April 10, 2020
Why Apple, Warren Buffett, And Others Use Stock Buybacks

Why Apple, Warren Buffett, And Others Use Stock Buybacks

The sweeping tax reform
measures passed in 2017 were supposed to spur
corporations to reinvest profits back into research
and paying their own employees, and by extension,
create new jobs. We are giving them
a big beautiful Christmas present in the form of
a tremendous tax cut. It’ll also be tax reform
and it’ll create jobs. The one-and-a-half trillion
dollar plan took effect in January 2018. It lowered the corporate tax
rate from 35 percent to 21 percent and the
hope was companies would use that money
for capital expenditures. That includes physical
equipment, offices in factories and software
or intellectual property—and that would create
jobs and other employment opportunities. Many businesses did spend
more on internal projects, at least
initially. In the first half of 2018,
business spending was at $341 billion, a 19
percent increase over 2017, and money spent on
research and development hit $147 billion—a 14
percent increase. But business investment slowed
later in the year as concerns about the
economy grew. At the same time, companies
announced buybacks to the tune of a record $1.1 trillion worth of
their own stock. The stock buyback debate has
drawn the ire of politicians on both sides
of the aisle. In an editorial in The
New York Times, Senators Chuck Schumer and Bernie
Sanders pledged to introduce buyback
legislation. Their bill would encourage
companies to do something for workers before
they could buy back stock and pledged to
set minimum requirements for investment in workers and
the long-term strength of the company as
a precondition for corporation entering into a
share buyback plan. At the same time,
Republican Senator Marco Rubio has suggested Congress raise
the rate on capital gains to
discourage buybacks. The mere suggestion
Congress should address buybacks drew a
swift response. This is basically legislators
saying we know better how to deploy
corporate capital than the managers in the business. Now, let’s look
to history again. Where has that
led people? When government officials decide
that they’re the ones who can
micromanage business—they’re talking about exactly how much to
pay people how much benefits to give them, that
they can’t do share buybacks. So what are
stock buybacks? Buybacks often occur when a company’s
CFO thinks a stock is undervalued. When a company has excess cash,
it can do one of several things: Invest that
money into their business by upgrading
equipment or real estate, acquire another
business, pay dividends directly to shareholders or
buyback its own shares. Buybacks come in different
shapes and sizes. And while they can be
indicative of a company’s performance, that’s not
always the case. Buybacks by themselves are no
reason to own a stock and in some
circumstances are actually reason to sell it. I think you never want to
own a stock of a company is wasting the money
it needs to survive on useless buybacks, or
even worse, spending money it doesn’t even
have an activity as fruitless as repurchasing
its stock at what you call
a bottom. And you shouldn’t rely on even
the largest buyback to help prop up a stock,
if the situation’s dire. The first and most obvious
benefit is a boost in the stock’s price. When a company buys back
shares, it reduces the number of
shares outstanding. If profitability remains the
same, it will increase a company’s earnings
per share. Buybacks are generally taxed at
the capital gains rate while dividends are
taxed as income. And if the stock is
owned beyond one year, the cap gains rate
is even lower. Buybacks can signal
good cash flow. Finally a company that has
excess cash to buy back shares is generally in
good shape when it comes to cash flow,
which boosts investor confidence over the
long term. Of the companies that initiated
buybacks in the last year, these were
the best performers. Critics say buybacks are
a form of financial engineering that does
nothing to improve business. They can also
provide cover for poor financials. The artificial lift
a buyback often brings can mask greater
problems at a company. Companies are notoriously bad
at timing the repurchase of shares. As a result, they often end
up paying more for shares than they should. Legendary investor Charlie Munger
sees that as one of the biggest
problems of buybacks. Generally speaking, I’m
restrained in my enthusiasm for politicians
telling corporations what they should do. But, I will say this: When
it was a very good idea for companies to buy
back their stock, they didn’t do very much. And when the stocks got
so high priced that it’s frequently a bad idea,
they’re doing a lot. Welcome to adult life. This is the way
it is. But it’s questionable at the
present levels whether a lot of it’s smart.
Was Eddie Lampert smart to buy so much Sears Roebuck? No. And there’s a
lot of that kind of mistake that’s been made. The short-term spike that
stocks often get can allow insiders to profit. Most times, those insiders
are executives or founders since they’re
often major shareholders in their own companies. Recently, Senator Chris
Van Hollen proposed barring corporate insiders
from selling stock within a prescribed time
after a buyback was announced. SEC Commissioner
Robert Jackson, Jr., recently expressed his belief
that most buybacks are better for
executives than shareholders. Last year, he appeared on
CNBC to discuss why buyback rules should
be re-examined. After the Trump tax
cuts passed billions upon billions of dollars have
been used for shareholder buybacks in
large public companies across the United
States. And in the speech that I
gave, I showed that those buybacks are accompanied by, at
the same time the company buys back shares,
the executive sells into the buyback. Now, we were clear in
this speech that that’s not necessarily insider trading or
fraud but it is troubling, because when an
executive does a buyback they’re suggesting to
the market that the stock is cheap. And the question I’m asking
is, if the stock is cheap, then why is the
executive selling into the buyback. As a result, there may
be new momentum within the SEC to change the rules. Jackson responded to Van
Hollen’s concerns with a letter. The commissioner said
he found that from January 2017 through the
end of 2018, insiders sell more stock
right after buyback announcements. That indicated
to Jackson the repurchases were more
geared to executive enrichment and less to
the interests of the shareholders or the benefit
of the company. Another problem with buybacks
is that share prices will eventually settle back
to their previous levels when investors realize
the company’s done nothing to
increase value. And finally, some investors
just prefer dividends over buybacks. These were the worst
performers among companies that have
initiated buybacks. So what, if anything, should
be done to stem the buyback tide? While many Republicans believe
there’s nothing to be fixed, there are
several suggestions floating around Washington. One from Senator Tammy
Baldwin would eliminate the 1982 regulatory change
that enabled such large buybacks in
the first place. Schumer and Sanders would tie
buybacks to a $15 minimum wage and other
improved worker benefits. And Senator Rubio would tweak
the tax code to eliminate what he calls
an artificial incentive for buybacks. Jackson has suggested an
open comment period on rules for stock buybacks. Regardless it appears the
firestorm about stock buybacks is just
beginning Schumer’s office didn’t offer specific time
on when he might introduce the
legislation. The bill is unlikely to
make it through the Senate, though, or make
it to President Trump’s desk.

100 thoughts on “Why Apple, Warren Buffett, And Others Use Stock Buybacks

  1. Stop over regulating everything
    Eliminate redundant taxes
    Stop telling the market what to do and let people FAIL on their own aka GM
    Efficiency is buily in when decisions have consequences – remove the consequences and these people will continue to mismange their companies

  2. I have a problem with government telling a business what to do. But executives selling their own stock after buy backs scream it should be illegal or some type of moratorium on selling after implementing share buy backs.

  3. It's funny how those in Washington with no business experience try to tell executives who know what they are doing how to do it

  4. Everything is green today in my portfolio:

    What a beautiful year

  5. Everything is green today in my portfolio:

    What a beautiful year

  6. I know apple does it because they cant keep revenue and growth up, so they use buybacks as a last resort to attract investors.

  7. The executive is selling because he wants to profit from the buyback. It’s a different way to look at it for dividends. Instead of getting dividends you get the same money put back in shares purchase and making a profit via capital gain tax. It’s an accounting logic .

  8. Government shouldn't tell the corporation what to do with government bail out money, but they should instead set goals to be met with the money. They will have to achieve certain outcome using their genius corporate ideas.

  9. GDP = C + I + G + NX. The U.S. economy(GDP) is close to 75% consumer spending. Tax cuts for consumers would create more jobs than tax cuts to corporations. A growing consumer spending will lead to more expenditure in property plant and equipment by corporations.

  10. A good us eof money would be part a special dividend, so companies don't have to cut it later. (if for example they hike the divided to high and is not sustainable in the future, a special divided would make every shareholder happy). Part should be reinvested in business and growing it, and smaller part of excess cash should be used to buy back hour own stock if the price makes sense.

  11. This is completely false

    Buybacks increase earnings per share, increasing the underlying price.

    Let’s say you own a chicken coup with 10 other friends, making 11 owners in total. Assume the chicken coupe makes a profit of $110 per year.

    A friend wants to sell their share of the chicken coup. The remaining owners say great, we will buy your share of the chicken coup.

    The $110 profit now get divided by the remaining owners and make a $11 profit per year. Instead of $10 profit per year perviously

  12. Share buybacks are nothing more than a fancy form of stock price manipulation! As an INVESTOR, I want that buyback money given to me as a DIVIDEND! Let ME invest that money rather than the company.

  13. Trump handed corporations $1.7 trillion in taxpayer money, and they used $1.1 trillion to balloon their stock prices to make their executives and investors rich.

    Trump dances on strings for his corporate puppet masters.

  14. Buybacks are moronic – they are a short term benefit to the share price that is consumed by the underlying assets diminishing. This means the corporation has to keep buying back shares all the time or the bubble will essentially burst. Managers initiating buybacks should be fired.

  15. Promote more stock-based compensation for all workers.. then buybacks will benefit employees as well.

  16. they all knew buybacks will hapoen.. this fake outrage is just outrageous… whenever these media and politicians rage over something but don't do anything, just know that they are all in it

  17. Democrats have the insane luxury of never running a business and are career politicians doing nothing…like Bernie Sanders and Joe Biden. The party is a bunch of losers that want to run the country off the cliff. Obama and Ocasio Bartender are community organizers, they don't know anything about the economy and that is why they have done a terrible job.

  18. Buyback is really bad portfolio for their business.once drop the share price
    soon shift them to hell during crisis.

  19. that's like stealing my little brother's lunch and selling it back to him…. don't worry he's like to eat… at some point we all get hungry.

  20. Buybacks are the result of unprofitable projects available to invest. The question is why tax cuts when economy is at full employment. That's why buybacks have been huge lately.

  21. If a majority of this buyback culture is based on loans and has spread across the world. We are creating another domino crash when the interest rates needs to be normalized. Which it should have directly after rescuing the banks around 2010. But the patient got hooked on drugs and didn’t want to operate without it.

    The real problem in the world is the ongoing “steam power transition”, that is going from a world based on manual farmer labor to a world using steam engines to increase efficiency. In 2018 and 2019’s case that steam power is IT, AI, etc. etc. increasing efficiency. Buybacks is just a meaningless distraction that cannot solve this labor transition problem.

  22. Simply put, stock buybacks should be banned. That would be a far, far better strategy for competing against China than Trump’s trade war. As the video pointed out over $ 1 trillion disappeared from the immediate investment pool due to buybacks.

    Sure, there are times when it’s actually a good idea. But it’s been so badly abused that banning would it, on balance, be so much better for the United States.

    We need to remember that a company’s whole purpose is to create value where value didn’t exist before. That requires serious investments which are the kind of resources that executives are now using to prop up a company’s stock price so they get a bonus. They receive big rewards for doing absolutely nothing, while the company essentially gets shafted because they don’t spend the money that’s needed for the long-term investments that truly create value and increase US living standards.

  23. China cannot be squeezed anymore they are already working 12 hours a day and 6 days a week! they already prudce consumer goods at record low rates! They bailed us out in 2008 by deleveraging their currency! They cannot give more it would be impossible and as an a conservative American this is a human rights issue! WE AS GREEDY AMERICANS MUST DEVALUE FIRST TO MATCH THE 2008 MELT DOWN AND THEN LETS THE 2008 BS DEFLATE! REMOVE POLITICS AND TALKING HEADS FROM AMERICAN BUSINESS AND LET REAL PRICES TAKE HOLD! ACTUARIES AND ECONOMIST'S WILL NOT WAIT FOR TRUMPS 2020 CAMPAIGN TO DRAG THE BS LOW EARNINGS! tHIS ENTIRE 10 YEAR GROWTH CYCLE HAS BEEN A COMPLETE BS SHAM BASED ON SLOW WORKING UNPRODUCTIVE SOFTWARE COMPANIES!

  24. I watched the entire video but I want to say this: $1.5 TRILLION. That's $1.5 trillion in corporate and whitey welfare.

  25. well if the

    "…government can't micromanage the market…"

    Maybe they shouldn't give corporations tax cuts.

    They'll take the tax cuts but not the government intervention on how to utilize the tax cuts.


  26. Americans don't seem to understand that tax cuts cost money. If the US government was an apartment, the tax cut would be as if your rich roommate decided to stop paying rent, but he still wanted to stay. Then, he forces you to take a loan from a Chinese bank to pay his portion. While at the same time he is putting the former rent money in his kids trust fund.

  27. Unscrupulous fiscal strategy …killing Sustainability and Competitive Advantage…..and Future generations' livihood.

    They are the carpet bagger generation!
    Making Millennials and their kids and their kid's kids pay for the "greed is good" hoarding of a dying babyboomer generation….

    When you die..the max amount of space you can hoard is the size of a coffin…..think about that ….and try to at least create a few education scholarships …maybe your God will forgive you …eventually….for helping Trump destroy young lives!

  28. When nobody wants to buy stocks anymore, the price will vigorously fall, and guess what companies will do? Buy more. And when companies realize they don't have nothing to do with their overvalued paper? Well this will be ugly

  29. Lesson learned: When corporations buy back their own stock, it's a signal for investors and regulators alike to investigate. It may signal a healthy cash flow, or it may mask an underlying problem.

  30. Cramer is probably a really smart guy, but I don't like to hear him speak. I wish I could listen.😩😩😩

  31. Dirty tricks. But its not the corporate fault its the capitalist society we are in that gives incentives to executives on buybacks. I like the idea that suggested executives can't sell shares in that specific window that way the buyback's negative effects are limited. giving benefits as Burney Sanders suggested will just hurt shareholders altogether and benefit workers (not bad for workers but shareholders will suffer greatly from the buyback).

  32. Of course the corporations were going to use the money for stock buybacks. How could they not? If it's not written in the terms, it's not off limits, and even if it is, it's debatable, ha!

  33. Buying back stock is the best thing you can do for employees and investors. Anyone with a 401k or stocks would know this. Why are these people so economically ignorant.

  34. Stock BuyBacks are a stock price manipulation tool, that incentivizes bad behavior by corporate insiders.
    Ownership of stock by corporate Insiders it's supposed to be an incentive for them to do the right thing for the company. It actually creates conflicts of interest that results in bad decisions/behaviors.

  35. Trump did say it was going to create jobs in the snippet show, and we are sitting on a few months of job growth & payrolls beating expectations…

  36. Republicans are for the rich, yet the poor whites vote for them. How are you enjoying the benefits of the tax cut?

  37. Buybacks is just insider trading with different words, that everybody already knew. Question is, why is it legal and insider trading is not

  38. I can't believe these 100-years old people appearing in public and being smart-asses. Who's this Charlie M… whatever?! We all ignore the fact that for one peron to get this emormously rich, millions have to struggle. Go rest in peace with all your wealth. Let young people live their lives. This world is run by half-dead people. It was enough!

  39. Steve Jobs hated Buybacks and under his leadership never allowed Apple to partake in such practices.

  40. Value is a subjective notion, but earnings, that number tends to be an objective metric, measured in dollars. As to what future earnings may be – again , that being debateable, is subjective.

    Persons may value earnings differently, saying, these earnings came through the sale of non-kosher products, and so is of low value compared to .. I do not see earnings that way, myself. God cursed the ground for man's sake – but does that mean man should avoid growing carrots ? Cash is merely a tool, like car keys, or paperclips. Else you may "go crazy" attempting to find products or services not tainted by sin. If you owned a grocery store, would you refuse to accept a customer's cash because you did not care for how
    she "earned" her money ?

    So, learn to touch, use, without accepting that which is evil. Value (profitability, sales) or value per share (buybacks?) – I think focusing on value per share is the answer – both the numerator and denominator matter. Which leads to a higher value per share – growing sales, or share buybacks? – then is the question for management to consider.

  41. Essentially a way for C-level to profit off selling their shares after artificially raising stock price, in an increasingly uncertain economic time.

  42. You can thank record low unemployment on the tax cuts, the unemployment rate is so low in fact that compaines are being forced to offer competetive wages and benefits to find employees, real wage growth

  43. Since the huge tax cut that was supposed to turbocharge the economy, the Stock market is up only
    3% annualized.
    825,000 more new jobs were created in the last 30 months of Obama than 1st 39 months of Trump. Winning.

  44. It is PATHETIC that so called “innovative” brands and companies like apple resort to stock buybacks. Stock buybacks is printing currency for the very wealthy, it’s inflation for the sake of the 1%.

  45. Buybacks are the biggest scam out there. Great way to mask a company that isn’t growing their profits and get the stock price up.

  46. Well of course they are going to buyback stock the market had one of the most unjust crashes in history due to the lack of security and moreso lack of understanding of the website Facebook. Fearful selling and discounted prices for CFO’s to buy for a profit, and of course they’ll sell into the move up and avoid the turbulence people create

  47. That one guy complaining about govt getting involved with business, I bet you weren’t complaining when the govt handed out over a trillion in corporate tax cuts you entitled elitist prick

  48. They buy back stocks and keep more of the profits in the long run. And so it gets even more concentrated. I wonder when the public will formally recognize the us as an oligarchy.

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