Share Buybacks

I have been thinking about share buybacks since the airlines bailout discussions started.

It’s amazing (and annoying) how companies do so many share buybacks when their prices are high.

Of course no one expects a crisis like this.

I have to read the article. Did read - I expects his comments about amounts spent on buybacks since 2012 are generally true, and funded by low interest rates helped by 2013 and later QE activity.

As an early ER (1999) it looks like I’m sentenced to experience one serious historic financial crisis and bear market per decade if I can lump 2020 in with the 2010s. I guess technically 2000 belongs in the 1990s, but the bear kept worsening and lasted until late 2002. It was kind of a rolling bear market with several events that had nothing to do with dot coms - we had 911, Enron (plus others), a credit crunch in 2002.
 
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One improvement of the 2000 bear over the 2009 one was that some deserving executives went to prison. For this one, there are no banksters to blame yet but I hope the U.S. taxpayer doesn’t have to backfill all these companies who diluted their stock to pay their executives massive stock options and then did massive stock buybacks with corporate cash to keep share prices high.
 
I gained nothing from share buybacks as the rise in stock prices has vanished. On the other hand my dividend $$......
 
We say it wasn't possible to predict something like this virus. But there is an 89 year old guy out in Nebraska with a lot of cash totally invested in federal debt. He claims the market corrects periodically, and having all his cash invested in treasuries means it's the most liquid market and he can loan money to the needy and buy stuff. So far, he's been right about every 10 years or so. You'd think some big companies might do something similar. I hear he gets pretty good interest on his loans during time like this. :)
 
Masquernom said:
We say it wasn't possible to predict something like this virus. But there is an 89 year old guy out in Nebraska with a lot of cash totally invested in federal debt. He claims the market corrects periodically, and having all his cash invested in treasuries means it's the most liquid market and he can loan money to the needy and buy stuff. So far, he's been right about every 10 years or so. You'd think some big companies might do something similar. I hear he gets pretty good interest on his loans during time like this. :)
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How is that 0.5% yield on Federal debt going to keep up with inflation?
 
Market observers have been sounding the alarm about stock buybacks for the last few years. Investors did not care, because who would complain when his stocks kept appreciating. One can just search the Web for past articles about stock buybacks. They are still there.

Because interest rate was so low, it was cheap money for corporations to borrow to finance the buy back to boost share prices. Investors and management were all happy. There are even Web sites listing corporations with the most buyback for retail investors to jump in and buy, buy, buy.

Fermion said:
Doesn't Berkshire do buybacks?
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It does, but very little compared to other companies. It's only a few percent.

Here are some examples. In 2005, Boeing had 803M shares outstanding. It's 565M now, or 70%.

GE went from 10.611B to 8.773B, or 83%.

Home Depot went from 2138M shares down to 1088M, or 51%.

Lowe's went from 1608M shares down to 764M, or 48%.
 
It also made sense if the company was paying a hefty dividend, like 6%. Instead of cutting the dividend, buyback shares using 3% money. Not only do you increase earnings per share but you save on the dividend.

The government is at fault though for keeping rates so low so long.
 
No bailouts at all. Chapter 11 for any company so that they keep operating but their stock is nuked.
 
Fermion said:
Doesn't Berkshire do buybacks?
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Yes, they have... but they have been very modest and prudent. $5b in 2019 but at year end 2019 they had $128b in cash.

In the final three months of 2019, Berkshire Hathaway, led by famed value investor Warren Buffett, repurchased $2.2 billion of its own stock, the most the company has spent on repurchases in a single quarter.

The record amount came after the company spent $700 million on share buybacks in the previous quarter. Over the whole year, Berkshire Hathaway spent $5 billion repurchasing about 1% of the company.

Buffett in his annual letter to shareholders, which is released in tandem with the company's year-end report, discussed both the "sense and nonsense of stock repurchases." Berkshire Hathaway will only buy back its stock if Buffett and vice chair Charlie Munger believe it is selling for less than it is worth, and the company is still left with ample cash after the purchase, he wrote.
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Fermion said:
How is that 0.5% yield on Federal debt going to keep up with inflation?
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Masquernom said:
I'm pretty sure when Warren Buffet runs firecalc, he gets 100% without any return. :)
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Not only is Buffett's WR very low, probably about 0.01%, he does not need to run FIRECalc for a 30-year duration either.
 
Shoot, my camera won’t let me attach it but I found a nice chart today how corporations have been massively the biggest buyer of their own shares for years. I became very bearish in Oct 2018 and sold most of my long term equity holdings then. As this thing progresses, it’s my belief that companies will need their cash (and be less able to borrow) for necessities and therefore most buybacks will cease. Without the largest equity buyer buying, the direction for stocks will remain down for some time.
 
My Finance Professor (one of the best I ever had) back in 1992 or 93 poisoned the idea of stock buy backs for me. He spent half of a class explaining how they were used to manipulate stock prices back in the 1920s and why they were forbidden in the 1932 regulatory changes and how he saw evidence of manipulation back in the late 80s and early 90s.
<Sarcasam> Of course Boards and Managements are much more morally motivated these days so that's not been an issue lately.</Sarcasam>
I'd rather see dividends than buy backs. You can argue tax efficency, but tax rules could be changed.
 
Fermion said:
It also made sense if the company was paying a hefty dividend, like 6%. Instead of cutting the dividend, buyback shares using 3% money. Not only do you increase earnings per share but you save on the dividend.

The government is at fault though for keeping rates so low so long.
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Gov did keep rates too low for too long. That kept zombie companies alive to rack up more debt vs. culling the weak ones over time (vs. all at once during panics).

But. Bond investors also didn't ask what the $ was going to be used for when they bought the corp bonds. "So you're going to take on all this debt and use it to buy back your own stock vs. growing the business. Where does the additional income come from to pay back the additional debt?"
Stock investors did the same... continuing to pile into shares where actual revenue/earnings were flat.

Also ratings agencies didn't blink when companies borrowed to pay their dividends or do buybacks when stock prices were at their highs.
 
(Hopefully the attachments work. I couldn't see them on the preview.)

Here's the chart I wasn't able to attach from my phone. You can see that corporations have been the largest (by far) net purchasers of their own shares for years. The other chart shows the price action of a corporate bond ETF recently, and I'm guessing you can find a similar chart for whatever corporate bond ETF you choose. (When prices go down, the cost of financing goes up.) On top of all that, there's now a movement (endorsed by POTUS this A.M.) about restricting future buy backs from companies who get any sort of govt. bail out.

In short, I think the biggest buyer of stocks has left the building. And while perhaps the Federal Reserve will pick up that position at some point, my understanding is that it would require an act of Congress. And even so, look at a long term chart of Japan's Nikkie 225 to see how well central bank stock buying does to lift markets.
 
RenoJay said:
And even so, look at a long term chart of Japan's Nikkie 225 to see how well central bank stock buying does to lift markets.
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Here ya go
29143-albums233-picture2128.png
 
Spock said:
Gov did keep rates too low for too long. That kept zombie companies alive to rack up more debt vs. culling the weak ones over time (vs. all at once during panics).

But. Bond investors also didn't ask what the $ was going to be used for when they bought the corp bonds. "So you're going to take on all this debt and use it to buy back your own stock vs. growing the business. Where does the additional income come from to pay back the additional debt?"
Stock investors did the same... continuing to pile into shares where actual revenue/earnings were flat.

Also ratings agencies didn't blink when companies borrowed to pay their dividends or do buybacks when stock prices were at their highs.
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All good points. “We” have also allowed a system in which pensions have gone by the wayside in favor of a very small tax code loophole known as 401k. Now “we” are paying the price of “our” decisions. (Air quotes because we have acquiesced to these decisions of elites.)

I think, let these companies go into Chapter 11. Investors’ holdings will be nuked and other healthier companies will take the zombies’ places in the indexes. With no bailouts our portfolios will be hurt for a while but we’ll avoid putting even more national debt burden on future generations to protect our current hides, which seems ethical. We’ll also create a healthier investment culture that expects companies to act more responsibly, spend their cash on better products instead of buybacks and stratospheric executive pay, and not expect to be able to run to the protective arms of government if they want to survive the next recession.
 
Markola said:
All good points. “We” have also allowed a system in which pensions have gone by the wayside in favor of a very small tax code loophole known as 401k. Now “we” are paying the price of “our” decisions. (Air quotes because we have acquiesced to these decisions of elites.)

I think, let these companies go into Chapter 11. Investors’ holdings will be nuked and other healthier companies will take the zombies’ places in the indexes. With no bailouts our portfolios will be hurt for a while but we’ll avoid putting even more national debt burden on future generations to protect our current hides, which seems ethical. We’ll also create a healthier investment culture that expects companies to act more responsibly, spend their cash on better products instead of buybacks and stratospheric executive pay, and not expect to be able to run to the protective arms of government if they want to survive the next recession.
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Also all good points... but what aircraft manufacturer is left to buy out Boeing? Sell it to Airbus? China?
Or split Boeing into space, defense, civil aircraft etc companies... basically spin out all the aerospace co's that merged into Boeing.

Plus its an election year... nobody is going to want to go down in history as having been the one to let Too Big To Fail companies actually fail.
 
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