All these recent comparisons to historic charts and other data on recessions and crashes - something more puzzling sticks out to me…

Submitted by TheyPromisedMePie888 t3_11cyrjt in wallstreetbets

Why are so many multibillion (trillion?) $ companies still issuing buy back plans with so much seemingly at stake? Is it irrelevant in the long term?

Looking at all the comparative data, much of it seems to point to - at best - a bad recession. However - at worst - we could be staring down a deep market crash and/or stagflation that deteriorates equity risk premium, slowly bleeding the market for a up to a decade as some suggest. So why would huge companies pour literal tons of their own monetary resources into their stocks instead of significantly hoarding it or at least greatly diversifying? Is it probably a bluff to lull investors into a false sense of ease? Or is it just a roll of their own dice in the short term, with not much concern over the long? And, possibly the most important question; did companies buy back in the same way immediately prior to past crashes? I really want to understand how these decisions may fit into the total probability of everything, but I can’t find straight forward answers to these questions.

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[deleted] t1_ja5wa2b wrote

[deleted]

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jdmulloy t1_ja6h9mh wrote

They also don't want to dilute stock that's used for compensation. It's also an alternative to giving dividends where they don't have to be concerned that investors will expect the same or higher dividends in the future. There's also a tax advantage for some investors in getting returns in appreciation instead of dividends, because unrealized gains aren't taxed, but dividends are. They can avoid taxes via charitable donations and margin loans.

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NOT_MartinShkreli t1_ja7jzhb wrote

Bingo. The upper management is unloading their bags on retail and their own company before it goes to shit.

Think of it like bidding on your own eBay item to drive up the price so you can get out at the max price possible …. (Which doesn’t fly on eBay but in the US stock market, play ball…)

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chinawcswing t1_ja6lbtv wrote

Why are you /r/antiwork types so opposed to stock buybacks, but not opposed at all to dividends?

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[deleted] t1_ja7i0qj wrote

[deleted]

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chinawcswing t1_ja96wta wrote

It's not a fact though, it is wrong.

There is nothing different about a stock buyback and a dividend payout. Both exist to return excess cash to shareholders.

Companies are not doing stock buybacks to "enrich CEOs". They do them for the same reason they do dividends, which is to enrich shareholders. Rather they are returning excess cash to shareholders, and shareholders turn around and invest that cash into other companies who can invest it more profitably.

Yes, CEOs often are big shareholders. But they in almost all cases are not the majority shareholder.

The reason companies prefer stock buybacks compared to dividends is that it is more tax efficient.

That is why Biden and the /r/antiwork crowd complain about stock buybacks, but not dividend payments. The government gets a larger chunk from dividend payments, compared to stock buy backs.

Even if your theory that stock buybacks exist to enrich the CEO were correct, what do you think companies would do in the absence of such a mechanism? First off they would do a dividend. If you banned that too, they would just ... increase the salary of the CEO.

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VisualMod t1_ja5r93u wrote

>The answer to your question is quite simple: companies buy back their own stock because it is an easy way to increase shareholder value. By buying back stock, companies are essentially telling investors that they believe their shares are undervalued and that they are committed to increasing the value of the company. This often has a positive effect on share prices, as investors see that the company is confident in its future prospects.

However, you're right in saying that there could be some ulterior motives at play here. It's possible that companies are using buybacks as a way to artificially prop up their share prices during times of market turmoil. This can give the impression that all is well when really there could be underlying problems with the business. So while buybacks can be a good thing for shareholders, it's important to keep an eye on why companies are doing them and whether or not they're sustainable in the long-term

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technoexplorer t1_ja5y9xh wrote

Companies do not want to invest cash in current business activities because an expansion right now would not be good for the oncoming recession. Instead, they shrink their companies by using cash to take stock shares off the market and right-size the company. They could also do this with dividends but there are tax implications and it is generally better for current management to do buybacks (although I once got a 40% of market-value dividend under similar circumstances).

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MillionsOfMushies t1_ja6tial wrote

40% market value of the current share price?

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technoexplorer t1_ja7fadv wrote

Yes, company sold an entire division in order to retarget. Was it for economic reasons? Who knows really. Anyways, stock price jumps 5% and out comes a huge dividend of 40%. In December, too, iirc. Fortunately, no negative tax implications for me beyond the normal. Stock price drops of course afterwards and then I have to rebalance the risk in my portfolio.

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AltcoinTraderNy t1_ja709ks wrote

If these firms expect a serious recession they would be hoarding cash like anything

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technoexplorer t1_ja7fitr wrote

Eh, why? Upper management gets paid with the buybacks or with dividends. Who cares about the workers? Heck, if the recession lasts 20 years then we bump into the 20 year rule, which states that anyone in a decision making capacity doesn't care about anything that impacts their company after 20 years because they will have retired by then. There's a chance that they will never need the cash to grow again.

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Theta_Ome t1_ja6l94r wrote

  1. Cash on the books during inflation is bad math, it’s losing value rapidly

  2. Buy backs increase price - historically, more buy backs before an economic downturn. In this case, the company doesn’t see the stock as undervalued as much as inflation as a risk to cash

  3. Buy back runs price up which makes it easy to justify a split. A split obscures the overpriced nature of the stock. Many see the lower price but don’t look at the valuation being unchanged. Makes it easier to sell the top to less knowledgeable traders/investors because some are not paying attention etc

  4. Unrealized Capital gains are not taxed but return of capital and dividends are. Better to have the option to defer taxes

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Steaminmcbeanymuffin t1_ja5tbh5 wrote

So you’re assuming that all these major businesses share popular bearish WSB sentiment. You’re already off the rails in considering a bad recession a best case scenario. When was the last time the market crashed when everyone expected it?

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avl0 t1_ja6v0ah wrote

It’s like text book false premise fallacy

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[deleted] t1_ja5u5py wrote

[deleted]

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Steaminmcbeanymuffin t1_ja5xvhr wrote

Wtf are you talking about dude

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[deleted] t1_ja64qrn wrote

[deleted]

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Steaminmcbeanymuffin t1_ja66nq7 wrote

I responded to OP, you thought I was responding to Visualmod because my comment is beneath him and you got it mixed it up in your dumb fucking potato brain

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Superfarmer t1_ja6h2ti wrote

Many of these energy companies have solid af books.

On paper shit looks bad, but they are printing the money at the rigs.

Better to slowly privatize

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AboveAvgShitposte t1_ja6i6fg wrote

Maybe they’re trying to hedge their bets?

If you think a dollar today is going to be worth significantly less tomorrow holding cash doesn’t seem smart. So where do they put the money?

Expansion is tough when interest rates are “high” (higher than recent history) and it’s a downturn, so that’s out.

Employees? If there are tough times now (missing earnings expectations) and harder times projected ahead hiring is unlikely (in fact more likely to implement layoffs like we’re seeing).

Extra equipment? That has its own problems.

My guess: At least if they buy back some stock, they burn cash that’s otherwise losing purchasing power, and prop up the stock price. It can also boost their financial ratios, which would be helpful if they believe they may need access to future credit in a tight market. Basically, the buyback increases the company’s equity value.

Also, the companies can “buy the dip” if they believe the shares are undervalued - buy them back now while undervalued and re-issue for more money when the stock price increases.

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Aramis9696 t1_ja7ad2k wrote

The more of its stock a company holds, the less prone to devaluation it is. They have a higher control over how many shares can be sold at lower prices and will have less of a struggle buying back the volume that people are ditching at low prices. As a company you want to be constantly spending the money you bring in to pay less of it in taxes. That means you don't want to just stack cash on the side for a crash because even if the prices will be lower you can't guarantee the difference will be superior to what you'd pay in taxes and the issues you'd get with your employees and shareholders asking for a cut of the money in the meantime.

Planning to just buy back your own stock when it dips also means accepting your company's image will take a massive hit and you'll have a harder time getting future funding if it takes longer to go back up, or might lose some customer confidence and therefore sales.

Also, buying more of your own stock means that when the economic collapse does hit you don't have to fight board meetings with random people who just bought a massive share of your company for cheap before you could and are suddenly gunning for the heads of the company because they think they're the ones responsible for the loss of value, despite it being a much more complex overall economic context at fault. Even if that's not their intent, in a financial crisis you don't want your priorities to be blurry because of new-comers trying to make their mark on the company. You have to be able to say that you all previously agreed to a plan and that it should be applied without anyone suddenly questioning the validity of that plan.

Lastly, the shareholders who decide on the buybacks usually don't trade their stock, they collect dividends. A stock's price fluctuation does not always reflect a company's performance. Also, if they have a higher control over the decision-making of the company and were allocating a big chunk of ressources to buying back stock at higher prices, then they suddenly have an excess of available funds to split among themselves and not have their dividends reduced despite the macro-economic situation and the state of the company.

To be noted: I have no sources, this is the first time I wonder about this topic, 100% of this could be bs, but that would be my immediate analysis of the situation. If you have experience with buying back stock or something I said makes no sense, feel free to let me know, but keep in mind this is a 5 minute thought on the subject with no research.

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VisualMod t1_ja5r8ir wrote

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>TL;DR: Why are companies still buying back stock with so much seemingly at stake?
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s1n0d3utscht3k t1_ja5vl84 wrote

cuz the c-suite and board only gives a shit about their compensation

buybacks = short term stock boost

when shit gets bad they’ll be the first to sell

always watch insider sales of high buyback firms

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bgd73 t1_ja5u94g wrote

a price drop never stays down. people are in for buy low sell high. propping up is to keep the drop from happening.

never treat theories as businesses being "nice"

they are not. they want trillions of dollars .. crazier than a social network issuing an IPO. img

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secrtive13 t1_ja5x4gk wrote

The artificialization is a major part of it, hell it's the only thing that makes any kind of sense right now. Missed earnings, lower guidance's, layoffs, even companies not having the tried and true sympathies towards their peers this ERs season are all just weird, non-correlating anomalies that don't lead to fat rally's after a year like 2022. They just don't. I know algos are partly to blame, no doubt, but c'mon.

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Okimingme t1_ja61szl wrote

The cool thing about announcing a share buy back is that you actually have generally lot of time to do it. So you get the immediate boost now and share holder appeasement. But you can also have it ready to pounce in case there is a sudden opportunity

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captiancb t1_ja6gw1q wrote

I think it’s to lower the volatility of their own stock this way it’s not going to tank that hard if the market does crash

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MillionsOfMushies t1_ja6u6l9 wrote

Hedging inflation? Whatever the opposite of diluting shares is to boost executive compensation? Or science.

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Pin_ups t1_ja70wea wrote

As per comments, I like to add that stock buyback prevent a company from over selling their shares and prevent future predatory acquisitions.

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Alexa_is_a_mumu t1_ja78amr wrote

It's all about the next quarter baby. CEO comps tied to stock prices etc. Anything to prop up share prices in the shirt term.

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scarr34 t1_ja7d6va wrote

Cash is bad during inflation. Buying their own stock deflates the share totals and increases the price. Consolidate voting power in the board who get paid in stock.

No company thats successful wants to issue stock. They would love to be privately controlled.

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ma_gappers t1_ja9xltg wrote

Why would someone SELL the SPY if they bought back in 2009?

Answer: They wouldn't. They would HOLD just like Warren Buffett has been preaching for decades.

"It's what's NOT going on in the market that's making it go up."

If people aren't selling then the SUPPLY is LOW. Therefore DEMAND is HIGH.

2 other things. 1) If the 2020 dip didn't scare them out, they ain't selling. 2) If they had the balls to buy during the 2020 dip, why would they sell now?

JMHO GLTA

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davesmith001 t1_ja6tz5i wrote

It’s a scheme to manipulate stocks. Given the choice of either retire debt or buyback stock, the former saves you 5% interest and prepares for the recession while the latter does nothing except manipulate stocks temporarily, which is another great reason to greatly penalize buybacks.

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EconHuman t1_ja781ey wrote

Lol, please provide proof for said 'manipulation'

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davesmith001 t1_ja78yzq wrote

People are incentivized to do stupid shit. Prove to me it’s not manipulation.

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