You are quite right, and I have posted often on this subject as I believe it does not get the attention it deserves. Buybacks are corrupt. Since the zombie (or ignorant) boards are complicit in this corruption, the way to eliminate it is for the SEC to require public companies to increase the strike price of all outstanding options when a buy back is implemented, by the ratio:
(number of shares outstanding before buyback) / (number of shares outstanding after buyback)
Without this necessary adjustment, buybacks disproportionately benefit management's options at shareholders expense. This leads them to buy back their stock, no matter how high the price, just to make sure their most recent and expensive options can be liquidated at a profit.
On Apr 10 12:44 PM stonebluff wrote:
> Has anyone tackled a study of the damage done by buybacks to American > financial corporations? I cannot understand the rationale for buybacks > except when the assets underlying the shares plainly exceed in value > the price of the shares. Then, and only then, do the shrareholders > as a group benefit. Buybacks otherwise benefit only EX shareholders, > who sell into the buyback storm. With buybacks, management is making > an investment decision with regard to my money; I would prefer to > invest it myself. Give me cash dividends. I'll invest them where > I choose. Buybacks carry even a mild odor of corruption, since managers > with options are commonly large and regular vendors of their companies' > shares, and buybacks tend to mask the dilution caused by prodigal > use of options.,
S&P 500 Watch: March 'Winners' Are Actually the Biggest Losers [View article]
Thanks for an informative analysis. When the market was near its lows I had argued that sound stocks were by no means "cheap"; and that the low SP500 was more due to some of its constituents being demolished, rather than due to its good companies becoming "cheap". This was just an observation, now bolstered by your excellent analysis, which says that the demolished ones have stirred back to life in the ER, boosting the SP500.
I still maintain that at current levels stocks are not "cheap" except relative to the bubble era. Dividends are being slashed at astonsihing rates, and historically, companies which drastically cut dividends have restored them slowly, if at all. Thus, I expect SP500 dividends will not climb back to 2007 levels for many years, and this suggests to me that stocks will be worth less than they were in 2007 for many years as well.
Close to the End of the Selling Cycle [View article]
There are some investors who have legitimate concerns that many stocks may not recover for a very long time due to the changes in consumer behavior and global economic balances. For instance, who is to say that AXP card holders, some of whom are being paid to just "go away", will resume spending (and paying their bills!) in anything like the past decades? In the case of BA, who is to say that global travel will return to the overheated excesses of the past decades, in which "Joe Sixpack" hops on coast-to-coast flight for a weekend out? Additionally, both these companies have balooning pension liabilities.
So yes, the stocks are at multi-year lows, but perhaps for good reasons, and perhaps these reasons are not going to disappear soon.
12 Attractive Companies That Also Pay a Dividend [View article]
I thought NOK just "suspended" their dividend.
Now that cutting dividends is de rigeur, even companies that don't need to cut them will jump on the bandwagon and take cover in the fact that others are cutting. Executives want all the available cash to buy back shares, so that their options can come back into the money. Paying dividends to the owners (i.e. the shareholders) is too old-fashioned, as it reduces the executives' loot, disguised as options.
On Mar 01 11:56 AM YoMama wrote:
> JNJ and NOK might be the safest payers on this list. Three more to > consider is PG,KFT and MCD for safety and regular increases. If you > put stock price movements above the dividends in importance your > better off staying in cash .
Let's Just Say It: Print More Money [View article]
You state: "..Bankruptcies, defaults, and deleveraging are destroying money at an historic pace..".
True, money has been destroyed, but not wealth.
Wealth was not destroyed. Houses did not burn to the ground. Factories did not turn to rubble. Airplanes did not vanish into thin air. Malls did not vaporize. No real wealth was destroyed. A money illusion of wealth which had been conjured, now turns out to be just what it always was, an illusion. So, time to face reality than to continue attempting to create illusions.
What you advocate is attempting to reflate an illusion that created the overcapacity that you so decry. The money bubble illusion certainly created overcapacity in some areas, at the expense of others. Education, health, environmentally sound energy, all suffer from underinvestment, whereas financial chicanery, shopping, and amusements all have overcapacity. Attempting to perpetuate this warped economy will simply create larger problems down the road.
Repurchase Cutbacks Spotlight Who's Healthy and Who's Not [View article]
Share buybacks inflate the value of options held by insiders disproportionately to their effect on the value of the stock.
If an honest board wants to return surplus money to shareholders it should be in the form of dividends. Alternatively, the board should increase the strike price of options in the event of a share buyback to reflect the lower number of shares outstanding. This way, the value returned to all shareholders including management is the same per share, rather than favoring option holders at the expense of the other shareholders.
I posted the comment below in response to another article on this website, just a few days ago. It bears repeating, as I believe many shareholders may not have realised how management uses share buy backs to defraud them:
Dividends benefit all shareholders equally, while buybacks disproportionately benefit management who have options.
If you are a CEO of a company with a stock price of $20 and have an option on a million shares at $22. A year later, the stock price has gone up to $23. Your options are now worth $1 each, i.e. $1,000,000. Now the company has $1 per share of surplus cash which can either be paid in dividends or used to buy back, let's say, 10% of the outstanding shares.
If you pay out the $1/share in dividends, all shareholders, you the CEO included, benefit equally, and your take is modest, just the dividend on the shares you already own.
If you buy back 10% of the stock, the price per share for the 90% remaining outstanding share increases by 1/0.9=11%, so your options are now worth 1.11x23 minus the strike price of 22 = $3.53 per option, i.e. $3,530,000 instead of $1,000,000 that they would have been worth if you paid the $1/share as dividend.
Thus, you the CEO, get $3.53 m instead of $1m if you buy back shares, whereas if you paid dividends your extra income per share that you already own will just be as modest as what the other shareholders get.
If company proxies were voted by knowledgeable shareholders, share buy backs would either be disallowed, or any outstanding options should be re-priced upwards to reflect the reduced number of shares outstanding.
The reality, however, is that most shares are voted by mutual fund managers, who are either ignorant of the basic math, or who are members of a "club" that includes the management, so options are not re-priced to adjust for fewer shares outstanding, and share buybacks are used to enrich option holders at the expense of the other shareholders.
Where Have All the Buybacks Gone? [View article]
(number of shares outstanding before buyback) / (number of shares outstanding after buyback)
Without this necessary adjustment, buybacks disproportionately benefit management's options at shareholders expense. This leads them to buy back their stock, no matter how high the price, just to make sure their most recent and expensive options can be liquidated at a profit.
On Apr 10 12:44 PM stonebluff wrote:
> Has anyone tackled a study of the damage done by buybacks to American
> financial corporations? I cannot understand the rationale for buybacks
> except when the assets underlying the shares plainly exceed in value
> the price of the shares. Then, and only then, do the shrareholders
> as a group benefit. Buybacks otherwise benefit only EX shareholders,
> who sell into the buyback storm. With buybacks, management is making
> an investment decision with regard to my money; I would prefer to
> invest it myself. Give me cash dividends. I'll invest them where
> I choose. Buybacks carry even a mild odor of corruption, since managers
> with options are commonly large and regular vendors of their companies'
> shares, and buybacks tend to mask the dilution caused by prodigal
> use of options.,
S&P 500 Watch: March 'Winners' Are Actually the Biggest Losers [View article]
I still maintain that at current levels stocks are not "cheap" except relative to the bubble era. Dividends are being slashed at astonsihing rates, and historically, companies which drastically cut dividends have restored them slowly, if at all. Thus, I expect SP500 dividends will not climb back to 2007 levels for many years, and this suggests to me that stocks will be worth less than they were in 2007 for many years as well.
Close to the End of the Selling Cycle [View article]
So yes, the stocks are at multi-year lows, but perhaps for good reasons, and perhaps these reasons are not going to disappear soon.
12 Attractive Companies That Also Pay a Dividend [View article]
Now that cutting dividends is de rigeur, even companies that don't need to cut them will jump on the bandwagon and take cover in the fact that others are cutting. Executives want all the available cash to buy back shares, so that their options can come back into the money. Paying dividends to the owners (i.e. the shareholders) is too old-fashioned, as it reduces the executives' loot, disguised as options.
On Mar 01 11:56 AM YoMama wrote:
> JNJ and NOK might be the safest payers on this list. Three more to
> consider is PG,KFT and MCD for safety and regular increases. If you
> put stock price movements above the dividends in importance your
> better off staying in cash .
Let's Just Say It: Print More Money [View article]
True, money has been destroyed, but not wealth.
Wealth was not destroyed. Houses did not burn to the ground. Factories did not turn to rubble. Airplanes did not vanish into thin air. Malls did not vaporize. No real wealth was destroyed. A money illusion of wealth which had been conjured, now turns out to be just what it always was, an illusion. So, time to face reality than to continue attempting to create illusions.
What you advocate is attempting to reflate an illusion that created the overcapacity that you so decry. The money bubble illusion certainly created overcapacity in some areas, at the expense of others. Education, health, environmentally sound energy, all suffer from underinvestment, whereas financial chicanery, shopping, and amusements all have overcapacity. Attempting to perpetuate this warped economy will simply create larger problems down the road.
Repurchase Cutbacks Spotlight Who's Healthy and Who's Not [View article]
If an honest board wants to return surplus money to shareholders it should be in the form of dividends. Alternatively, the board should increase the strike price of options in the event of a share buyback to reflect the lower number of shares outstanding. This way, the value returned to all shareholders including management is the same per share, rather than favoring option holders at the expense of the other shareholders.
Don't Buy Into Share Buybacks [View article]
Dividends benefit all shareholders equally, while buybacks disproportionately benefit management who have options.
If you are a CEO of a company with a stock price of $20 and have an option on a million shares at $22. A year later, the stock price has gone up to $23. Your options are now worth $1 each, i.e. $1,000,000. Now the company has $1 per share of surplus cash which can either be paid in dividends or used to buy back, let's say, 10% of the outstanding shares.
If you pay out the $1/share in dividends, all shareholders, you the CEO included, benefit equally, and your take is modest, just the dividend on the shares you already own.
If you buy back 10% of the stock, the price per share for the 90% remaining outstanding share increases by 1/0.9=11%, so your options are now worth 1.11x23 minus the strike price of 22 = $3.53 per option, i.e. $3,530,000 instead of $1,000,000 that they would have been worth if you paid the $1/share as dividend.
Thus, you the CEO, get $3.53 m instead of $1m if you buy back shares, whereas if you paid dividends your extra income per share that you already own will just be as modest as what the other shareholders get.
If company proxies were voted by knowledgeable shareholders, share buy backs would either be disallowed, or any outstanding options should be re-priced upwards to reflect the reduced number of shares outstanding.
The reality, however, is that most shares are voted by mutual fund managers, who are either ignorant of the basic math, or who are members of a "club" that includes the management, so options are not re-priced to adjust for fewer shares outstanding, and share buybacks are used to enrich option holders at the expense of the other shareholders.