"IBM has bought back $140 billion in stock over the last 20 years, its current market cap is $110 billion today" goes the tweet.
Is this bad? Are buybacks evil? What about dividends? An especially timely topic in the context of federal bailouts of entire industries ⬇️
Is this bad? Are buybacks evil? What about dividends? An especially timely topic in the context of federal bailouts of entire industries ⬇️
The initial quote is actually misleading.
They've bought back $140B in stock over the last 20 years. They've also paid out another $40B just in dividends since 2010!
They've given back way, way more to shareholders than their company is worth today.
They've bought back $140B in stock over the last 20 years. They've also paid out another $40B just in dividends since 2010!
They've given back way, way more to shareholders than their company is worth today.
Let's take a step back and understand the terms. The market cap of $110B is the current market valuation of the company's equity. This is what the market thinks the company is worth today.
The $140B in buybacks is the total amount spent by the company buying back their shares over the past 20 years.
Why buy back shares? It's a way to give money back to shareholders. Why do shareholders want money? Well... they own the company, after all.
Why buy back shares? It's a way to give money back to shareholders. Why do shareholders want money? Well... they own the company, after all.
How do buybacks work? It's almost like the opposite of an IPO.
In an IPO, a a company offers to sell new shares to the public.
In a buyback, a company offers to buy back old shares from the public .
After buying them for cash, they will typically destroy ("retire") the shares
In an IPO, a a company offers to sell new shares to the public.
In a buyback, a company offers to buy back old shares from the public .
After buying them for cash, they will typically destroy ("retire") the shares
By retiring the shares, all shareholders benefit. Not just the ones who sold back to the company. How?
The stock price is roughly equal to the <value of the company> divided by <the number of shares outstanding>
We just reduced the denominator, ergo... stock price go up ⬆️
The stock price is roughly equal to the <value of the company> divided by <the number of shares outstanding>
We just reduced the denominator, ergo... stock price go up ⬆️
But wait a minute. The company just spent some money. Shouldn't the value of the company go down? Yes.
In theory, those $ moving out of the company's value should equal the price increase from reducing the equivalent number of shares.
(Thanks Jonathon!)
In theory, those $ moving out of the company's value should equal the price increase from reducing the equivalent number of shares.
(Thanks Jonathon!)
So our friendly public company has just managed to give money back to shareholders without reducing their share price.
Let's see what happens with the alternative way of giving back money: a dividend!
Let's see what happens with the alternative way of giving back money: a dividend!
The dividend is simpler. You're probably already familiar with it.
The company takes the 💰 it wants to give back and evenly distributes it across all the shares. Everyone gets a check for their pro-rata amount.
The company takes the 💰 it wants to give back and evenly distributes it across all the shares. Everyone gets a check for their pro-rata amount.
Of course, taking the cash out of the company will reduce its value. In theory, by that amount. So the price of the stock (the price per share) will fall ⬇️
...by <amount of the dividend> divided by <number of shares outstanding>. The number of shares doesn't change here.
...by <amount of the dividend> divided by <number of shares outstanding>. The number of shares doesn't change here.
Those are the two simplest ways of returning money to shareholders.
Buybacks, which keep the share price steady. ➡️
Dividends, which cause the share price to drop. ⬇️
You may be wondering... why do buybacks catch so much heat?
Buybacks, which keep the share price steady. ➡️
Dividends, which cause the share price to drop. ⬇️
You may be wondering... why do buybacks catch so much heat?
The typical story revolves around executive compensation.
Over the years, executives have begun to be compensated less in cash and more and more with stock options.
Cash is predictable.
Options are not! Their value is tightly linked with the value of the stock!
Over the years, executives have begun to be compensated less in cash and more and more with stock options.
Cash is predictable.
Options are not! Their value is tightly linked with the value of the stock!
If the stock falls, or even stays steady, executives go without bonuses. If the stock rises, executives make extra.
Options-heavy executive compensation is one way of explaining the meteoric rise of executive comp.
CEO compensation goes ⬆️ along with stocks going ⬆️
Options-heavy executive compensation is one way of explaining the meteoric rise of executive comp.
CEO compensation goes ⬆️ along with stocks going ⬆️
Finally, we can talk about the hot topic 🔥 at hand.
We have CEOs lining up for COVID-related bailouts. Why do they need a bailout? Why didn't they save up for a rainy day?
It looks especially bad when their buybacks may have been padding their own pockets (albeit indirectly)
We have CEOs lining up for COVID-related bailouts. Why do they need a bailout? Why didn't they save up for a rainy day?
It looks especially bad when their buybacks may have been padding their own pockets (albeit indirectly)
What alternative world is being suggested by this criticism? I see two.
In one, the company paid out the same money to shareholders, except in the form of dividends. In fact, let's say buybacks were banned. ❌ Everyone only pays dividends.
In one, the company paid out the same money to shareholders, except in the form of dividends. In fact, let's say buybacks were banned. ❌ Everyone only pays dividends.
This is an example of treating the "symptom", not the "disease".
Do we expect such a ban to change the incentives of executives? We merely remove one existing tool from the arsenal. I predict execs will find another way to accomplish the same thing.
Do we expect such a ban to change the incentives of executives? We merely remove one existing tool from the arsenal. I predict execs will find another way to accomplish the same thing.
In such a world, the same money would have been paid out to shareholders. And the same companies would be coming to Congress, hat in hand.
Also, with executives that found new, more clever, ways of making their share prices go up.
Also, with executives that found new, more clever, ways of making their share prices go up.
The other alternative world goes something like this:
These companies generating all these profits should have known better. Rather than giving the money back to shareholders, they should have held on to it and prepared for a rainy day.
These companies generating all these profits should have known better. Rather than giving the money back to shareholders, they should have held on to it and prepared for a rainy day.
The implication of this stance is interesting. It's saying that we should force profitable companies to hold on to more of their profits. Kind of like the FAANGs with giant cash hoards.
How can we know how much they should hold on to? Do we force purchasing of disaster insurance? What prevents the company from being taken private and having all the cash taken out? The loop holes and questions are endless.
The fundamental problem is a hard one. It's an expansion of what happened in 2008 with the banks. We have these businesses that we view as some way essential to our economy. We're collectively afraid of what happens if they all go through bankruptcy at once.
And... surprise, I don't have an answer! Maybe we need to put more thought into our bankruptcy laws. Maybe we need broader unemployment protections. Or maybe it's fine how it is.
I am pretty sure, though, that arguing about buybacks vs dividends is just a distraction.
I am pretty sure, though, that arguing about buybacks vs dividends is just a distraction.
Thank you for attending my TED talk
