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Buybacks And Such
One consequence of the improved mood across risk assets was a resurgence in equity offerings.
Although IPO activity will be moribund until markets recover the kind of speculative joie de vivre that turns everyone with a brokerage account into potential exit liquidity for unicorn backers, secondaries picked up earlier this month, when issuers raised the most since the S&P was perched at record highs in early January.
July was lamentable for IPOs. Just a handful of listings raised a paltry s
I’m curious if those are gross or net buyback numbers. Some buybacks are designed to offset the dilution from share-based compensation of employees and execs.
I know managements call buybacks “returning cash to shareholders”. But that is flatly false.
If I give you $10,000 in return for your car, we don’t call it my “returning cash” to you, we call it an exchange – you get my cash but I get your car. You may be pleased to sell your car, but you sure don’t feel like “that nice man gave me $10,000” and you probably don’t feel like “I just made $10,000 of income!”. Because I took something of equal value from you, and now you have to take the bus.
That’s why buybacks are bogus “return of cash”, as distinguished from dividends, which are genuine return of cash – you don’t have to give up stock to get them, so they are a continuing source of income.
Let’s be honest, dear Corporate Management. If share buybacks didn’t reduce your share count, offset your stock compensation dilution, allow you to spend the company’s money to support your personal share and option holdings, and allow you to create EPS growth without actually growing revenues or margins or investing to do so – would you be so devoted to “returning cash to shareholders [while taking away their shares]”?
So devoted that you even pile on debt leverage, make the company weaker, then periodically have to get rescues funded by the taxpayers, including the employees you laid off to conserve the oxygen that you just pissed away buying shares at 300% the current price?
As a person, I’m very much in favor of disincentives to share buybacks. As an investor . . .
. . . as an investor I’m much more impressed with companies that have lots of net cash, pay a hefty dividend, don’t use too much stock comp, have non-GAAP financials that look similar to GAAP, invest enough capex to not only grow topline but also grow margins beyond merely operating leverage, do smart and even transformational M&A, and return excess cash through special dividends.
Unless the share buybacks are so large that the company is essentially on its way to going private, or are strategically done when the stock is at extreme low valuations, I think buybacks are basically throwing away cash that belongs to shareholders.
If corporations were willing to take on debt (albeit at relatively low rates < 3%) to finance buybacks, it’s hard for me to believe that a 1% tax is going to prove much of a modifier. Now, a 1% tax on top of a (now) 4.5% borrowing rate may prove to be more of a disincentive, but for cash-on-the-balance sheet repurchasers, I doubt this changes much, other than a modest pulling forward as H has laid out.
Suppose a reasonably profitable company produces a product that is a necessity for the twenty-first century consumer and it has a consistent market share. It has been downsized, right sized, outsourced and optimized to the point that there is nothing left to cut or optimize. Its profit equals its income minus expenses and has been stable for years. Management takes out a payday loan and repurchases some of the company’s stock. Now their profit equals income minus expenses and loan payments. Assuming that the dividends not paid on the repurchased shares does not offset the cost of servicing their loan, the only way to maintain a reasonable profit is to increase income by raising prices. How is this practice not inflationary? So please, tax the hell out of them.