companies weren't aching to build new facilities and hire more people, if only they could get lower taxes. They don't because demand isn't sufficient, because low & middle class earners still have their belts cinched pretty tight, and their share of the economic pie is near historic lows.

Can't find the exact story I am looking for with a quick google. And this is not exactly a stock buy back but very similar.



Nationwide Insurance is a mutual. So no stock. But they had an affiliated company that WAS publicly traded. Many NW Insurance upper executives got bonuses in the form of stock options for MW Financial and served dual roles in both companies. In 2008, as you can imagine the financial services company had some difficulty with it's stock price. Which as you can imagine made stock options less than profitable. Jerry Jurgensen was then CEO of NW Insurance. Somehow the board was convinced to buy NF at a price that was admitted to be a $500 million premium over the stock price, in late 2008. This yielded the CEO $23.5 million. NF lost $200 million+ in the 3 quarters before the purchase. 3000 people were laid off that year.

ETA - found this story which was written after the CEO was fired but quotes many of the things noted in the original story which was written a month or two earlier- https://www.dispatch.com/...90221/news/302219746

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I'm beginning to think that we are much more fucked than I thought.

Your middle class investor with a 401k who bothered to think about it probably concludes that stock buybacks benefit him proportionately equal to the ones making the decisions.

Of course when you are compensated in options and stock performance that is plainly - or perhaps I should say mathematically - untrue.

From a simple case study: Apple has become addicted to the buyback and I think they are suffering a little bit because of it. They clearly missed on demand for the earbuds, they are not in position to ramp up production because they simply don't have the facilities, and as a consequence 3rd parties are making a killing selling $400 accessories that cost $30 to make.

So a real life example is Warren Buffett and IBM.

Pretty much since he made his heavy investment in IBM he pushed stock buybacks jacking up the stock price an depriving their R&D dept. Then he made his move and sold all of Berkshire Hathaway's stake in IBM. Now IBM is struggling to increase revenue because their R&D dept was underfunded for years. But they beat EPS target for years even during the recession!

6- bankruptcy screwing all creditors.
7- same people that loaded company up with debt and pulled out wads of cash in debt fueled stock buybacks buy the exact same company out of bankruptcy after shedding the debt through bankruptcy for round two.

See Sears

https://www.google.com/...tml%3foutputType=amp

Creditors getting less than 4% of what they are owed. Retirees screwed. Execs on round two of milking the cash cow. The greed is impressive. I think it’s finally crossing a line.

I don't think stock buy backs are inherently wrong, it is just moronic to give a massive corporate tax cut when there is already a historic stock buy back going on. All that will mean is the tax cut will just fuel more stock buy back, which is just a waste of a tax cut, because all it does is raise stock prices. It won't lead to more jobs.

This looks like it was a bonus based on stock price. Now could that be manipulated? Yes. But it depends on how the bonus was paid. If it's cash. Yes. If it's options that are vested over years. Getting them at $200 each and then watching them crash to $10 isn't playing the system very well.

Not sure exactly. My wife had a breakfast awards thing he was speaking at the day before the first article came out. He tried to get in front of it saying the article would sound bad but it really isn't. Board wasn't buying it either.

The question I always had was where was the board when the purchase was approved?

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I'm beginning to think that we are much more fucked than I thought.