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[Sub_Level]

No, the stocks companies buy back are already owned by share holders.

So are the owners of said stocks forcibly relinquished of their ownership? Or are they transferred to being given "new" stocks with the presumably higher value?

 

[terrisus]

Yeah, there were unions and living wages. It was a strange time in society.

I read that as "unicorns and living wages."

Either way, far too magical for me >.>

 

[iamblades]

So are the owners of said stocks forcibly relinquished of their ownership? Or are they transferred to being given "new" stocks with the presumably higher value?

No, they buy them off the market* just as any shareholder would, from shareholders who willingly sell them.

* - This is a bit of a simplification as sometimes the company issues a tender offer to shareholder quoting a price other than market value, but that's aside from the point.

 

[Sub_Level]

Thanks for the answers everyone.

 

[Ace Harding]

Some of you might find this interesting


http://www.theatlantic.com/magazine/archive/2013/07/stop-spoiling-the-shareholders/309381/

There was another good article, either in The Atlantic or Slate or something like that on this topic, but I can't seem to find it now.

I sort of see this point, but really it's not that trying to create shareholder value is itself a bad thing. It's how a company goes about it. If you say "I am going to try to maximize shareholder value by growing earnings consistently in a very thoughtful and calculated manner with a focus on the long-term, and will not dilute earnings or jeopardize my capital structure for a short term benefit," is that a bad thing?

If a company is doing buybacks to influence their stock price or win over shareholders in the short term it's not going to work out very well for them. It is not a sustainable practice. It has its uses, for example if a company feels it's stock is trading at a steep discount, or if external forces make reinvesting a much more costly endeavor at that moment. But buybacks are not something you want to do year in and year out, and for that reason very few companies are consistently buying back large amounts of stock before reinvesting in other ways.

 

[arglebargle]

key to james montier's argument (as GMO is an investment firm, after all) is that not even shareholders are benefiting from the era of shareholder value maximization. shareholders saw much higher total returns over the period from the 1950s to the 1980s than from the 1980s through today, at least according to him (and assuming i have the dates right, but that should be approximately correct).

one of the studies he quotes that i found interesting concerns the use of equity and options to incentivize management. the argument for paying executives in stock is that doing so aligns management with shareholders and obviates principal-agent problems. but apparently what happens when the incentives become too large is that the executives focus too much on the incentive itself and stop focusing on what it takes to achieve it. so a moderate options plan aligns incentives, and a huge one makes a CEO look at his job like a lottery ticket that he just sits around and stares at, hoping it will pay off.

Hiring a former Wall Street CEO as the leader of the Securities and Exchange Commission is like hiring the Captain Planet Villains as the leaders of the EPA. "I know how to prevent corruption on Wall Street because I did it myself" isn't a great selling point.

worked for joe kennedy, who actually did shut down a lot of fraudulent stock manipulation schemes in the 1930s after perpetrating those schemes in the 1920s.

Thanks for the answers everyone.

obviously too late to help you, but it is worth noting that buybacks are a tax efficient way to return cash from a corporations balance sheet to shareholders. the other way to do this is dividends, but dividends are taxed. besides the tax consideration, there is no economic difference between between buybacks and dividends.

 

[Zissou]

Stock value becoming this all important measure of success reminds me of Campbell's law.

 

[Ether_Snake]

An employee can ask for a higher wage. If you'd prefer, they can demand it under the implied threat of taking their talent elsewhere. I'm all for that.

Again, in my original comment I'm all for increasing wages, by federal statute if necessary. I'm not against government intervention in business. I'm fairly progressive, I'd prefer if the government was more active in influencing the economy through its own spending and smart regulations of business. I draw the line at what to do with net income, and again fail to see what point is being served by any call for governments to reign in the return of that income to the shareholders. After all employees are paid, after expenses are accounted for and everyone is satisfied and Uncle Sam has his cut, what's left belongs to the business owner. The government can do whatever it has the political will to do regarding wages, taxation, incentives, but after all obligations are met, give me my money. If you instead invest it, I'll trust that my dollar invested now nets me $1.13 next year.

What the obligations are are determined by society. Each one you list were once not obligations at all.

 

[Ace Harding]

Pretty good (long, lots of data) post from an NYU Stern prof on buybacks. This guy has been quoted in an Atlantic and WSJ story on the subject:

http://aswathdamodaran.blogspot.com/2014/09/stock-buybacks-they-are-big-they-are.html

I think that both ends of the spectrum on buybacks are making too much of a simple cash-return phenomenon. To the boosters of buybacks as value creators, it is time for a reality check. Barring the one scenario where companies that buy back stock stop making value-destructive investments, almost every other positive story about buybacks is one about value transfers: from taxpayers to equity investors (when debt is used by an under levered firm to finance buybacks) and from one set of stockholders to another (when a company buys back under valued stock).

To those who argue that buybacks are destroying the US economy, I would suggest that you are using them as a vehicle for real concerns you have about the evolution of the US economy. Thus, if you are worried about insider trading, executive compensation, tax-motivated transactions and or under investment by the manufacturing sector, your fears may be well placed, but buybacks did not cause of these problems, and banning or regulating buybacks fall squarely in the feel-good but do-bad economic policy realm.

 

[gamechanger87]

Companies are looking at the easy and cheap money from banks and realizing the ROI is better on a buyback than capex.

The Fed is fueling a bubble and it is afraid to raise rates because the stock market will crater as valuations are being driven by a lack of yield elsewhere rather than fundamentals.

Until the Fed raises rates, we won't see companies investing in capex which is what we need. Even Apple is raising debt for buybackks rather than capex rather than repatriate any cash.

A few articles

http://www.zerohedge.com/news/2014-02-23/why-no-capex-recovery

http://www.zerohedge.com/news/2014-10-06/why-stocks-just-wont-drop-companies-spend-almost-all-profits-buybacks

 

[HideyoshiJP]

All I hear is "boo hoo, less stock for us to leach with our HFT systems.” Then again, the side effect is less for mutual funds to invest in, but its not like they'll be hurting.

 

[numble]

Restricting buybacks means less capital gains taxes being paid. I don't think it will lead to more investment in America or higher wages for the average worker either. The growth areas are abroad, and since US tax regulations basically punish a company for repatriating money (basically rewarding you extra for investing abroad, where market growth potential usually already is high).