Halls of Shrewd'm / US Policy❤
No. of Recommendations: 7
The fictions about buybacks are widespread and are driven as much by ideological blinders as they are by a failure to understand what a business is, and how to operate it. The first is that buybacks can increase or decrease the value of a business, with buyback advocates making the former argument and buyback critics the latter. They are both wrong since buybacks can only redistribute value, not create it. The second is that surge in buybacks has been fed by debt financing, and it is part of a larger and darker picture of over-levered companies catering to greedy, short-term shareholders. The third is that buybacks are bad for an economy, with the logic that the cash that is being used for the buybacks is not being invested back in the business, and that the latter is better for economic growth. The final argument is that the large buybacks at US companies represent cash that is being taken away from other stakeholders, including employees and customers, and is thus unfair.
https://seekingalpha.com/article/4585887-data-upda...An excellent article with loads of data on buybacks and dividends across a business's life cycle.
No. of Recommendations: 7
In the article Damodaran says,
"It is true that some companies buy back stock at high prices, and if that is your reason, as a shareholder in the company for taking a stand against buybacks,
I have a much simpler and more effective response than banning buybacks. Just sell your shares back and be on the right side of the redistribution game!"
LOL!
So if you own META, or GOOG, or Cisco, or Amazon, or Pepsi, or Nvidia, or American Airlines, or AT&T or the S&P500, or any of the hundreds of companies that are literally incinerating capital by buying back overvalued shares (some with borrowed money!)....you should, "Just sell your shares back and be on the right side of the redistribution game!"
OK wonderful advice, thanks for that.
In 2018, according to Yardeni Research, borrowing funded 56% of that year's record buybacks. (Insane right? Look it up.)
In 2022 buybacks reached a record high of $1.2 trillion. Yeah, that's trillion with a T! And in 2022 the Buffett indicator was in the 180%-200% range. (Overpay much?)
That's the range that Warren has called "playing with fire"...
https://www.youtube.com/watch?v=2n-lVaZYYXk
No. of Recommendations: 2
Correction to above post, in 2022 the Buffett indicator was in the 150%-190% range, not 180%-200% as stated.
Still well overvalued and not a time for buybacks on a grand scale...
"If the ratio approaches 200% as it did in 1999 and a part of 2000 you are playing with fire." ~ Buffett
No. of Recommendations: 7
LOL!
So if you own META, or GOOG, or Cisco, or Amazon, or Pepsi, or Nvidia, or American Airlines, or AT&T or the S&P500, or any of the hundreds of companies that are literally incinerating capital by buying back overvalued shares (some with borrowed money!)....you should, "Just sell your shares back and be on the right side of the redistribution game!"
OK wonderful advice, thanks for that.
You are right to point out that a lot of these companies with overvalued shares are incinerating capital by repurchasing at high prices. But if you do own one of those companies, you have 3 good reasons to sell:
(i) the shares are overvalued;
(ii) the managers are incinerating capital, which might make one wonder whether they are good capital allocators;
(iii) you really can get the dividend that you would have preferred by selling those overpriced shares, selling the exact number of shares needed so that you get your desired amount of dividend.
But since this strategy gives people choice about whether shares are overvalued and also about how much dividend to receive, one wonders whether indiscriminate share repurchase, at whatever price, might not be the way all companies should distribute capital that they don't need internally.
dtb
No. of Recommendations: 0
<one wonders whether indiscriminate share repurchase, at whatever price,
might not be the way all companies should distribute capital that they don't need internally.>
I believe that has actually been the business model for countless companies: GE, Citigroup, HP, Xerox, Big Lots, Macy's, Sears, QCom and numerous others come to mind.
Of course with a capital allocation system like that in place these companies almost always end up performing like a one-legged man in an ass-kicking contest!
No. of Recommendations: 1
It is a good article, but it is awkward how he seeks to avoid calling buybacks at prices over intrinsic value "destructive" and instead says:
"A company that buys back stock at too high a price, relative to its intrinsic value, is redistributing value from the shareholders who remain in the company to those who sell their shares back."
Unnecessarily harming the remaining owners sounds destructive to me.
No. of Recommendations: 1
I believe that has actually been the business model for countless companies: GE, Citigroup, HP, Xerox, Big Lots, Macy's, Sears, QCom and numerous others come to mind.
Of course with a capital allocation system like that in place these companies almost always end up performing like a one-legged man in an ass-kicking contest!
Didn't most of these companies peak BEFORE they started distributing their capital through buybacks? Aren't the buybacks a symptom, and not a cause?
No. of Recommendations: 7
"A company that buys back stock at too high a price, relative to its intrinsic value, is redistributing value from the shareholders who remain in the company to those who sell their shares back."
Unnecessarily harming the remaining owners sounds destructive to me.
Given that everybody rational buys shares with the idea that they might someday be sold for a higher amount than they were bought for, why do you think selling shareholders are less deserving than non-selling shareholders?
A company doing a buyback is buying back shares in the market, and telling eveybody that that is what they are doing. Here's the trading desk, here's the posted prices bid and ask. What better way to decide who to give the capital back to than to ask for volunteers and have them bid for the right to get the payments?
R:
No. of Recommendations: 13
<I believe that has actually been the business model for countless companies: GE, Citigroup, HP, Xerox, Big Lots, Macy's, Sears, QCom and numerous others come to mind.
Of course with a capital allocation system like that in place these companies almost always end up performing like a one-legged man in an ass-kicking contest!>
<<Didn't most of these companies peak BEFORE they started distributing their capital through buybacks? Aren't the buybacks a symptom, and not a cause?>>
How about Meta? Here's how the scam works...
"Meta spent $32 billion buying back shares in 2022, $9 billion more than net income! And it's not like the company just invented share repurchases, however.
They spent $50 billion in 2021, again way more than profit and nearly all cash produced from operations.
2021 was spectacular. On $50 billion spent buying shares back, the share count declined all of 3.8%.
It was the first time the share count actually declined despite sizable ongoing repurchases since 2017.
You see, Facebook, I mean Meta's management perfected the (age old) craft of paying themselves a mountain of shares and money.
This is what you do in what is apparently called a Metaverse." ~Chris Bloomstran
