"Consider the 449 companies in the S&P 500 index that were publicly listed from 2003 through 2012. During that period those companies used 54% of their earnings—a total of $2.4 trillion—to buy back their own stock, almost all through purchases on the open market. Dividends absorbed an additional 37% of their earnings."
That's shocking, is this is a case of lying with statistics somehow? That paints such an ugly picture that I can't believe it's the first time I've heard anything about it.
What do you find shocking about it? There is a big moral question about corporate profits vs. wages. But given that some portion of revenues become profits, they are either going to turn into a corporate cash hoard, dividends, or buybacks. I don't see anything shocking about choosing a buyback over the other two choices. After all, when a company takes investor money in a public offering, the idea is that the money will eventually be returned to investors, plus a profit if possible. A buyback is one way to close out the deal with some of those investors and return that money.
Edit:
Also, I think there's a bit of funny math here possibly contributing to a misunderstanding when the article says things like this:
> During that period those companies used 54% of their earnings—a total of $2.4 trillion—to buy back their own stock, almost all through purchases on the open market. Dividends absorbed an additional 37% of their earnings. That left very little for investments in productive capabilities or higher incomes for employees.
By definition, wages don't come out of profits. A company could increase wages by $1 billion, have $1 million profit, do a $1 million buyback, and then a journalist could write an article saying "company spends 100% of profit on buyback, giving none of it to workers."
In reality, many companies have a large cash hoard which is not going to employees or investors. Doing a buyback in those circumstances (notable recent examples include Apple and Facebook) doesn't have any effect on employee wages.
Stock buybacks have a distinct advantage over dividends: they're not taxable
Done correctly, it’s a synthetic dividend without the immediate tax burden on the shareholders. Those that want to cash out, can sell a portion of their higher priced shares.
IMO, there's an injustice here when things like stepped-up basis result in these gains never being taxed, but that seems like a separate issue from the question of wages vs. profits.
To be explicit, there is a decision tree where a company can decide whether to have wages increase or profit, then decide what to do with the profit, and the rise of stock buybacks vs. dividends is an answer to the second question, not the first.
The corporation pays corporate taxes on the money used for the buyback. The investors taxed are avoided because they haven’t realized their gains. When they eventually sell their shares they pay taxes.
If the company made the money from selling beer, it was triple taxed due to the alcohol tax! Wait, if the customer paid for the beer with earned income, the beer was quadruple taxed. But if he paid for the beer with dividend income, it was quintuple taxed!
In the stepped-up basis case I mentioned, the investor may never pay taxes on the gains.
> Done correctly, it’s a synthetic dividend without the immediate tax burden on the shareholders. Those that want to cash out, can sell a portion of their higher priced shares.
If you cash out you're still potentially paying taxes on capital gains.
The only way to avoid taxes while still profiting from the increased price of the shares (it seems to me) is to take a loan against your portfolio (possibly deduct that interest) and re-invest the money.
Retail Joe six-pack investor probably won't be able to do that; but it seems like the sort of thing a professional money manager might do?
That's assuming that the buy back actually increases the stock price by the amount spent and for those of us that hold stocks in an ISA (tax free) id much rather have a dividend
a journalist could write an article saying "company spends 100% of profit on buyback, giving none of it to workers."
I think the claim is that reinvestment causes the company to trickle down wealth to workers more than the alternatives. It's not an absurd claim, though not an obviously true one either.
> Something is deeply amiss when a company can ascend to almost a half trillion dollars in market value—becoming the fifth most valuable firm in the world—without paying any meaningful income tax. Does Amazon really owe so little to support public revenue and public needs? If a giant firm pays less than the average 24% in income taxes that the companies of the S&P 500 pay, it logically means that less-successful firms pay more. In this way, Amazon further adds to the winner-take-all tendencies plaguing our economy.
(I know, I know, "The poor embattled multinationals...")
But there is no reason why it is better or somehow more moral for a business to invest more and more in expanding its own operations vs. making that capital available for other kinds of investments.
There is a reason why it can be more moral. If managers are just running the share price up to inflate the value of their options, that costs the owners (shareholders) money. (The managers might keep exercising options, then spending the owners' money to buy back shares. Long term you end up with the same number of shares outstanding. Where did all the money for those buybacks go? To people who exercised stock options.)
A genuine robber baron capitalist who intended to hang onto her own shares long term would generally just shitcan managers who behaved that way. But 401k investors don't have the option.
I'm ignoring workers here. I'm only talking about morality between owners and managers.
> Companies can also reinvest profits in the business
The point of the stock market is to efficiently let investors re-deploy capital from mature companies (earned through capital gains and dividends) to growing companies. If all the lemonade stands that need to be built have been built, your research dollars will be less effective than others’, then constraining capital to the incumbents, by dissuading dividends or buybacks, results in (a) bad investments and (b) rent seeking by the agents overseeing this restricted capital.
You have to identify a demand for lemonade before you can reasonably invest in more lemonade stand. In a lot of industries the demand just hasn't been there, and in that case it doesn't make sense to increase capacity no matter how much money you're making.
Sure, reinvestment could be a bad idea. But it's really not correct to say that retaining profits as cash or paying them out are the only possible options for a business. That's what I was responding to.
Agreed, the "cash hoard" option should also include assets, and we should also talk about debt and depreciation in that case. I don't think it conflicts with my original assertion wrt. wages.
Profits are either returned to shareholders or accumulated (and returned later). Returning 91% of profits to shareholders does not seem particularly odd to me.
(Possible point of confusion: earnings means profits earned, not revenues earned.)
> Profits are either returned to shareholders or accumulated (and returned later).
That's a false dichotomy. The article specifically mentions other alternatives, such as raising employee's wages or raising the number of employees (both of those examples result in more tax revenue for the government as well).
If the money is paid as wages, then it wasn't profit.
For example, suppose my company earns $100 in profit in 2017. I choose to pay out $90 in dividends to the owners. That means 90% of earnings have been given to shareholders.
Now suppose I decide to pay an extra $50 in wages. My 2017 profits are now $50. I choose to pay out $45 in dividends to the owners. Again, 90% of earnings went to shareholders despite 50% of 'profits' going to wages.
Talking about using 'profits' to pay costs is somewhat nebulous, since 'profits' are defined as revenues after costs.
I was thinking along the lines of using last year's profits to pay for this year's wage raises and new hires.
If you have a $100 profit in 2017 you can't retroactively pay it out as wages, like your example suggests. You would have to pay 20-40% taxes on the profit (depending on where the company is domiciled) and then you can choose to pay it out during 2018.
That's shocking, is this is a case of lying with statistics somehow? That paints such an ugly picture that I can't believe it's the first time I've heard anything about it.