Stock Buybacks are Fine

Ted Frank writes:

Let’s start with what a buyback is, since even many financial journalists do not understand this: A corporation purchases stock from its shareholders. It’s economically indistinguishable from a special dividend, where a corporation pays out money to every shareholder, except it permits shareholders to elect their own tax consequences, unlike a dividend that creates a tax event immediately.

…Proposals to ban buybacks are effectively proposals to demand corporations hold such huge stockpiles of cash, depriving shareholders of investment choices. Such proposals will backfire by slowing down the economic recovery when money that could be invested is instead held in corporate bank accounts, doing nothing.

I agree. Buybacks are just not a big deal.


Yes, they’re fine if financed by legitimate business revenue— NOT when financed by American taxpayers through bailouts. If that’s the intended use of the funds then maybe those industries don’t need the help.

Exactly. Though it usually works the other way around. Bailout funds aren't used for buybacks, but rather buybacks may necessitate bailouts. Many buybacks (and special dividends to sponsors) are debt-financed. These levered companies are vulnerable to economic downturn and generally more in need of a government bailout.

I suppose you could argue that occasional government bailouts are actually more efficient than companies trying to bulletproof themselves for every possible contingency, but like everything, it's tough to know how and where to draw the line.

I definitely think buybacks and dividends paid from debt should be banned. That would have the other side-effect of neutralizing some of the more predatory private equity firms (they love doing special dividends by borrowing money with the acquired firm).

@Brett - sounds like a savvy comment. In my 1% family, I notice they are impressed by closed end funds that either borrow to pay a dividend or return principal, disguised as a dividend (the 1% is often not so much as good as lucky IMO).

Also a minor point about AlexT's OP: it's true a buyback is a special dividend, but only if shareholders sell during or after the buyback. if they don't sell, and the price of the stock goes down, they lose their 'dividend'. Employees love buybacks since it keeps the stock price higher than it should be and allowed employees to exercise their options 'in the money'. I think buybacks are OK but they are not really, IMO, completely shareholder friendly. It's more for insiders.

yes, if you're management holding lots of options, you love buybacks and hate dividends - special or otherwise (except to the extent a regular dividend increases the attractiveness/price of a stock).

It actually related to limited liability. The assets of the company are used to secure any liabilities that the company takes on.

If you pay a dividend (or buy back), then you are moving money from where it can be used to compensate any creditors to behind the limited liability shield.

This is great for shareholders but not so great for creditors.

If the taxpayer will bailout the company anyway, then taxpayers lose and the creditors don't even lose.

A way to reduce this effect would be to payout dividends using unsecured multi-year bonds (ideally lowest possible priority, they are paid ahead of shareholders and nobody else). This means that if the company goes bankrupt, the unsecured bond holders would be burned instead of other creditors.

You could alternatively, give the shareholders unsecured 5 year bonds instead of dividends, and they could sell them immediately if they wish.

This. I think it's entirely reasonable for the US government to demand that a corporation use the money for operating costs only, and be barred from issuing dividends and doing share buybacks while the loan is outstanding.

Also, I think they should be barred from borrowing money to do buybacks in general, but that's another issue. I'm fine if they just want to do buybacks from profits - there's no evidence that firms that do buybacks underinvest in capital investment versus those that don't.

As long as the government keeps financial markets open there is no societal blowback from debt financed buybacks. That is basic modigliani-miller theorem that capital structure is neutral to the firm.

It simply creates two classes of capital - equity that is higher return/higher risks and debt that is lower return/lower risks.

That is basic modigliani-miller theorem that capital structure is neutral to the firm.

But not to the taxpayer if the firm expects a bailout.

How do you even tell what a debt financed buyback is? Every company in the world, even the very wealthy, has debt, and money is fungible. Clearly, preventing any company that has debt from doing buy backs is ridiculous.

Why don't companies use the buyback money to pay down debt? Maybe I'm old fashioned but that makes more sense to me than stock buybacks.

Huh??? So if they used the bailout money on dividends rather than buybacks, you would be cool with that? BTW, nobody is actually proposing a no-strings handout; the 'bailouts' in question are loans that have to be paid back with interest. As long as they are paid back, what's the point of a categorical ban on either buybacks or dividends??

As long as they are paid back, what's the point of a categorical ban on either buybacks or dividends??

Unless you have a time machine how do you know they are gong to be paid back? Ever heard of companies going broke?

Besides, the point is that the people asking for the money are talking about it being needed to avoid massive layoffs.

So it's perfectly reasonable to say the companies have to use it to retain employees and generally finance operations, not hand it out to shareholders.

This is all the more so when they are in danger of bankruptcy, in which case the Treasury gets stuck.

The loans should have to be paid back before there are payments to shareholders. That's not particularly onerous, by the way. Lots of loans place restrictions on what the borrower can do with the money.

Ordinarily I'm of the opinion that buybacks are tax-efficient dividends, and therefore perfectly fine.

Here, the whole premise of needing a bailout is that you need the financing for something. You do a dividend or a buyback when you don't have a use for the cash and therefore you must not need a bailout. So it's kind of one or the other. Do you need financing or not?

Using debt to finance "tax efficient" stock buybacks is "fine", because it's the best way to extract cash from worker 401Ks in money funds to give to shareholders selling today?

After all, workers laid off when the economy tanks don't deserve to get their savings they put in debt instruments while working, and workers selling stock when unemployed need to be punished for driving down stock prices by getting less out than they put in in savings.

Of course, when companies layoff lots of workers to preserve cash needed to make debt payments, they need government bailouts because no firm could ever anticipate that laid off workers will be forced to cut their consumer spending which will cut business revenue.

As if Boeing has never seen its revenue fall because of reduced revenue caused by high unemployment cutting consumer spending bankrupting airlines who buy from Boeing. After all, if it hasn't happened since Trump took office, then its ancient history: 2008-2010 never happened, 2001-2003 never happened, 1987-1993 never happened, 1980-1983 never happened.

Obviously Warren Buffett is an idiot who has failed to stay in business because he has not loaded up on debt, failed to deplete cash holdings with stock buybacks.

And if you think Boeing is already doing more in aerospace than the market can consume, how is it that SpaceX is nibbling away at Boeing's market? SpaceX is building more dollars worth of satellites than Boeing after starting in the satellite business at least 50 years after Boeing.

SpaceX and Boeing both got development money during the Obama years, while Boing had coddles of cash and Elon and his paypal mafia were nearly tapped out, but now SpaceX is delivering services at a lower price than Boeing which is failing to deliver. The problem for boeing is it failed to pay enough workers to work making sure every part of Boeing's engineering and manufacturing were as good as SpaceX.

Profit is the money not paid to workers, so the logic of those justifying stock buybacks is bizarre: not paying workers creates jobs, because using profits to pay workers destroys wealth (lower stock prices), and destroying wealth kills jobs.

Clearly prohibiting stock buybacks is just another leftist job killing rule like the 13th amendment.

First off, buyback don't create jobs...I mean really your argument is that the money can be better deployed elsewhere. The reality is that the past 10 years there has been massive inflation of financial assets. Now taking the cornovarus aside for a second, the reality is that Boeing spent money on buyback instead of aircraft. The truth is that the wing needed to be changed, and that was 2/3 billion. That management could not give to its shareholders (and management vis larger bonus). So management decided to cut corners and hope for the best (while keeping the money).

As for company keeping a cushion its only reasonable to do so, but of course the markets penalize those who do (like having lower leverage). American companies have been piling on debt over the past 10 years, increasing leverage and aggressively buying back shares.

YOu may call it socialism or communism, but trust me if these companies had been partnerships instead of limited companies they would have kept a capital cushion for the bad days.

It seems that over the past decade recklessness is being rewarded and prudent managers penalized. This time around if Amerca's companies get a bail out they should "pay for it" with shares and not loans. So that the country that is backing them up gets the benefit of the upside.

I wonder of Boeing's shareholder will be as enthusiastic for government money if they have to give up 30% of the company...inquiring minds want to know

This just sounds like Monday morning quarterbacking: if every company has to cushion itself to fully prepare for unexpected plagues or 9/11s, we would forfeit a lot of economic growth during the vast majority of time when we’re not in crisis.

And given how poorly businesses that are not LLC seem to be doing, I doubt converting the whole economy to partnerships would make a difference. Family owned businesses for example have about as little an incentive to prepare for a pandemic as a publicly traded one, for the same reason: it’s a really rare event.

"we would forfeit a lot of economic growth during the vast majority of time when we're not in crisis" -- isn't that exactly the moral hazard issue? They reap the gains and juice the stock prices during bull markets, then get bailed out during crises, at least three or four of which I've lived through since my birth in the mid-80s?

I think it depends on the nature of the crisis. If we can produce a particular quantity of goods with our current capital then if we ask companies to hoard capital it will reduce the total output and make all of us poorer especially for a once in a century pandemic. One thing about the current crisis is that no actions taken for/against companies today will increase or decrease moral hazard with respect to creating new pandemics.

Did any private companies get bailed out in the 2008 crash?

I'm not aware of any.

Private companies tend to keep a cash cushion for emergencies.

From the Omaha World-Herald:

The president of United Airlines Holdings Inc. on March 11 described a “dire scenario” in which monthly sales would plunge 70% until the start of June, then 60% that month and 40% in July and August.

That outlook, it soon became clear, was too optimistic with the coronavirus pandemic destroying virtually all demand for travel. Airlines worldwide are making pleas for government help as bookings evaporate.

But the request for taxpayer assistance comes after a decade of massive consolidation — and billions in profits — that put the industry in a far more robust condition than before.

What’s more, from 2010 to 2019, U.S. airlines spent 96% of their free cash flow, some $45 billion, to purchase shares of their own stock, according to data compiled by Bloomberg. The world’s largest carrier, American Airlines Group Inc., was the biggest buyer, spending $12.5 billion.

Share repurchase programs aim to help boost share prices. And that effort — as opposed to using the cash to build up reserves — is drawing attention as governments start to funnel aid to the industry.

Just remember that the airlines could get what they need by selling equity stakes. That would hurt the current shareholders, almost surely, but they are the ones who benefitted from the buybacks.

My C*ck go Brrrrr

If they shareholders just reinvest their earnings from buybacks (which is what they mostly do), then aren’t buybacks just reallocating investment from companies that don’t need the money to ones that do?

Think about it: if a company doesn’t need a bailout, but can’t do buybacks, well then is the bailout they get any more effective because of that? Now they’re just sitting on a bunch of cash not doing anything with it. What does that accomplish again? You might say they shouldn’t have gotten a bailout in the first place, but then the problem there is that governments are bad at allocating capital in the first place, and can’t easily tell who dies or doesn’t need a bailout. Which is an argument against bailouts in general.

The airline industry stock buybacks disqualify them from anything other than repayable loans from Government. Ditto Boeing.

Shouldn't the airlines have to go bankrupt first before they get the loans? First wipe out the shareholders to punish them for agreeing to the buybacks and they the government can offer bankruptcy financing to get them back on their feet.

Maybe next time some CEO says, "We should do some share buybacks to goose EPS so I can get my bonus." The shareholders will say, "Hell no!"

Given CEO stock grants require holding the stock to retain the job, either de jure or de facto, bankruptcy is the perfect clawback of CEO compensation by zeroing the price of shares the CEO has been granted. (A CEO dumping stock requires both advanced notice and rapid public disclosure which indicates the firm he heads is doomed to the market.)

Granted, few CEOs take as little cash as Elon Musk, about $1000 a week at Tesla, but few get more than a couple million in cash. The big numbers are in restricted grants/options of shares which are worth zero in bankruptcy, or at best pennies on the dollar from creditors getting newly issued stock.

Given the point of stock is to raise cash, all firms running short of cash today should be selling new shares of stock.

If not, the stock market no longer serves the function conservatives have claimed for decades justify low tax rates on stock price inflation.


Let them sell stock. They won't get a good price? Too bad.

It will dilute current holders? Too bad. That's part of the risk.

As an investor in airlines who recently lost significant money in them - I would not invest in airlines if they did not return a ton of cash to shareholders in the form of buybacks/dividends. That is the only reason to invest in airlines. The business sucks. They trade at cheap multiples. You get cash flow yield in the mid-teens. Sucked to be long when they went to zero, but that was a known risks. Without the buybacks then you would not get a return for investing in airlines.

And the stock markets for capital raising...are they still in operation?
And the bankruptcy courts?
Oh, from what you said at first I was afraid that something had happened to stop them in their useful course. I'm very glad to hear it.
*They should have to raise money in the market.*

Meh. Airlines are different from Boeing.

With the airlines, if we're really not flying much domestically or at all internationally for a few years, there's an argument for an orderly wind down followed by building new airlines when this is all over. Exit and entry in airlines is easy: there isn't much to an airline other than a bunch of planes and a logo.

Boeing is more complicated. But prior to the latest crisis, buybacks were not their major problem. Frankly they aren't even now. My guess is parts are preserved. There's an argument for breaking it up.

What about
“My [email protected] go Brrrr”?

“ Exit and entry in airlines is easy: there isn't much to an airline other than a bunch of planes and a logo.”

Maybe the most staggeringly stupid thing I’ve ever seen in the comments on this blog, which is saying a lot. You really should just STFU and stop making a total ass of yourself.

I couldn't help but give props to you (Rex) for stating the idiocy of "Exit and entry in airlines is easy: there isn't much to an airline other than a bunch of planes and a logo."

If the whole economy goes belly up and the 1% is .5%, none of them would start an airline themselves simply for the reason Sean states above, "I would not invest in airlines if they did not return a ton of cash to shareholders in the form of buybacks/dividends. That is the only reason to invest in airlines. The business sucks. They trade at cheap multiples. You get cash flow yield in the mid-teens."

Taxpayers would be footing much the bill and we would be starting over again: see the bankruptcy of Swissair - luckily their not wholly owned regional carrier was there to pick up what pieces were left.

Because they bought back stock in the past, before the pandemic? If so, then you’re disqualification is idiotic. “They didn’t need the money before the pandemic, so they don’t need it now” is not sound reasoning. If they’ve been buying back stock in the last few weeks, sure, but buybacks a year or two ago are completely irrelevant to right now. Anyone making that argument clearly just thinks buybacks are a sin and wants to punish anyone who ever did then.

The issue isn't the buybacks. The issue is (for example) Boeing clearly stating in every 10k filing that one of the biggest risks to its business is a pandemic and then spending $50 billion in share buybacks so when the crisis it's warned about for years finally happens, it risks bankruptcy because it has no spare cash.

How much spare cash do you want them to have? Sometimes you disclose a risk and you take the risk. This is an unfair criticism.

We all knew about pandemics, war with China, asteroid strikes, nuclear terrorism, India-Pakistan war, Iranian nukes, North Korean nukes, superintelligent AI, etc. But we run those risks and don't ask individual companies or people to sit on mountains of cash. just in case.

If you want to Monday-morning-quarterback the pandemic cash hoarding question, ask yourself how vocal you've been calling for ballistic missile defense funding over the past few years. What about asteroid searches and space capability in general? Worried the Navy didn't have enough carriers?

What is unsavory to the public is that these corporations are now going to the public, hat-in-hand, and acknowledging that they are indeed too-big-to-fail. Don't you agree that if that is the case they should be regulated as such? It seems that there isn't a single industry that can't avail themselves of the "nobody could have seen it coming" defense.

I mean, since the fire is still ablaze, why not wait until the the rubble has settled and then society can determine which facets of the economy need to be supported and which are better off with a "fresh start". As long as order of magnitude proportions are being thrown around, what is another 10M jobs here or 100B there?

I think this time it's fundamentally different. The virus wears no colors and picks no sides. Let it burn the f down, as they say and see where we go from there.

I never would have let Boeing get that big. The Clinton era defense consolidation favoring fewer, bigger vendors was a mistake. But here we are, and Boeing has businesses we need to preserve. I would not advocate a plan that kept them from feeling pain.

With respect to the airlines, I don't think they're too big to fail. I'd let them fail and start over in a couple of years. I don't think supporting them through this is viable or necessary.

In either case, though, past buybacks have nothing to do with it.

If you honestly think they should’ve seen it coming (which I doubt anyone really believes) then I guess mandate that everyone buy pandemic insurance.

Maybe we should let them all fail, but the problem with the concerned industries is there are many barriers to entry which make rebuilding after the fact quite a chore. If these industries were less heavily regulated and subsidized and more competitive, this would be less of an issue.

Sometimes you disclose a risk and you take the risk. This is an unfair criticism.

OK. But when the decision to take the risk turns out badly, because you get hit, don't go asking the government to make you whole. Because that means you didn't take the risk.

The government made Boeing what it is. They didn't have to, they chose to. And now they're stuck because the government needs Boeing to survive.

With respect to the airlines, yeah, I think we should let them go. And if your bailout plan doesn't including floating them for three years, you don't have an accurate picture of what it will cost to keep them around.

they're stuck because the government needs Boeing to survive.

You are conflating Boeing as an organization that designs and builds airplanes with the structure of Boeing's capital and ownership.

What the government needs to have survive is the former, not the latter. I mean, ownership of Boeing changes probably every minute anyway.


You'd have a point if the crises haven't been coming more or less every 10 years like clockwork - 9/11, Financial Crisis, Pandemic...

We can't have airlines if we require them to hold three years revenue in reserve. I'd rather have airlines for the 99/100 years we don't start a major pandemic and start over the 1/100 years we do.

This is the sort of risk it makes sense to socialize. This is why governments exist. It's also very different from the financial crisis where you can argue the participants were part of the cause. Here, this is totally on China.

1- who said 3 years? What about one year of revenue in reserve? Six months?
2- can't you substantiate "we can't have airlines if we require "? Why is that true?

We have Berkshire or apple with money in reserve. I would have thought other businesses could? It is just a risk / return decision is it not?

Berkshire or Apple couldn't handle three years without revenue. And they're extremely cash-rich by corporate standards. Airlines just happen to be the most unlucky companies this time around. Even restaurants will be back sooner.

We won't have domestic air travel until a large majority of Americans are vaccinated and coronavirus checks are the sort of thing they can do while scanning your boarding pass, and we won't have international air travel until that's true of most of the world, at least in anything like the current model.

Six months revenue does them no good. Better to turn them off in an orderly fashion and start again when technology is up to the task.

At a 10% profit margin 1 year of revenue is still 10 years of profits saved up.

In theory high-margin business could save up a year of revenue more easily, but they tend to be growing very quickly, so this year's revenue could easily be more than all cumulative profits.

We can't have airlines if we require them to hold three years revenue in reserve.

Sure you can. You'd just have ticket prices that reflect un-subsidized reality. Tickets used to be twice as high as they are now and people still flew. Fewer people sure. But the airlines were very much in business.

The key issue with buybacks is incentives.

You want CEO to run the business dispassionately for the long-term benefit of stakeholders. We can debate where shareholders fall vs. other stakeholders, but however it is, you want the CEO to maximize long-run shareholder value.

The problem if you believe in incentives and you compensate CEOs with stock options, is the CEO has a substantial incentive to conduct buybacks (which increase the price per share by decreasing shares), a substantial disincentive to conduct dividends (which make the capital structure worse and give no compensation to optionholders).

So to say dividends and buybacks are equivalent is, in my view, incorrect. Buybacks are tax advantaged for shareholders, and significantly more favorable for management that holds options.

This could in theory be fixed. And reasonable people could disagree as to the strength of this incentive, or the effectiveness of the idea that the board of directors is a check and balance on this behavior.

But a reasonable person could clearly conclude that there is too strong an incentive today to conduct buybacks, and through that incentive, we have created a situation of many large companies with overly risky capital structures.

+1. Buybacks are just not a big deal apart from beneficial tax treatment and impact on executive compensation compared to dividends.

Bingo. Combine large stock option related incentives of management with financial (and volatility) repression by the Fed that pushes investors further out on the risk spectrum limb and what happens?.. Over-leveraged corporate balance sheets and asset prices that are priced for perfection (or at least a "Fed put").

That was not me but another Bill. But, I agree.

This argument - which assumes shareholders are fairly indifferent to their self interest and let executives regularly screw them by giving generous stock options - is inconsistent with the argument others are making that buybacks are done to appease current shareholders.

The case for banning buybacks needs to be clarified: is it to protect shareholders from executives or executives from shareholders?

Buybacks at Boeing shifted the capital structure from equity to primarily debt. Now, in a crisis, the debt is much more difficult to restructure.

Another example of what an idiot Tabarrok is.

Not sure what world these guys are living in right now... If these companies had cash they wouldn't need bailouts. All these years railing against socialism and now they want the government to take equity stakes in corporations. The "jokes" about capitalism for the poor and socialism for the rich aren't so jokey anymore.

Who has been "railing against socialism"? I'm amazed at how many people, after two weeks off the job, need rent forgiveness, deferred mortgage payments and and cash fronted by the government to hold onto cars and cell phones. I was surprised to learn a couple years ago that at least 40 percent of Americans didn't have enough savings to cover a $400 emergency. In my city, I share the streets with a significant number of homeless people, almost all of them able-bodied young white men, who have worked an average of less than four months during the last three years of full employment and strong GDP growth. They seem to rely on public and private "services."

And now we're supposed to be surprised that businesses run close to the margin and are vulnerable to failure after six weeks of economic strain? Who needs cash when we have a federal government?

Wasn't there a newsmagazine cover story a few years back titled, "We're All Socialists Now"?

>I was surprised to learn a couple years ago that at least 40 percent of Americans didn't have enough savings to cover a $400 emergency. I

How is this disinformation so widely spread?

This was never true, the study merely asked would you pay out of pocket or via credit card, etc.

Buybacks are dividends... and that´s it.

And companies shouldn't be paying dividends and then asking for bailouts because they don't have enough cash.

Is that so hard to understand?

Yea except for the huge difference that CEOs love buybacks and hate dividends. This is about getting CEOs to stop acting like complete sociopaths. And I am not in anyway a leftist. Corporate incentives in executive compensation in America is completely out of control.

If stock buybacks are fine, secondary offering of stocks too (

No bailout is needed, just resell the shares.

Great point, and one that has not been mentioned enough. The government should only support companies through purchasing equity, and diluting existing shareholders (that's the market system). Shareholders benefited when excess cash use used (perhaps correctly) to repurchase shares. Now the opposite should happen.

If private sector capital structures are highly leveraged, they are especially fragile in an economic downturn. Should we expect the private sector to plan for these events at all? Or should large-scale bailouts become the norm in a crisis?

Ahaha. What a moron.
Buybacks were banned because they were considered market manipulation. Big money interest groups got that changed so that they could add volatility to the markets.
In theory, buybacks can be great because, eventually the market will equalize the risks involved. Apple is surviving their buyback program, and Boeing isn't.
But let's stick to reality, where volatile markets aren't the goal.

Talking about buybacks in an abstract, academic way obscures the issue.

The problem is twofold.

First, we were told that companies would use the tax savings from the Trump tax cut to invest, expand, etc. They didn't. They paid big executive bonuses and bought back stock instead.

Now some of these same companies are screaming for bailouts. WTF? Yeah. They got hit with an unexpected disaster (though Boeing doesn't deserve much sympathy). So what? Ever heard of contingency planning? Ever heard of the seven fat years and the seven lean years?

Besides, some of them could go through normal Chapter 11 bankruptcy without huge disruptions. Airlines used to do that constantly. The planes don't disappear. The pilots don't drop dead. Ownership changes.

Maybe Mr. Frank and Alex, who I'm sure understand this, cold explain it to those who don't.

In general stock buybacks aren’t a big deal. But from 2001-2008 XOM was engaging in stock buybacks while America was in the midst of an energy crisis. So XOM should have been investing in increased production but they were seduced by lazy conventional wisdom/groupthink that America had hit peak hydrocarbon production. The biggest kick in the you know what was Trump rewarding Tillerson with the job of SoS after he was the worst CEO in America by Trump’s very own standards!

In fairness considering XTO acquisition maybe Exxon should have just been lighting money on fire.

That was an attempt to play catch-up...and then Tillerson missed out on fracking for oil. Here is my favorite Lee Raymond quote from 2005:

"Gas production has peaked in North America," Chief Executive Lee Raymond told reporters at the Reuters Energy Summit.

Asked whether production would continue to decline even if two huge arctic gas pipeline projects were built, Raymond said, "I think that's a fair statement, unless there's some huge find that nobody has any idea where it would be."

Nobody is going to do stock buy backs with loans from the government. Stock buy backs are actually safer than an aggressive dividend policy since you can suspend them at any time. The most inefficient use of capital and wealth destroying idea in America is to force companies to hold excess capital. Capital that can be deployed in more beneficial uses.

Holding Capital sufficient to deal with a Black Swan event like the current one would result in returns so for airlines that nobody would provide the capital to

Sounds like governments need to be operating air lines in that case. Or airlines need a special tax rate that takes into account this propensity for needing bailouts. Otherwise you are just saying privatize profits and socialize cost.

The most inefficient use of capital and wealth destroying idea in America is to force companies to hold excess capital.

How often do these black swan events have to happen (9/11, the financial crisis, the pandemic) before holding sufficient cash to weather a crisis isn't considered "excess capital" but rather prudent savings?

Stock buy backs are actually safer than an aggressive dividend policy since you can suspend them at any time.

Nonsense. You can also suspend dividend payments at any time.

It’s economically indistinguishable from a special dividend, where a corporation pays out money to every shareholder, except it permits shareholders to elect their own tax consequences, unlike a dividend that creates a tax event immediately.
Collect all these advantages and we get one definition, the stock market is a structured liquidity system designed to cancel the distortions of central government. If all firms used NASB accounting standards, and money was accurate and taxes uniform then we would not need a central market for shares, over the counter would work fine.

“Proposals to ban buybacks are effectively proposals to demand corporations hold such huge stockpiles of cash ...” Wow! So our corporate leaders know only 2 things to do with cash? Either buy back shares or hoard it? Might there be other options?

Isn't there kind of an important assumption in "stock buybacks equal dividends?"

And isn't especially evident this month?

Really too many people on this page accept the "model" that any stockholder missing a dividend gets to collect equivalent in permanently higher valuation from that day forward.

1) The communication between buyback and price may not be efficient at all.

2) Other market events may dwarf the signal in #1 anyway, rendering it useless.

I'm inclined to think boards do buybacks because it's easy, and accepted in their circles, and not because it has been shown to benefit most shareholders .. especially not consistently across all companies.

the "model" that any stockholder missing a dividend gets to collect equivalent in permanently higher valuation from that day forward.

I have no idea what you’re trying to say. What model is this and how do you come up with it?

1) The communication between buyback and price may not be efficient at all.

This sentence makes no sense. Communication....between what?

not because it has been shown to benefit most shareholders .. especially not consistently across all companies.

Take a DCF valuation for a firm, with 10,000 shares what’s the valuation per share?

Now do the same for 9,000 shares.

It benefits all shareholders on a per share basis......

"I have no idea what you’re trying to say."

What else is new. When things fly over your head don't reduce them to something you can comprehend, and something that fits your prejudice.

Just walk along.

The issue is tax. All distributions should have a tax.

Good news everyone, if the stock falls after a series of buybacks, no one has to pay tax!

"Such proposals will backfire by slowing down the economic recovery when money that could be invested is instead held in corporate bank accounts, doing nothing."

Must also include the funds received from selling the shares is then invested in some new economic investment, not merely put back in the secondary markets. While somewhere in the who chain of events some of that will happen I don't think it is that strong of an event -- a bit like the old pushing on a string plan.

Should corporations hold large stockpiles of cash to deal with systematic tail risks? I don't know, but it does seem like some people expect ordinary workers to hold large amounts of savings or insurance to deal with health emergencies or recessions while not making the same demand of corporations.

Stock Buybacks are Fine

No, they're not. They're a conduit for dubious practices.

except it permits shareholders to elect their own tax consequences, unlike a dividend that creates a tax event immediately.

And why should receiving cash in return for an asset not create a tax event?

If corporations have the ability to save money for times like these and don't, then let them die when these times come. Or, if they have become crucial to national well-being, nationalize them. You're right, not a big deal.

"except it permits shareholders to elect their own tax consequences, unlike a dividend that creates a tax event immediately.

Does the government actually *want* that feature?

Is it fair? Some stockholders have more capacity to opportunistically time things e.g., match with other losses, or a 90 yro vs a 20 yro.

Hmm seeing a lot of commenters here that are pro-medical-supply-hoarding-and-price-gouging but anti-bailout-and-buyback. I guess support for anti-social behavior and recognizing its effects on society is highly correlated with the possibility of their behavior coming under scrutiny. Principles suck I guess.

Investors should look for debt-less companies with good cash cushions.

Seems like there's a consensus: Saying stock buybacks are fine was a dumb thing to say.

A stronger statement from Alex would be "If buybacks are fine, then bankruptcy is fine". Because it sends the message that you have the freedom to do what you want but you must own the consequences including bankruptcy. Otherwise it sounds like he's condoning both bailouts and the reckless behavior lead up to it.

Stock buybacks are the natural consequence of tying executive compensation to stock price. They artificially inflate stock prices in the short to medium term, allowing employees to cash in their options at inflated prices.

If a buyback is in theory the same as a special dividend, then banning them takes nothing away from the corporation's ability to distribute earnings to shareholders. It does not "demand corporations hold huge piles of cash". It merely forces the corporations to distribute that cash as dividends. That may create tax disadvantages to shareholders, but that is a tax loophole that I would like to see closed, in any case. If we can't have a wealth tax (unconstitutional), let's ban share buybacks, tax dividends the same as labor W-2 income, and create a special tax for companies that have huge cash piles sitting doing nothing. Let's tax firms who neither distribute nor invest their income. While we're at it, let's tax university endowments. Not to be a left wing populist, here, but corporations maintaining huge piles of cash does not help the economy. If a company is making income, it should be invested or distributed to the owners as dividends (and therefore taxed).

In other words: let’s punish companies for being financially prepared for crises like this one? As if we needed another reminder for why left wing populists should never be in charge of anything. Your suggestions are just a visceral anti-corporate wish list.

Corporations are legal entities that respond to the legal environment that they find themselves in. Stock buybacks were illegal until the SEC changed its mind sometime in the 1990s. Has that resulted in a wave of good governance? No, it has resulted in companies curtailing investment and often taking on debt in order to finance buybacks, which suit executives tremendously, and lessens owners' tax bills (at least short term), but has demonstrably only hurt corporate governance by penalizing long-term investment and rewarding the accumulation of corporate debt. All of this to fund what amounts to a combination of rent-seeking (for executives) and tax avoidance (for shareholders). We don't need share buybacks; we were fine without them before, we'd be much better without them now. They don't help companies; they help certain wealthy individuals with clever tax lawyers, none of whom need our help.

I'll grant that penalizing cash piles is more problematic. Certainly, companies shouldn't be penalized for retaining a cash pile suitable for normal investment and 'rainy day' funds. The problem is when companies take to hoarding billions simply as: a) a threat that they can use to threaten smaller rivals with takeover, and b) once again a scheme to lower the tax bills of their owners. Countries choose the legal environment that their corporations live in. Governments should choose one that encourages good corporate governance, long term investment, fair compensation, and efficient and fair tax collection. Penalizing cash piles in excess of a reasonable limit (let's say a function of average earnings over the past 5-10 years) encourages better corporate governance. It's not unfair if everyone has to play by the same rules.

And the fact that Elizabeth Warren might agree with me doesn't necessarily make me wrong; she has some good ideas interspersed among the terrible ones.

>Stock buybacks are the natural consequence of tying executive compensation to stock price.

It's probably more a consequence of how we calculate "taxable income" i.e., unrecognized capital gains don't count.

That is, if shareholders wanted taxable dividends, then they'd tie executive compensation to it, not share price.

To be fair, any company that did buybacks in the past
and now wants bailout money from the government should
get that money by selling to the government the shares
they bought back.

The other big problem with buybacks is cultural. No one expects quarterly buybacks. Management gets to do them whenever they want. In contrast there is a strong cultural tendency to pay dividends quarterly (for the companies that do pay them at all). This expectation of regularity makes it more difficult for management to game the timing of transfers to shareholders in ways that benefit them more than the shareholders.

Yeah, I don't think buybacks are the same as special dividend even if we took away the tax differences. A lot of businesses stopped their buyback program ironically now that stocks are cheap (a business that is "long term greedy" starts the buying now). Had they instead paid out special dividends then long term shareholders would have something in the bank instead they get hosed while short term shareholders already exited and got their rewards.

Why not just have the government buy shares in the relevant companies at a negotiated discount? The more shares they buy, the more the discount. Agree not to sell them (at full price) until after the crisis, gradually I assume so as not to tank the company in a big sell off after the fact. Companies can then do whatever they want with the money, and have little incentive to ask/offer a discount if they don’t need it since the discount comes at the expense of shareholders. If done without foreshadowing, current shareholders wouldn’t have time to sell beforehand and would just have to take the loss.

A lot of people are hoping for no bailout or bailouts with restrictions so bad that no one will take them.

Before I retired I was the CEO of a company that owned one of the largest aircraft leasing companies. Here is what is going to happen if their is no bailout.

The airlines will default on their aircraft leases.

The leasing companies will not be able to support the debt underlying those leases. This debt is largely owned by pension funds or mutual funds underlying 401K's .

The bonds will default. The bondholders will take back the aircraft but they will be worth a fraction of the underlying debt.

The employees will be laid off. The union contracts will be voided.

Several large private equity investors together with Warren Buffet will buy the company out of bankruptcy.

They will re lease some of the planes at a fraction of the current lease price.

They will negotiate new contracts with labor .

The new restructured company will have operating costs 25 to 35% less than those companies who did not go bankrupt.

The non bankrupt companies will not be able to compete or will be at severe competitive disadvantage so they will be forced into bankruptcy as well.

I have already been approached to be part of such endeavors . The analyses is going on as we speak.

I am to old to do this again and have rejected the overtures but it will happen if their is no bailout.

The beloved Warren Buffet will take advantage like he always does of the misfortunes of others. He can hold excess cash because he controls his company. A company that has underperformed the S&P 500 for the last 20 years. If he didn't control the company he would be gone. I know him and have negotiated with him and he is no friend to the little guy.

Being mad at CEO"s for doing what their shareholders want them to with their capital structures and their buy backs wont help all of those people who are going to be seriously hurt in the process.

By the way I have been Non Executive Chairman of 5 publicly traded companies and every single quarter I got pressure to buy back stock from our largest shareholders. You can resist to a point but you and or the management wont be employed for long if you do.

Without enforcing market discipline on the decisions made by management/shareholders/debtholders, we don't have a market. There is a good case for nationalization, which is one option. Another choice if we want to keep the industry private is to use DIP financing to keep the business continually running while it goes through bankruptcy. The current arrangement seems very lopsided for a particular group and very lopsided against the public.

There is no case for Nationalization. Its been tried .

Scandinavian Air is owned by Norway and Sweden. Air New Zealand, China Airlines, Czech Airlines, and Malaysia are owned by their respective countries. You might not agree with it or like it but it is an overreach to say there is no case for nationalization. Simply stated, the arrangement where profits are privatized and losses are socialized lacks both a market logic and a public welfare argument.

Here's a more complete list of nationalized airlines:

On a different point you mentioned:
"every single quarter I got pressure to buy back stock from our largest shareholders. You can resist to a point but you and or the management wont be employed for long if you do."

This inadvertently or not scores a point for making stock buybacks illegal. We need strong management like yourself to be able to function as proper stewards that can resist corporate raiders who seek short term gain through long term wealth destruction.

Companies should be allowed to go bankrupt including airlines. I pointed out in an earlier post that you have to accept the consequences. None of those airlines you mention are economic without subsidies either in the form of route protection or subsidies. Nationalization is a losing strategy.

"None of the those airlines you mention are economic without subsidies..." The same could apparently be said of every airline that gets bailed out in the US. In fact I think someone was saying that in this very thread...

OK, you've given me all of the good things that will happen,
What are the bad things.

What makes you think pension funds will not learn a lesson.
Should have bought insurance
From Buffett
To protect yourself from such events.

Buybacks are just tax advantaged dividends. Still, there is no excuse for a a bailout. The airlines should be liquidated. The important stuff will still be there. The airplanes, trained pilots and crew, the airport gates and facilities will all still be there. Wasn't the whole point of deregulation under Carter to let the free market do its work. I'm sure lots of investors will be glad to buy airplanes, hire crew and occupy gates in exchange for a closed end investment.

The alternative is to nationalize the airlines if they are going to require subsidies on a regular basis. There's no reason they can't be treated like highways and the resource allocation and service levels left to the states.

"A corporation purchases stock from its shareholders. It’s economically indistinguishable from a special dividend, where a corporation pays out money to every shareholder, except it permits shareholders to elect their own tax consequences, unlike a dividend that creates a tax event immediately. "

With due respect to Ted Frank, the first sentence is fine as it defines clearly what a stock buyback is. The second sentence starts by asserting equality to another form of payment but then immediately contradicts itself explaing how it is in fact different. Special dividends and stock buybacks are different, not just from the tax view but also from the incentive view. CEOs paid in stock options treat the stock market different than CEOs paid in stock. Since they don't own the company outright they on average behave in a riskier fashion because their upside in unlimited but their downside is limited.

"the difference covers less than a month of expenses in a once-in-a-century economic shock far worse than Sept. 11"

The airlines have a once-in-a-century shock requiring bailouts every decade. They more than anybody else in the US economy should know they need to build a financial reserve but they don't do it because they depend somewhat reliably on politicians and taxpayers to bail them out.

If stock buybacks result in a temporary spike in the stock prices a great investment strategy would be to short or sell every company that engages in a stock buyback because under this theory the price will drop shortly.

Banks are expected to hold stockpiles of cash, depriving them of investment choices. If you receive public favors, you must take on public accountability.

Buybacks are fine. The problem is that some companies paid out most of the surplus cash through buy back programs but now rely on the taxpayers' handout to deal with the current crisis. It's the typical moral hazard problem.

I was forced to borrow money once from Buffet to shore up the balance sheet of a Reinsurance company that had its line of credit withdrawn just before earnings release. I needed $150million of reinsurance to meet the required solvency margins. Know what his price was. I only needed it for 90 days until our new capital raise was complete. You know what good old Warren's charge was --$150 million payable over 10 years even though we only needed it for 90 days.

Buffett is an egg McMuffin eating shark. He had sold billions $ worth of 20 year worst-of Puts (with one way CSA from the banks!) to raise money all the while telling everyone derivatives are WMD. A huge chunk of his portfolio was bailed out by Uncle Sam.

I have nothing against buybacks in general, and in general I really don't think it's the government's business (or the public's) to tell a company what it can or cannot do with its money.

But if a company is deemed "too big to fail" or "too important to fail," and taxpayers are going to be on the hook to bail it out, then the game changes.

In that case, taxpayers essentially become the insurance company. And like any insurance company, should be able to set the premium.

For me, either one of the following two options would be sufficient:

1. Regulate an industry to ensure there are enough companies so that the demise of one (or several of them) does not have such a negative impact on society or whatever that the government must step in to the rescue.


2. Require that a company have enough operating cash on hand for [pick one: 1, 2, 3, ...] years before it can initiate buybacks, special dividends, etc.

Just that simple. If I am going to bail someone out in a pinch, I think I should get a say in how they behave before the pinch.

Maybe someone has said this already -- I am late to the thread and it is already to long to read every entry (I have only skimmed them). But here is my reaction to the buyback issue:

If there is anything wrong with buybacks, it is that they have left the corporations in question overleveraged, possibly (would have to look case by case) as a governance abuse to enrich management at the expense of shareholders. Even if the overleveraging was only imprudent, not corrupt, there is a solution. The bailout should not give LOANS to any corporation that has had a buyback since, say, the big tax cut. Instead, the government should take EQUITY in those corps through a "reverse buyback" -- repurchasing the same stock the company bought back from its shareholders, but at today's lower market price. When (if?) things return to normal, sell the stock on the open market at a profit.

On buybacks: Yes they are basically just a tax scam to turn under-taxed dividends into still more under-taxed capital gains. So if a company is in a tight spot now, why not just issue new stock to reverse the operation.

The main issue with buybacks is how they are administered. Done wrong, they become a back-door way of providing executive compensation, with borrowed cash exchanged for shares that are effectively outside the pool of a company's shares that are publicly traded. That increases the debt load of the firm, increases the income of the executive, but does little to benefit general shareholders because it doesn't much affect the stock price because the shares transacted this way have never really ever been publicly floated.

Why do companies do this? Tax laws provide strong incentives for executives who can control how they receive their compensation to pursue this approach.

There would be far fewer ethical problems if buybacks were administered so that general shareholders are included to proportionately participated in the buyback transactions. Ethical firms may also be distinguished by whether or not they also reduce the company's debt load when they implement a buyback policy. Firms that do clearly have the equity to support the policy and can be argued are working in the general shareholders' favor. These kinds of firms can also weather recessions relatively well.

Firms that don't follow this practice create problems when recessionary conditions cause corporate liquidity to run dry and their debt loads put them at immediate risk of bankruptcy and becoming taxpayer bailout candidates if they're systematically important enough to the nation's economy. This is the chaff that has to be sorted from the wheat when a financial crisis hits.

The airlines in a regulated market had capital structures not much different than today. You just paid a lot more money to fly because of the inefficiencies that regulation led to.

Buybacks are required by the SEC to be announced in advance. Anyone who wants to can sell into the buyback even if they don't sell directly to the company they can do it through the exchanges. . Thus the opportunity for proportionality that you talk about already exists.

Buybacks are NOT ok if taxpayer money is the funding.

Nationalize the airlines. They are public transportation like the bus lines or the railways. There is no point keeping them private when they misspend their funds on buybacks and executive bonuses only to beg on their knees for taxpayer bailouts every 10 years.

Completely fine. Buyback (or dividend) is an entirely reasonable thing for a corporation to do with its cash. Just not with the taxpayers' cash.

Now would probably be a good time for buybacks with most share prices depressed. Buybacks typically feel like backdoor employee compensations. A company issues a bunch of new shares for employees, then turns around and buys a bunch of shares on the open market. They typically do this when the shares are doing well, rather than when they need propping up. In theory, buybacks are fine, but in practice, not so much.

When are people on here going to just get it that their wont be any dividends or buy backs until the government is paid back with a profit if the airlines get financial help.

Not true absent a Pandemic shutdown that has never been seen before in the US they fine. The national airlines you mentioned owe their existence on an ongoing basis to subsidies.

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