Author Topic: On buybacks and transfer of wealth from shareholders to managers  (Read 1426 times)

habaneroNorway

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On buybacks and transfer of wealth from shareholders to managers
« on: December 10, 2019, 01:39:59 PM »
This is pretty good and illustrates why the buyback-spree that has been going on for a good decade isn't the same thing as a company paying out surplus to shareholders. Illustrates the mechanics of massive debt-financed buybacks exemplified by Texas Instruments. A tad long, but defenatly worth a read.

https://www.epsilontheory.com/yeah-its-still-water/


For the past five years, Texas Instruments has been nothing more than a tracking stock for a passive semiconductor index.
For this privilege, shareholders have rewarded management and directors with $6.2 BILLION in stock, plus a couple of BILLION in cash compensation
....
Under the narrative cover of “returning capital to shareholders” and the common knowledge of “aligned interests” and the cash windfall of “job-creating tax cuts” and the equity valuations driven by “extraordinary monetary policy” … management teams like that at Texas Instruments have sucked the FUTURE of their company dry for the NOW of their personal enrichment.

Telecaster

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Re: On buybacks and transfer of wealth from shareholders to managers
« Reply #1 on: December 10, 2019, 01:43:29 PM »
See also Boeing. 

MaaS

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Re: On buybacks and transfer of wealth from shareholders to managers
« Reply #2 on: December 10, 2019, 02:04:22 PM »
When a buyback is funded by profit, it's a great thing. Unproductive money goes back to shareholders who often invest it into businesses with more promising growth runways.

When a buyback is funded by debt, yeah, it's a giant scam.

I just hope future conversations about what, if anything, should be done about buybacks differentiates the two.

I also hope the companies that used debt to buy shares are allowed to disappear in the next downturn.

Buffaloski Boris

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Re: On buybacks and transfer of wealth from shareholders to managers
« Reply #3 on: December 10, 2019, 02:29:23 PM »
The author seems to have missed the punch line: chumps investors are lining up to invest more in these companies via index funds. Heck, one of the pillars of FI seems to be throwing money at publicly traded equities via index funds while intentionally disregarding the individual holdings within those indexes. Because, you know, the stock market always goes up over time. I’ve even got a pretty graph and a book that shows me that.

All the while these firms are running up total leverage to execute stock buybacks. Corporate debt is very likely the next “black swan.”*  It’ll be interesting to watch.

*(is something that is such an obvious problem as excessive corporate debt really a “black” swan? Maybe a “gray” swan or “slightly less white” swan would be a better term.)

Edit: fewer words.
« Last Edit: December 10, 2019, 03:22:20 PM by Buffalo Chip »

habaneroNorway

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Re: On buybacks and transfer of wealth from shareholders to managers
« Reply #4 on: December 10, 2019, 03:34:06 PM »
Despite US corporate debt rising to record levels actual business investment is quite low, as exemplified in the blog post using TI as an example. Companies borrow cheap money to buy back their own stock, not to invest in the future profitability of the company. Actual investments have been flat to falling for quite a few years now. And as pointed out, whenever the shit hits the fan at some point in the near or distant future, corporate debt is where most people are pointing their finger at.

And it's not fund investing that's drving the market.. The most significant underlying bid in equity markets comes from company buybacks.

frugledoc

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Re: On buybacks and transfer of wealth from shareholders to managers
« Reply #5 on: December 10, 2019, 03:41:12 PM »
The author seems to have missed the punch line: chumps investors are lining up to invest more in these companies via index funds. Heck, one of the pillars of FI seems to be throwing money at publicly traded equities via index funds while intentionally disregarding the individual holdings within those indexes. Because, you know, the stock market always goes up over time. I’ve even got a pretty graph and a book that shows me that.

All the while these firms are running up total leverage to execute stock buybacks. Corporate debt is very likely the next “black swan.”*  It’ll be interesting to watch.

*(is something that is such an obvious problem as excessive corporate debt really a “black” swan? Maybe a “gray” swan or “slightly less white” swan would be a better term.)

Edit: fewer words.

The problem is that a handful of stocks make up almost all the gains of the American/global stock market.

If you don’t own this handful of stocks you miss out on most/all the gains.

That is why I buy the haystack rather than try and find the needle.

PathtoFIRE

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Re: On buybacks and transfer of wealth from shareholders to managers
« Reply #6 on: December 10, 2019, 03:54:26 PM »
How worrisome is this? You could make a narrative that large stable companies are borrowing money at low rates, buying back shares of their own stock, causing the value of each share to proportionately rise, allowing sellers of that stock on the secondary markets to command higher prices, and then those sellers spend that money, either on shares of others stocks or consumption or actual business investment.

So the net effect is that low-cost debt flows into consumption and/or business investment in other unrelated companies. I think there is a good case to disapprove of private equity firms who leverage businesses to the hilt in order to collect fees and then dump the stock in some form, a la Toys R Us, etc., but this seems slightly different, although tangentially related.

frugal_c

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Re: On buybacks and transfer of wealth from shareholders to managers
« Reply #7 on: December 10, 2019, 05:31:59 PM »
I don't think the issue is with the debt. It's the billions that went to management as compensation despite just average results. This is a newer phenomenon.  I don't know if you are going to get those 7% returns we are promised if management is taking the funds out from under your nose. Historically this wasn't as big of an issue as it was less common but I think this could eventually affect index returns as it becomes more the norm.

What is vanguards position on this?  Do they vote against these type of management?
« Last Edit: December 10, 2019, 05:36:06 PM by frugal_c »

harvestbook

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Re: On buybacks and transfer of wealth from shareholders to managers
« Reply #8 on: December 11, 2019, 05:44:21 AM »
That's supposedly one of the "horrors" of index funds--that Vanguard, Blackrock, and Fidelity will eventually try to influence boards. Is wealth transfer really a new problem, though? And who is to say that debt won't get even cheaper in the years ahead and all these rich white guys will look like geniuses?

Buffaloski Boris

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Re: On buybacks and transfer of wealth from shareholders to managers
« Reply #9 on: December 11, 2019, 01:44:13 PM »
The author seems to have missed the punch line: chumps investors are lining up to invest more in these companies via index funds. Heck, one of the pillars of FI seems to be throwing money at publicly traded equities via index funds while intentionally disregarding the individual holdings within those indexes. Because, you know, the stock market always goes up over time. I’ve even got a pretty graph and a book that shows me that.

All the while these firms are running up total leverage to execute stock buybacks. Corporate debt is very likely the next “black swan.”*  It’ll be interesting to watch.

*(is something that is such an obvious problem as excessive corporate debt really a “black” swan? Maybe a “gray” swan or “slightly less white” swan would be a better term.)

Edit: fewer words.

The problem is that a handful of stocks make up almost all the gains of the American/global stock market.

If you don’t own this handful of stocks you miss out on most/all the gains.

That is why I buy the haystack rather than try and find the needle.

Yes. None of us really know where the needle is, so investing in a large number of companies makes good sense. Where I have the issue is in the the picking of the bales in that haystack and the size of the bales. An index doesn’t allow you to exclude obvious problem companies from your portfolio. It also usually forces you into cap weighted indexes.  To me that’s a big problem. And why I think what Charles Schwab is doing has the potential to be Huge game changer for individual investors.

To recap recent events, they’re going to zero cost trades AND allowing fractional shares. We’ll see how that works but it has the potential to allow for direct or “boutique” indexing. For example, what I foresee is being able to take all of the 3500 or so stocks that are publicly traded and winnow that down to say 2000 stocks I don’t have an objection to owning.  I buy say $50 of each stock using fractional shares for a $100,000 “boutique” index. All the advantages of indexing at lower cost, and I can harvest tax losses/gains as I see fit. I can weight holdings to be dividend heavy, dividend light, or dividend neutral. I can exclude companies that have crappy executive compensation plans. And as an added bonus I’d own the shares of stock and can attend shareholder meetings, introduce shareholder motions, etc.

MustacheAndaHalf

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Re: On buybacks and transfer of wealth from shareholders to managers
« Reply #10 on: December 12, 2019, 08:32:02 AM »
Wow, yeah, Schwab is really taking the lead here.  It looks like $0/trade for stocks... even small cap.. maybe even micro-cap.
https://www.schwab.com/pricing


It's worth pointing out that the index funds discussed in this forum are primarily total market index funds.  But there exist equal weight index funds, small cap, value and all variety of index funds.  So you might be able to slice up the market by segment (large/growth, large/value, ...) and exclude some companies that way.

PathtoFIRE

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Re: On buybacks and transfer of wealth from shareholders to managers
« Reply #11 on: December 12, 2019, 10:57:14 AM »
I don't the actual mechanics of how to do this, but since I'm pretty sure you're not going to find a discount broker who'd actually create a "nearly total market fund but without the crazy tech companies" fund, and it'd take a LOT of individual purchases and potential nightmare rebalancing to recreate most of an index, wouldn't it be easier to just buy the total market fund, and then hedge via short-selling or some other mechanism the 10 to 20 companies with (1) high PE ratios that make no sense to you and (2) are large enough to make any sort of impact on the return of your index fund?

Scandium

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Re: On buybacks and transfer of wealth from shareholders to managers
« Reply #12 on: December 12, 2019, 02:10:41 PM »
doesn’t allow you to exclude obvious problem companies from your portfolio. It also usually forces you into cap weighted indexes.

Obvious to who? If it's so obvious why doesn't the stock tank?

Telecaster

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Re: On buybacks and transfer of wealth from shareholders to managers
« Reply #13 on: December 12, 2019, 02:25:52 PM »
It's worth pointing out that the index funds discussed in this forum are primarily total market index funds.  But there exist equal weight index funds, small cap, value and all variety of index funds.  So you might be able to slice up the market by segment (large/growth, large/value, ...) and exclude some companies that way.

If you do about 60/40 S&P500 Index and S&P Mid-cap index you essentially get equal weight.   Still a little small cap if you like. 

Buffaloski Boris

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Re: On buybacks and transfer of wealth from shareholders to managers
« Reply #14 on: December 12, 2019, 05:28:10 PM »
I don't the actual mechanics of how to do this, but since I'm pretty sure you're not going to find a discount broker who'd actually create a "nearly total market fund but without the crazy tech companies" fund, and it'd take a LOT of individual purchases and potential nightmare rebalancing to recreate most of an index, wouldn't it be easier to just buy the total market fund, and then hedge via short-selling or some other mechanism the 10 to 20 companies with (1) high PE ratios that make no sense to you and (2) are large enough to make any sort of impact on the return of your index fund?

You make a good point. Hedging is an alternative, but the carrying costs are pretty high. We’ll have to wait and see what the details are at Schwab but what I woold like to do is put together a “boutique index” as a representative sample of the market based on my set criteria. The information I’ve seen indicates that a portfolio of 20 to 40 stocks is adequate for diversification to reduce single company risk.  Let’s say I do 100 companies. I can always add more companies later. And there is nothing to prevent doing a combined strategy with a regular index that can be easily increased or decreased as rebalancing needs dictate. YMMV as to whether it’s worth it.



YoungInvestor

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Re: On buybacks and transfer of wealth from shareholders to managers
« Reply #15 on: December 14, 2019, 02:16:15 PM »
That's supposedly one of the "horrors" of index funds--that Vanguard, Blackrock, and Fidelity will eventually try to influence boards. Is wealth transfer really a new problem, though? And who is to say that debt won't get even cheaper in the years ahead and all these rich white guys will look like geniuses?

Look at Europe. I don't expect North American  to get significantly higher in the near-to-mid-term.

TomTX

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Re: On buybacks and transfer of wealth from shareholders to managers
« Reply #16 on: December 14, 2019, 06:11:57 PM »
I don't the actual mechanics of how to do this, but since I'm pretty sure you're not going to find a discount broker who'd actually create a "nearly total market fund but without the crazy tech companies" fund, and it'd take a LOT of individual purchases and potential nightmare rebalancing to recreate most of an index, wouldn't it be easier to just buy the total market fund, and then hedge via short-selling or some other mechanism the 10 to 20 companies with (1) high PE ratios that make no sense to you and (2) are large enough to make any sort of impact on the return of your index fund?

You make a good point. Hedging is an alternative, but the carrying costs are pretty high. We’ll have to wait and see what the details are at Schwab but what I woold like to do is put together a “boutique index” as a representative sample of the market based on my set criteria. The information I’ve seen indicates that a portfolio of 20 to 40 stocks is adequate for diversification to reduce single company risk.  Let’s say I do 100 companies. I can always add more companies later. And there is nothing to prevent doing a combined strategy with a regular index that can be easily increased or decreased as rebalancing needs dictate. YMMV as to whether it’s worth it.

While it's certainly not perfect, I've moved over entirely to ESG index funds.

https://investor.vanguard.com/investing/esg/

The problem with the portfolio of 20-40 companies - while it may protect you from downside risk, the remaining risk is missing the upside/growth - most index growth in a given year is usually from a small number of companies.