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Should companies or gov limit buybacks in the future
Posted on 4/22/20 at 11:35 am
Posted on 4/22/20 at 11:35 am
Many companies need stimulus loans because they refused to shore up their rainy day fund and instead.
Two examples: you have companies like Boeing, oil companies, auto industry, and airlines who buy back stocks to prop the price up and cuts their cash reserves. Then all the top executives and board members get bonuses which costs even more.
Then Apple, who does buy backs and still is smart enough to keep their Rainy day fund filled before doing buy backs, which is the way it should be done.
I don’t feel like the government should be giving loans/bailing out companies because they are financially irresponsible. On the other hand the gov has to save the companies to save the jobs. Should anything or can anything be done to fix this issue in the future? There has to be something that can be done or at least recommended.
Two examples: you have companies like Boeing, oil companies, auto industry, and airlines who buy back stocks to prop the price up and cuts their cash reserves. Then all the top executives and board members get bonuses which costs even more.
Then Apple, who does buy backs and still is smart enough to keep their Rainy day fund filled before doing buy backs, which is the way it should be done.
I don’t feel like the government should be giving loans/bailing out companies because they are financially irresponsible. On the other hand the gov has to save the companies to save the jobs. Should anything or can anything be done to fix this issue in the future? There has to be something that can be done or at least recommended.
7
Posted on 4/22/20 at 11:37 am to Lsutiger2424
Umm no. You just let mismanaged companies go BK and restructure.
quote:
On the other hand the gov has to save the companies to save the jobs
Posted on 4/22/20 at 12:17 pm to Lsutiger2424
I could see an SEC rule that says you to meet certain qualifications in order to do a buyback. Something like a minimum days cash or debt ratios below a certain number.
In a black swan event like this, I'm sure some companies would have met those threshholds and still have trouble.
In a black swan event like this, I'm sure some companies would have met those threshholds and still have trouble.
Posted on 4/22/20 at 12:32 pm to wutangfinancial
quote:
Umm no. You just let mismanaged companies go BK and restructure.
quote:
On the other hand the gov has to save the companies to save the jobs
I agree lets also let the small businesses go bankrupt as well.
I don't see the difference between a small business owner taking some profits and stock buybacks/dividends.
Posted on 4/22/20 at 12:41 pm to Lsutiger2424
quote:
who buy back stocks to prop the price up and cuts their cash reserves
Eliminating share buybacks does not fix this problem. There is nothing stopping these companies from distributing the $ via dividend instead.
quote:
Then all the top executives and board members get bonuses which costs even more.
This is the primary reason why share buybacks should be outlawed. It increases principal-agent risk by giving directors/executives an easy lever to manipulate share price, which is not in shareholder interest.
Posted on 4/22/20 at 12:55 pm to Lsutiger2424
quote:
Many companies need stimulus loans because they refused to shore up their rainy day fund and instead.
A rainy day fund is never large enough to stem this kind of catastrophic event.
Sitting on a bunch of cash is an inefficient use of capital. Should companies have a larger rainy day fund...yes. But we shouldn't try to litigate our way to driving that business practice.
Buybacks are a more tax efficient distribution to shareholders. The hate on buy backs is a political talking point that is emotionally driven rather than a rationale discussion of business.
Posted on 4/22/20 at 1:05 pm to lynxcat
quote:
The hate on buy backs is a political talking point that is emotionally driven rather than a rationale discussion of business.
Agreed. Many investors would be hating on these companies if they were just hoarding cash saying that they are not using their cash effectively to return value to the shareholders.
This needs for bailouts is not just due to share buybacks but many factors. Using what is happening during COVID-19 as a justification of any business policy is crazy. So every business should be prepared that at any day the government could shut down the economy for an undetermined amount of time? How big of a safety net is needed? 3 months, 6 months 3 years?
Many of these same people who are bashing public companies from bailouts and share buybacks right now, have no issues with the government bailing out small businesses or individuals.
This post was edited on 4/22/20 at 1:07 pm
Posted on 4/22/20 at 1:21 pm to bod312
quote:
Agreed. Many investors would be hating on these companies if they were just hoarding cash saying that they are not using their cash effectively to return value to the shareholders
This...
You don't run a business like you run your personal checkbook.
Posted on 4/22/20 at 1:26 pm to bod312
People are going to bitch regardless.
IIRC people wanted Apple to repatriate their cash and payout because they wanted the tax monies.
IIRC people wanted Apple to repatriate their cash and payout because they wanted the tax monies.
Posted on 4/22/20 at 1:27 pm to Lsutiger2424
Shareholders should decide, not Govt.
Posted on 4/22/20 at 1:36 pm to bod312
They buy back shares with debt up to there azzes for share price performance to pad there pockets with big bonuses and could care less about hard times. There should be reasonable capital requirements for all companies before buybacks are approved.
Posted on 4/22/20 at 1:38 pm to Tigers4life
quote:
They buy back shares with debt up to there azzes for share price performance to pad there pockets with big bonuses and could care less about hard times. There should be reasonable capital requirements for all companies before buybacks are approved.
Should the government require the same stipulations on small businesses before the owner can take profits? If the whole purpose is to prevent government subsidizing companies.
The real issue a certain political faction has an issue with share buybacks is the loss of taxes. I bet if there were no tax advantage to share buybacks versus dividends, you would not hear as much about it.
Posted on 4/22/20 at 1:55 pm to bod312
Are small businesses buying back shares to artificially inflate there stock price while carrying large amounts of debt? Private small business are a whole different animal than publicly traded companies. There survival depends on them carefully managing there profits. Buybacks are ok if your balance sheet is in order.
This post was edited on 4/22/20 at 1:58 pm
Posted on 4/22/20 at 2:30 pm to Tigers4life
Small business owners are taking profits from the company instead of potentially building a bigger emergency fund for the company. They are doing this to return value (in form of cash) to the owner while the business is leveraged.
This is similar to the people running a corporation taking profits to buy back shares instead of potentially building a bigger emergency fund for the company. They are doing this to return value (share price thus equity that can be turned into cash) to the owners (shareholders) while the company is leveraged.
A small business owner taking profits (cash) is more aligned to a dividend (cash) than share buybacks (equity) but it is a similar principle.
This is similar to the people running a corporation taking profits to buy back shares instead of potentially building a bigger emergency fund for the company. They are doing this to return value (share price thus equity that can be turned into cash) to the owners (shareholders) while the company is leveraged.
A small business owner taking profits (cash) is more aligned to a dividend (cash) than share buybacks (equity) but it is a similar principle.
Posted on 4/22/20 at 3:12 pm to lynxcat
quote:
Buybacks are a more tax efficient distribution to shareholders. The hate on buy backs is a political talking point that is emotionally driven rather than a rationale discussion of business.
The problem is when executive compensation is tied (directly or indirectly through stock grants) to stock prices.
If you got $15M excess cash and you need to juice the stock price a bit in order to hit an employment contract incentive, big difference between a buyback and a dividend.
I don't have an issue with buybacks when they are an efficient means to distribute excess cash. It's when they are used to game executive incentives, especially when there is a real lack of excess cash, that is the issue.
Posted on 4/22/20 at 3:17 pm to Lsutiger2424
No.
They should create a government backed Business Interruption Insurance and only companies who pay that premium get bailed out in future.
They should create a government backed Business Interruption Insurance and only companies who pay that premium get bailed out in future.
Posted on 4/22/20 at 4:13 pm to LSUFanHouston
I have neverly fully understood this argument. Let's suppose I run a company with 100 shares, the company produces $500 in profit [after-tax, free cash flow or however you want to term it] per year and will grow at 2% for perpetuity. In addition, my company has $1,000 in cash sitting in the bank. Everyone would then agree that the value of this company is $500/2% + $1,000 = $26,000. The intrinsic stock price of this company is $26,000 / 100 = $260/share [assuming all profits will be eventually distributed].
If I decide to buy back $780 worth of stock, I go out and purchase 3 pieces of stock at $260 each. My company now has 97 shares and is worth $500/2% + 220 = $25,220. Divided by 97 shares yields.... $260. My company's stock price has not shifted despite the share buyback!
Granted, this is a simplified version and there are numerous assumptions, transaction costs, and behavioral aspects that don't lead to such perfect numbers; however, shouldn't the fundamentals stay pretty much the same?
If I decide to buy back $780 worth of stock, I go out and purchase 3 pieces of stock at $260 each. My company now has 97 shares and is worth $500/2% + 220 = $25,220. Divided by 97 shares yields.... $260. My company's stock price has not shifted despite the share buyback!
Granted, this is a simplified version and there are numerous assumptions, transaction costs, and behavioral aspects that don't lead to such perfect numbers; however, shouldn't the fundamentals stay pretty much the same?
Posted on 4/22/20 at 4:37 pm to blackoutdore
quote:
Granted, this is a simplified version and there are numerous assumptions, transaction costs, and behavioral aspects that don't lead to such perfect numbers; however, shouldn't the fundamentals stay pretty much the same?
Market stock price isn't the same as intrinsic stock price. In fact, most buybacks occur when market stock price is trading at a discount to intrinsic stock price.
Posted on 4/22/20 at 5:22 pm to lynxcat
quote:
The hate on buy backs is a political talking point that is emotionally driven rather than a rationale discussion of business.
Dude, how many of these people in the "ban buybacks" crowd bitch and moan about the "hoards" of cash the FANGs have that they are "stealing" from their employees and the government?
This post was edited on 4/22/20 at 5:28 pm
Posted on 4/22/20 at 6:27 pm to JetsCoach
Yes and they don't. The CEO and Board that gets $$$ based on the share price use 90% of available cash to inflate the prices or give dividends. Very little profit is stashed away for a rainy day.
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