Hi Allison, I don't have an issue with stock buybacks per se, but if a CEO can't figure out how to deploy profits to grow the business, why are they being paid 350x the median worker's salary?
The finance math says dividends and buybacks are the same, but I think it ignores a lot of corporate and executive behavior differences.
A dividend generally implies a company thinks it s best use of a subset of its available annual cash in sending a regular cash payment to its shareholders. Companies generally don't start or raise dividends unless their internal forecasts support that dividend for at least several years in the future. It is a long-term decision.
Buybacks are essentially one-time special dividend payments preferred in the US due to the tax code preference for capital gains instead of cash dividends treated as ordinary income. This is irrelevant to people holding shares in 401ks/IRAs, non-profit trusts, and pension funds, but is important for executives and wealthy shareholders with taxable accounts. They are also a useful tool for reducing cash holdings to make the companies less of a target for LBO takeovers. Some of the biggest mischief happens when the buybacks are used to hide large share option compensation for executives. The executives become billionaires while the public holds fewer shares.
Hi Michael, you are right there should be ways to spend the money to grow the business. However, maybe sometimes its not the right time (yet) so I understand temporal stock buy backs to sell them in the future to fund growth.
Re: Interest rates. History has shown that around 3%-6% is pretty normal for interest rates (e.g. Bank of England rate and consols since early 1700s and US interest rates since 1800). Lower interest rates for more than a few months mean everything is fabulous with no inflation (e.g. England 1890s) or very bad, such as depression or war. High inflation occurs occasionally and drives interest rates up to high single digits or higher (leaving out hyperinflation episodes but looking at "normal" inflationary cycles like in UK and USA in 1970s).
We need to understand that ZIRP is not a right, but an experiment tried out by central banks over the past 15 years. Worked for a while, and then stopped working. Covid had put ZIRP on steroids and delayed the return to normal interest rates that started in 2018. Another experimental wild card is the unwinding of the Fed balance sheet that started middle of 2022. I think we are going back to "normal" interest rates for the next decade unless inflation stays high. We made sure we refinanced our mortgage at sub 3% rate in 2021 Q2 - I didn't see that opportunity recurring again for quite a while.
A major problem in modern finance and economics is that it is structured around post WW II conditions, as much as due to ready access to good data as recency bias. But the story of geopolitics and its impact on economies is usually told on cycles that are much longer than a handful of decades. It generally takes a couple of centuries or more for empires etc. to go through a cycle. So extrapolating the next 20-50 years based on post-WW II data and conditions is ignoring a lot of valuable historic data and trends and leaves out potential alternate story lines.
Hi Allison, I don't have an issue with stock buybacks per se, but if a CEO can't figure out how to deploy profits to grow the business, why are they being paid 350x the median worker's salary?
The finance math says dividends and buybacks are the same, but I think it ignores a lot of corporate and executive behavior differences.
A dividend generally implies a company thinks it s best use of a subset of its available annual cash in sending a regular cash payment to its shareholders. Companies generally don't start or raise dividends unless their internal forecasts support that dividend for at least several years in the future. It is a long-term decision.
Buybacks are essentially one-time special dividend payments preferred in the US due to the tax code preference for capital gains instead of cash dividends treated as ordinary income. This is irrelevant to people holding shares in 401ks/IRAs, non-profit trusts, and pension funds, but is important for executives and wealthy shareholders with taxable accounts. They are also a useful tool for reducing cash holdings to make the companies less of a target for LBO takeovers. Some of the biggest mischief happens when the buybacks are used to hide large share option compensation for executives. The executives become billionaires while the public holds fewer shares.
That's easy: Because they they worked it so they can get paid 350x. Not that it's sustainable or will end well. It's all part of the cycle of empire.
Hi Michael, you are right there should be ways to spend the money to grow the business. However, maybe sometimes its not the right time (yet) so I understand temporal stock buy backs to sell them in the future to fund growth.
Just my two cents on the matter.
Re: Interest rates. History has shown that around 3%-6% is pretty normal for interest rates (e.g. Bank of England rate and consols since early 1700s and US interest rates since 1800). Lower interest rates for more than a few months mean everything is fabulous with no inflation (e.g. England 1890s) or very bad, such as depression or war. High inflation occurs occasionally and drives interest rates up to high single digits or higher (leaving out hyperinflation episodes but looking at "normal" inflationary cycles like in UK and USA in 1970s).
We need to understand that ZIRP is not a right, but an experiment tried out by central banks over the past 15 years. Worked for a while, and then stopped working. Covid had put ZIRP on steroids and delayed the return to normal interest rates that started in 2018. Another experimental wild card is the unwinding of the Fed balance sheet that started middle of 2022. I think we are going back to "normal" interest rates for the next decade unless inflation stays high. We made sure we refinanced our mortgage at sub 3% rate in 2021 Q2 - I didn't see that opportunity recurring again for quite a while.
A major problem in modern finance and economics is that it is structured around post WW II conditions, as much as due to ready access to good data as recency bias. But the story of geopolitics and its impact on economies is usually told on cycles that are much longer than a handful of decades. It generally takes a couple of centuries or more for empires etc. to go through a cycle. So extrapolating the next 20-50 years based on post-WW II data and conditions is ignoring a lot of valuable historic data and trends and leaves out potential alternate story lines.