Stock Buybacks-Increases Income Inequality

Investment Analysis Clubs Macro Economic Trends and Risks
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and new ones tend to be insecure and underpaid.

Take the 449 firms in the S&P 500 that were publicly listed from 2003 through 2012. During that period, they used 54% of their earnings—a total of $2.4 trillion—to buy back their own stock.

Why are such massive resources dedicated to stock buybacks? Because stock-based instruments make up the majority of executives’ pay, and buybacks drive up short-term stock prices. Buybacks contribute to runaway executive compensation and economic inequality in a major way. Because they extract value rather than create it, their overuse undermines the economy’s health.

We dove into the data, studying 385 buybacks over the last fifteen months….First, we found that a buyback announcement leads to a big jump in stock price….That’s unsurprising….What did surprise us, however, was how commonplace it is for executives to use buybacks as a chance to cash out. In half of the buybacks we studied, at least one executive sold shares in the month following the buyback announcement….In the process, executives take a lot of cash off the table. On average, in the days before a buyback announcement, executives trade in relatively small amounts—less than $100,000 worth. But during the eight days following a buyback announcement, executives on average sell more than $500,000 worth of stock each day—a fivefold increase. Thus, executives personally capture the benefit of the short-term stock-price pop created by the buyback announcement.

Quite aside from the fact that this is obviously a way for insiders to make money, it makes you wonder about the timing of buybacks. Do they really happen when boards and executives think the timing is right and this is the best possible use of corporate cash? Or does it happen when the CEO wants to cash out and is hoping to goose the stock price a bit?

Seems to be a case of working the system.
Stock buyback largely reward the top 10%
In 2016, the top 10% owned 84% of all stocks. This January the figure raised to 93% of all stock owned by the top 10%.

I suppose the “fair” solution is increased taxation. But on whom/what?
Increase of capital gains tax to the level of income tax on wages?
Increase corporate tax rate?
Increase tax on top 10%

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I think most CEO’s try to make smart capital allocation decisions. If they focus on short term self enrichment, those generally aren’t the best companies to own and CEO’s whose tenure is probably short lived. Buybacks are always going to benefit the largest shareholders in a business, just as dividends and equity appreciation in general will also.

In a timely fashion, John Rotonti recently posted the following quote from Ken French.

Buybacks are divisive. They divide people who understand finance from those that don’t.

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Thing is, a formerly great company, like Boeing, with the change of CEO, can become a laughingstock, like Boeing, due to the CEO’s value system. Over the short term, financial manipulation to juice the stock, will be rewarding to the shareholders, just like a Ponzi. Over the long term, when the lack of investment in the company comes back to haunt it, the shareholders take it on the chin, just like a Ponzi. The thing is, a CEO with a short time horizon, like McNerney, can time the collapse to happen after he has pocketed his loot and moved on. Outside shareholders do not have that quality of information.

a 73 Max 8 had to abort a flight and return to Korea, due to a failure of it’s pressurization system today.

Steve

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But if they are large enough they are guaranteed bailouts from the Federal government.
I don’y recall any Chrysler or GM or major bank CEOs who lost their job from poor execution of their duties.

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GE/Welch alum Bob Nardelli finished running Chrysler into the ground for Cerberus, then moved on. The government arranged the sale to Fiat, headed by Sergio Marchionne.

iirc, the CEO of GM did leave, temporarily replaced by the former CEO of AT&T. Then Mary Barra was elected CEO.

Bank honchos are different. For the most part, they were bailed out, without going bankrupt, like GM and Chrysler had to.

Steve

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What you are suggesting is that all properly run businesses with well meaning CEO’s should have their asset allocation decisions restricted because of political decisions to bailout a few a companies. I don’t agree, the simpler approach might be just to let those businesses face the consequences, otherwise the behavior gets repeated again and again.

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That will NEVER happen today’s corporate political campaign contributions. Our nation, IMO, is a corporacracy.

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In the long run, Boeing and its shareholders would have benefited from stronger corporate governance and greater claw back provisions, I doubt McNerney planned to be a short term CEO. In truth, the decision by the US Gov’t to make Boeing the de facto supplier, may have played a part in the ensuing culture of complacency. I still see no reason why it should mean limiting the ability of other businesses to use their capital as they please, because of Boeing’s bad behavior. There are execs that will take on debt and mismanage a company into bankruptcy. Should all other companies be prevented from using leverage?

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Not sure if it’s driven more by Union influence or Corporate donations. Either way, I agree there is no willpower to let them fail or succeed on their own merits.

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Management uses it’s employees as hostages, when they fumble the company into trouble. “bail us out, or all these Proles will lose their jobs”. So the company gets bailed out, and thousands, or tens of thousands, of Prole “jobs” are cut anyway. Remember how many factories GM closed after they were bailed out? Remember the brands that GM abandoned, and all the dealers that were put out of business by not having any product to sell?

Steve

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Management uses whatever leverage it has, including appealing to the standard bearer for unionized labor. At the end of the day, even with the bailout, the company will have to make whatever changes are necessary to insure its survival. The politicians know that but in the short run, they get to appear as if they are saving the American worker.

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There comes a time in the history of a nation when extreme inequality turns into pillage. If economic power is concentrated so is political power, and the wealthy are able to do whatever they damn well please. They can lie, cheat, and steal because they know they won’t be held to account.

Have the super-rich now taken control of America’s political and economic systems? Some current news makes me worry.

Let’s start with the food industry, the food cartel that includes General Mills, PepsiCo, and Tyson, which has been jacking up prices non-stop since 2020. Why are food prices up 25 percent since then?

These giants blame supply chains, the rising costs of labor, and the rising prices of other inputs required to produce and distribute their products. It’s not their fault, they say. But the real culprit, upon closer examination, is stock buybacks, another word for stock manipulation . These firms are fleecing shoppers by raising prices and then using the cash to buy back their own stocks, thereby increasing the market value of each share.

Stock buybacks do not increase the value of a company, but they move money effortlessly to the largest Wall Street shareowners and to a company’s top executives, who receive most of their compensation via stock incentives.

As food prices shot up by 25 percent, “the ten largest grocery and restaurant brands have together returned or pledged to return more than $77 billion to shareholders,” reports Veronica Riccobene in her excellent article “Big Food, Big Profits, Big Lies.”

In related news, California fast-food giants have claimed that the state’s 2023 minimum wage law, which raised wages from $16 to $20 per hour, killed 10,000 jobs. A closer look, picked up by the Los Angeles Times , showed that the industry cooked the numbers by comparing employment in September with December.

But every year, September is within the peak dining out season, and in December people dine out least. When adjusted for seasonal variation or compared with the employment levels exactly one year earlier (both standard ways of measuring employment levels) the number of jobs actually increased by 7,000 after the minimum wage law was enacted.

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As offered here before: in the Shiny-land of today, the only thing that matters is the enrichment of the “JCs”. Everything is expendable in service of that agenda, including the company itself.

https://www.reuters.com/legal/us-pushes-boeing-plead-guilty-connection-with-fatal-crashes-sources-say-2024-06-30/

Steve…notices the astronauts are about two weeks late getting back to earth, because their Boeing built capsule doesn’t work.

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Correction: They increase the value of all shares and benefit all holders. The same applies to dividends.

DB2

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Only in the short term, which is all that concerns the “JC”.

sold Boeing at $260.94, in 2017. Trading today at $186.23 But McNerney made his packet and retired, before the crash(es)

Steve

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I know it’s not the only way to view it but I value a stock as the sum of the future cash flows discounted back to present value. Based on that logic, aren’t buybacks that permanently reduce the share count more than just temporarily accretive to shareholders?

If a particular CEO abuses these types of tools, isn’t it for the board to address this behavior rather than a blanket statement about the merit of buybacks?

I have owned Apple for years and view buybacks as prudent and effective capital allocation strategy by the company to maximize all of shareholder’s value.

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Their own R&D would be a better investment–unless there is a valid reason to NOT re-invest in their own company…

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Apple R&D spend in 2023 was $29 billion. After dividend and SBC, it’s still another $65 billion in net free cash flow. It appears there is more than sufficient funds for any R&D spend independent of whether they decide to buyback shares. It is the beauty of having a business like this generating this kind of excess cash for shareholders.

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Then return it to the shareholders in the form of CASH. Let them decide–NOT MANAGEMENT–if further investment in that business is worthwhile.

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