> Taxpayers and workers brought GM out of bankruptcy, yet it is the hedge funds that will reap the biggest rewards. Taxpayers and workers should demand that open-market repurchases by all companies be banned. Stock buybacks manipulate the stock market and leave most Americans worse off. In this case, it is clear that what is good for the hedge funds is bad for the United States.
Stock repurchases are just a different way of paying dividends. Nothing scary about them.
It doesn't matter if the stock is undervalued (which is a strictly subjective premise anyway - undervalued by what measure?). If it's overvalued that just reduces the value proposition of the buyback. The value proposition is always positive no matter what price is paid (that however says nothing about the specific value proposition, merely that it's a positive number).
I'd argue that GM is closer to undervalued than anything else. It's capable of yielding at least $6 billion in net income over the next four quarters, giving it in the neighborhood of a 10 multiple. The economy looks to remain strong'ish over 12 months, the consumer is spending and able to borrow at low rates, which will continue to float GM's sales.
It's also worth noting it's not enough to only take the over / under valuation of the stock into account when doing a buyback. You have to account for use of cash - that is, what's the best use of your cash holdings. If there are no great alternatives - for any number of reasons - there is nothing wrong with doing stock buybacks when the stock price is richly valued (especially if the cash held is producing mediocre returns, as cash does today). Buying the stock back may be a vastly superior choice to sitting on the cash when it comes to producing returns for shareholders.
Chipotle is famous for doing this despite their very hefty valuation and relatively rapid expansion. Has turned out very well for shareholders.
Warren Buffett has written the opposite of this numerous times. Paying $1 for something that is worth 80 cents (even if it's your own stock) destroys shareholder value. The math and logic behind this is so basic, I don't understand how anyone could believe otherwise.
Sometimes it's easiest to illustrate the flaw in a theory by using extreme examples, so please forgive me for the hyperbole.
Let's say you have a company with only $100M in discounted future earnings (and no significant balance sheet assets), but it is trading on the market for $1B. This 10x intrinsic value scenario isn't common in real life but we definitely see examples like it during market bubbles.
The company wants to distribute $1M back to shareholders. If it pays a dividend, shareholders receive the full million less taxes - so perhaps $600-750k in their pockets.
If on the other hand the company buys back $1M in stock, they are buying 0.1% of $100M in future earnings, or $100k.
If my post doesn't make sense, google "Buffett on buybacks." He's written about the subject in a number of his annual letters.
As adventured mentions, it doesn't matter what the stock price is.
A stock repurchase is a way to move money from the company to the stockholders. Exactly the same as dividends.
In an efficient market, the effects on market capitalization (outstanding stock * stock price) of dividends and stock repurchases will be exactly the same.
Yeah, my mistake. I guess my argument was against how there was "nothing scary about them." This article wouldn't exist if there wasn't some concern about buybacks.
However, stock repurchases are preferred by executives because they're either awarded stock options or have compensation tied to the stock price, as the author mentioned in an earlier piece (linked there):
"Consider the 449 companies in the S&P 500 index that were publicly listed from 2003 through 2012. During that period those companies used 54% of their earnings—a total of $2.4 trillion—to buy back their own stock, almost all through purchases on the open market. Dividends absorbed an additional 37% of their earnings. That left very little for investments in productive capabilities or higher incomes for employees."
"Stock-based instruments make up the majority of their pay, and in the short term buybacks drive up stock prices. In 2012 the 500 highest-paid executives named in proxy statements of U.S. public companies received, on average, $30.3 million each; 42% of their compensation came from stock options and 41% from stock awards. By increasing the demand for a company’s shares, open-market buybacks automatically lift its stock price"
"Jolls finds that the average executive in her sample of firms with repurchase activity enjoyed a $345,000 increase in stock option value as a result of the repurchase activity. "
Yes, any stock options or compensation tied to stock price should account for these effects of repurchases. (Ask any lawyer / accountant how to do it, it's not magic.)
The author makes some valid points, but instead of banning stock buybacks for all companies, I think there would be a stronger case for banning stock buybacks for companies that have been beneficiaries of bailouts with public money.
Share re-purchase actions take money held by the company and transfer it to stockholders. It's a statement by management that "we don't have good ways to invest this money in building the business further, so we're gonna just return it to shareholders."
That in itself is not a negative statement to make. There are market conditions in which a company simply cannot effectively invest $1b productively, or $5b, or $8b.
The author of the piece doesn't address this. What is his alternative plan for where to put the money? He says "if the old GM had 'saved' money...." it would have had more to withstand the eventual downturn in 2009. Well where exactly would GM save its money today? In a bank? Investing in someone else's shares?
GM has been ramping up production (building factories) in China but that looks like a huge risk given the proven willingness of the Chinese government to seize foreign commercial investments.
Should GM be building more factories in the USA? EU? Should it be investing in massive new electric vehicle research? All interesting possibilities.
but Mary Barra doesn't have a plan for the money, which is why an activist investor asked for her to give it to the owners of the stock. If she had said - "look, I understand you want the $5b, but it's better for the company long-term if we invest it in developing XXX" - then the shareholders might have sided with management.
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[ 0.26 ms ] story [ 47.3 ms ] threadStock repurchases are just a different way of paying dividends. Nothing scary about them.
I'd argue that GM is closer to undervalued than anything else. It's capable of yielding at least $6 billion in net income over the next four quarters, giving it in the neighborhood of a 10 multiple. The economy looks to remain strong'ish over 12 months, the consumer is spending and able to borrow at low rates, which will continue to float GM's sales.
It's also worth noting it's not enough to only take the over / under valuation of the stock into account when doing a buyback. You have to account for use of cash - that is, what's the best use of your cash holdings. If there are no great alternatives - for any number of reasons - there is nothing wrong with doing stock buybacks when the stock price is richly valued (especially if the cash held is producing mediocre returns, as cash does today). Buying the stock back may be a vastly superior choice to sitting on the cash when it comes to producing returns for shareholders.
Chipotle is famous for doing this despite their very hefty valuation and relatively rapid expansion. Has turned out very well for shareholders.
Warren Buffett has written the opposite of this numerous times. Paying $1 for something that is worth 80 cents (even if it's your own stock) destroys shareholder value. The math and logic behind this is so basic, I don't understand how anyone could believe otherwise.
If an outside investor buys stock, of course, under/overvaluation matters.
Let's say you have a company with only $100M in discounted future earnings (and no significant balance sheet assets), but it is trading on the market for $1B. This 10x intrinsic value scenario isn't common in real life but we definitely see examples like it during market bubbles.
The company wants to distribute $1M back to shareholders. If it pays a dividend, shareholders receive the full million less taxes - so perhaps $600-750k in their pockets.
If on the other hand the company buys back $1M in stock, they are buying 0.1% of $100M in future earnings, or $100k.
If my post doesn't make sense, google "Buffett on buybacks." He's written about the subject in a number of his annual letters.
A stock repurchase is a way to move money from the company to the stockholders. Exactly the same as dividends.
In an efficient market, the effects on market capitalization (outstanding stock * stock price) of dividends and stock repurchases will be exactly the same.
https://hbr.org/2014/09/profits-without-prosperity
"Consider the 449 companies in the S&P 500 index that were publicly listed from 2003 through 2012. During that period those companies used 54% of their earnings—a total of $2.4 trillion—to buy back their own stock, almost all through purchases on the open market. Dividends absorbed an additional 37% of their earnings. That left very little for investments in productive capabilities or higher incomes for employees."
"Stock-based instruments make up the majority of their pay, and in the short term buybacks drive up stock prices. In 2012 the 500 highest-paid executives named in proxy statements of U.S. public companies received, on average, $30.3 million each; 42% of their compensation came from stock options and 41% from stock awards. By increasing the demand for a company’s shares, open-market buybacks automatically lift its stock price"
http://www.nber.org/digest/nov98/w6467.html
"Jolls finds that the average executive in her sample of firms with repurchase activity enjoyed a $345,000 increase in stock option value as a result of the repurchase activity. "
http://www.wsj.com/articles/buybacks-can-juice-per-share-pro...
That in itself is not a negative statement to make. There are market conditions in which a company simply cannot effectively invest $1b productively, or $5b, or $8b.
The author of the piece doesn't address this. What is his alternative plan for where to put the money? He says "if the old GM had 'saved' money...." it would have had more to withstand the eventual downturn in 2009. Well where exactly would GM save its money today? In a bank? Investing in someone else's shares?
GM has been ramping up production (building factories) in China but that looks like a huge risk given the proven willingness of the Chinese government to seize foreign commercial investments.
Should GM be building more factories in the USA? EU? Should it be investing in massive new electric vehicle research? All interesting possibilities.
but Mary Barra doesn't have a plan for the money, which is why an activist investor asked for her to give it to the owners of the stock. If she had said - "look, I understand you want the $5b, but it's better for the company long-term if we invest it in developing XXX" - then the shareholders might have sided with management.