Apparently, quite some number of publicly-held American companies have decided to boost their stock values by buying back stock rather than hiring people or otherwise expanding their operations:
When the financial crisis hit in 2008, many U.S. firms began planning for the worst. And by cutting costs and streamlining operations to prepare for a potential depression, they put themselves in very good position when the economy began to rebound. According to one recent study by Credit Suisse, U.S. companies collectively have all-time-high levels of cash as a percentage of market cap and aggregate free cash flow yield.
Companies won’t sit on that cash forever, especially not with money market funds yielding so little. Many have already started putting it to use, and one way they’re doing so is by buying back their own shares — a practice that had become extremely unpopular in 2008 and 2009. S&P 500 companies slashed spending on repurchases by more than 85% from peak to trough, SmartMoney’s Jack Hough recently noted.
That’s changed in 2010. U.S. firms have already announced plans to make more than $150 billion in stock repurchases, up from less than $20 billion in the same period in 2009, Time magazine recently reported (citing data from Dealogic).
Share repurchases can have some very beneficial impacts for shareholders. One of the biggest is that taking shares off the market spreads a firm’s earnings over a smaller number of shares, giving shareholders a bigger cut of earnings for each share they hold. And, Hough notes, there’s reason to believe companies may be particularly keen on using cash for share repurchases going forward because of tax law changes: The expiration of the Bush tax cuts means that next year, dividends should be subject to normal income tax rates — not the current 15% maximum level.
I’m not sure whether to file this under the “things that should have been expected but, apparently, were unforeseen by our feckless Congress” or not. It certainly makes sense if you’re a manager with substantial stock holding trying to boost your income or exercising fiduciary responsibility and maximizing shareholder value.
I remember attending a motivational speech by Ray Kroc many years ago. He emphasized building a business with one simple idea that was something you liked to do. I genuinely wish we had more managers who were interested in building their businesses than in maximizing near term revenues. Our system doesn’t encourage that.
Makes sense to me. Who is going to buy anything they produce?
Steve
They don’t need to produce anything. All they need to do is keep their stock prices up.
That’s actually my complaint. Too many large companies have transmogrified from enterprises that produce and sell things into financial firms.
Cannot remember if I linked it, but Waldman’s recent post is pertinent. I have limited exposure to MMTers with whom he jousts, but they have interesting ideas.
“So what is the role of approach (ii), which stimulus proponents and MMT-ers frequently advocate? Note how Parenteau phrases things: because “capitalists [fail] to act as capitalistsâ€, because businesses are not increasing the value of their nonfinancial assets, fiscal policy must be employed to avoid “debt deflation dynamicsâ€. Here we reach the formal limits of the sectoral balance approach. This style of analysis gives us no insight into the dynamics or distribution of financial positions within any of the categories we have carved out.”
http://www.interfluidity.com/v2/871.html
Steve
Oh, boy. So much erroneous analysis and themes going on here.
“Apparently, quite some number of publicly-held American companies have decided to boost their stock values by buying back stock rather than hiring people or otherwise expanding their operations.”
I guess we have to start right here. The value of a share of stock is not increased just because management/Board decides that cash on the balance sheet should be used to purchase it. First, shareholders do not have to sell. So they make an evaluation: I own the stock at this price factoring in the value of cash on BS, and the alternative uses of cash on BS for growth……….. vs selling out. If you think the best thing for the enterprise to do is distribute cash vs fritter away the cash on unworthy investments………you sell. If not, you don’t. The per share equity price moves on those merits, not on some higher price on new-demand-because-of-money-availability thesis. This is generally covered in the first 5-6 chapters of a basic CorpFin course.
“When the financial crisis hit in 2008, many U.S. firms began planning for the worst. And by cutting costs and streamlining operations to prepare for a potential depression (Drew: you don’t say), they put themselves in very good position when the economy began to rebound. (Drew: OK, if it rebounds, otherwise……) According to one recent study by Credit Suisse, U.S. companies collectively have all-time-high levels of cash as a percentage of market cap and aggregate free cash flow yield. (Drew: Yeah, OK, everyone knows that, maybe because of no rebound?)
“Companies won’t sit on that cash forever, especially not with money market funds yielding so little. Many have already started putting it to use, and one way they’re doing so is by buying back their own shares — a practice that had become extremely unpopular in 2008 and 2009. (Drew: Well, duh. They were shoring up their financial position, just as the author said in the previous paragraph. So what’s his point?)
“That’s changed in 2010. U.S. firms have already announced plans to make more than $150 billion in stock repurchases, up from less than $20 billion in the same period in 2009…………….Share repurchases can have some very beneficial impacts for shareholders.”
Drew: Aha! So balance sheets are now in order, and management teams now have to decide what to do with this additional cash. Brilliant. Are we ever going to get to the point of this dude’s article??
“One of the biggest is that taking shares off the market spreads a firm’s earnings over a smaller number of shares, giving shareholders a bigger cut of earnings for each share they hold.”
This is just vapid. Its seductive in its apparent arithmetic. But go back and read my opening remarks, and ask yourself, “what rationale shareholder is going to sell out at below FMV so that some other guy can “spread earnings over fewer people,” and if they do, so what? That’s their decision. And so if EPS for the remaining shareholders goes up, who didn’t get the benefit of their freely chosen bargain??”
“And, Hough notes, there’s reason to believe companies may be particularly keen on using cash for share repurchases going forward because of tax law changes: The expiration of the Bush tax cuts means that next year, dividends should be subject to normal income tax rates — not the current 15% maximum level.”
Well, well, well. How many times have I pointed out that people react to tax policy? All this is, is an inverse tax increase. And people are taking action ahead of the increase, and they will most assuredly react to the consequences after the increase. Our two most prominent deniers, Michael and steve, just don’t seem to understand that this is how the economy is going to react, and it won’t be good. I guess Michael will write 4 more pages a day, and solve it all.
“I’m not sure whether to file this under the “things that should have been expected but, apparently, were unforeseen by our feckless Congress†or not. (Drew: File it under defective ideology, and expected by those without defective ideology.)
“It certainly makes sense if you’re a manager with substantial stock holding trying to boost your income” (Drew: Don’t go there. The standard criticism of managers is that they DON’T return capital, rather to employ it to expand their asset base, power, compensation……..you can’t have it both ways. This was a huge issue in the 80’s.)
” or exercising fiduciary responsibility and maximizing shareholder value.”
What a terrible concept, that. Maybe they do act rationally after all. Pigs that they are, an sech……
“I remember attending a motivational speech by Ray Kroc…………..
building a business with one simple idea that was something you liked to do. I genuinely wish we had more managers who were interested in building their businesses than in maximizing near term revenues. Our system doesn’t encourage that.”
I think its very misguided to invoke something like that. My entire world is comprised of people who do just that, they fund, buy, create, build, and grow businesses because its fun, its like competitive sport, its rewarding and you can do well financially.
But its truly more so in small corporate than large corporate. If you want that in the Fortune 50……..good luck, noble, but good luck.
And as for “our system,” we do in fact encourage that, at least we have in the past. But we now have a Congress and President doing everything in their power to set up disincentives, not because they are mean, evil people, but because they just don’t have a clue. Not a clue. The current reaction of small and large corporations should be a surprise only to the most business-ignorant among us.