{"id":106085,"date":"2017-05-16T10:27:20","date_gmt":"2017-05-16T14:27:20","guid":{"rendered":"http:\/\/countingpips.com\/?p=106085"},"modified":"2017-05-16T07:27:57","modified_gmt":"2017-05-16T11:27:57","slug":"the-hard-truth-about-stock-buybacks","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex\/2017\/05\/the-hard-truth-about-stock-buybacks\/","title":{"rendered":"The Hard Truth About Stock Buybacks"},"content":{"rendered":"<div id=\"inves-933865600\" class=\"inves-below-title-posts inves-entity-placement\"><div id =\"posts_date_custom\"><div align=\"left\">May 16, 2017<\/div><hr style=\"border: none; border-bottom: 3px solid black;\">\r\n<\/div><\/div><p>By <a href=\"http:\/\/WallStreetDaily.com\/\"><u>WallStreetDaily.com<\/u><\/a> <img loading=\"lazy\" decoding=\"async\" class=\"attachment-home-th size-home-th wp-post-image\" style=\"display: block; margin-bottom: 5px; clear: both;\" src=\"https:\/\/s3.amazonaws.com\/wallstreetdailywebsite\/wp-content\/uploads\/2017\/05\/0417_buyback_feature.jpg\" sizes=\"auto, (max-width: 580px) 100vw, 580px\" srcset=\"https:\/\/s3.amazonaws.com\/wallstreetdailywebsite\/wp-content\/uploads\/2017\/05\/0417_buyback_feature.jpg 580w, https:\/\/s3.amazonaws.com\/wallstreetdailywebsite\/wp-content\/uploads\/2017\/05\/0417_buyback_feature-300x155.jpg 300w\" alt=\"The Hard Truth About Stock Buybacks\" width=\"580\" height=\"300\" \/><\/p>\n<ul>\n<li>Avoid companies that disavow ethics.<\/li>\n<li>Volkswagen is buying its own cars back.<\/li>\n<li>Are all buybacks created equal?<\/li>\n<li><strong><a href=\"https:\/\/pro.agorafinancial.com\/m\/677562\">Also recommended: Gold mine lurking beneath the sea.<\/a><\/strong><\/li>\n<\/ul>\n<hr \/>\n<p><img decoding=\"async\" style=\"float: left; max-width: 85px;\" src=\"https:\/\/duip7hn7nchpo.cloudfront.net\/editor-circle-louis-basenese.jpg\" alt=\"Louis Basenese\" \/>You\u2019ll recall that Volkswagen admitted to rigging 11 million vehicles with software designed to trick emissions tests.<\/p>\n<p>Well, it\u2019s time for the company to make amends.<\/p>\n<p>A federal judge just approved an order for Volkswagen to buy back $1.2 billion worth of \u201ccheating\u201d vehicles.<\/p>\n<p>All told, Volkswagen will buy back 20,000 polluting diesel-engine cars.<\/p>\n<p>The company will offer free repairs on another 63,000 cars.<\/p><div id=\"inves-4132297155\" class=\"inves-in-content inves-entity-placement\"><hr style=\"border: 1px solid #ddd;\">\r\n<div id=\"inpost_ads_header\">\r\n<p style=\"font-size:10px; float:left; color:#666;\">Free Reports:<\/p><\/div>\r\n<div id=\"inpost_ads\"> \r\n<p style=\"font-size:15px; float:left;\"><a href=\"https:\/\/goo.gl\/1ApBOV\"><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/investmacro.com\/wp-content\/uploads\/2018\/06\/graph_techs_PD.png\" align=\"left\" width=\"80\"  height=\"55\"\/><\/a>\r\n\t     <a href=\"https:\/\/goo.gl\/1ApBOV\"><b><u>Get Our Free Metatrader 4 Indicators<\/u><\/b><\/a> - Put Our Free MetaTrader 4 Custom Indicators on your charts when you join our Weekly Newsletter<\/p><br><br>\r\n<br>\r\n<br>\r\n<p style=\"font-size:15px; float:left;\"><a href=\"https:\/\/goo.gl\/f3RrHX\"><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/investmacro.com\/wp-content\/uploads\/2019\/01\/cot_pie_80.png\" align=\"left\" width=\"80\"  height=\"55\"\/><\/a>\r\n\t    <a href=\"https:\/\/goo.gl\/f3RrHX\"><b><u>Get our Weekly Commitment of Traders Reports<\/u><\/b><\/a> - See where the biggest traders (Hedge Funds and Commercial Hedgers) are positioned in the futures markets on a weekly basis.<\/p><br><br>\r\n<\/div>\r\n<hr style=\"border: 1px solid #ddd;\">\r\n<br><\/div>\n<p>Volkswagen\u2019s buyback plan got me thinking\u2026<\/p>\n<p>What\u2019s the difference between Volkswagen buying back its own cars and a public company buying back its own shares?<\/p>\n<p>Warren Buffett believes that stock buybacks destroy shareholder value.<\/p>\n<p>Others think it\u2019s a bullish sign when a company is hoarding its own shares.<\/p>\n<p><a href=\"https:\/\/www.bloomberg.com\/gadfly\/articles\/2017-05-03\/warren-buffett-not-a-prophet-yet-when-it-comes-to-stock-buybacks\"><strong>Bloomberg<\/strong><\/a>:<\/p>\n<blockquote>\n<p class=\"blockquote\">Repurchase activity slowed last year and is down drastically in 2017 to the slowest pace in five years\u2026 Bank of America, based on its own proprietary survey, says buyback activity could be down as much as 30%.<\/p>\n<\/blockquote>\n<p>I asked my senior analyst, Martin Hutchinson, to give us the final word on buybacks.<\/p>\n<p>Bullish or bearish?<a name=\"video\"><\/a><\/p>\n<p>Hutch\u2019s full report is below.<\/p>\n<p>Ahead of the tape,<\/p>\n<p>Louis Basenese<br \/>\nChief Investment Strategist, <i>Wall Street Daily<\/i><\/p>\n<hr \/>\n<p><script src=\"https:\/\/fast.wistia.com\/assets\/external\/E-v1.js\" async><\/script><\/p>\n<div class=\"wistia_responsive_padding\" style=\"padding: 56.88% 0 0 0; position: relative;\">\n<div class=\"wistia_responsive_wrapper\" style=\"height: 100%; left: 0; position: absolute; top: 0; width: 100%;\">\n<div class=\"wistia_embed wistia_async_y4xfrmyglx videoFoam=true\" style=\"height: 100%; width: 100%;\"><\/div>\n<\/div>\n<\/div>\n<hr \/>\n<p><strong>Question:<\/strong> Martin, you agreed to help us compile a library of the most important investment catalysts. These are baseline concepts that every investor should know. Today we\u2019ll be discussing stock buybacks.<\/p>\n<p>Let\u2019s jump right in, Martin. Let\u2019s start right at the beginning. What\u2019s a stock buyback?<\/p>\n<p><strong>Martin Hutchinson:<\/strong> In a stock buyback, a company announces a program of buying stock from the market generally over a time period rather than through a single tender offer. By doing this, it reduces the number of shares outstanding and increases earnings per share.<\/p>\n<p>There are two reasons for doing this. Firstly, buying back shares returns cash to shareholders like dividends but in a way that tends to boost the stock price. Because there are fewer shares outstanding, it pushes the price up.<\/p>\n<p>This benefits management, which has stock options, more than dividends, which they don\u2019t receive until they exercise the options into shares. If you hold stock options, dividends are a bad thing. They represent a leakage of cash and value from the company from which they don\u2019t benefit.<\/p>\n<p>The second reason for doing buybacks is if the buyback does increase the share price by reducing the number of shares outstanding, shareholders don\u2019t have to pay tax on the gain immediately. If you pay a dividend to them, they pay tax on it immediately.<\/p>\n<p><strong>Question:<\/strong> Interesting, Martin. Now, I know coming out of the financial crisis, we were seeing a ton of stock buybacks. In fact, some experts were thinking that the bull market was being facilitated by these tons and tons of stock buybacks. Might that have been true?<\/p>\n<p><strong>Martin Hutchinson:<\/strong> Yes, it was. I think companies have a lot of cash, and they use it on stock buybacks because those are more beneficial to management. There are, however, some dangers to stock buybacks.<\/p>\n<p><strong>Question:<\/strong> Would you walk us through those dangers?<\/p>\n<p><strong>Martin Hutchinson:<\/strong> Absolutely.<\/p>\n<p>Firstly, management has more money for buybacks in good years, obviously enough. But then the stock tends to be high. If management buys back stock at the top and then runs out of money at the bottom, which they quite often do, they may have to do an emergency share issue at a much lower price. Obviously, a company that buys stock high and sells low is bad news for its other stockholders.<\/p>\n<p>Secondly, companies often do buybacks and pay dividends together that are more than company earnings. For example, they might pay dividends of 40% of earnings and buybacks of another 80% of earnings \u2014 for a total of 120%. They finance these by piling on leverage, which of course, in today\u2019s market, is at attractive rates. Apple, for example, is doing this. Naturally, in a downturn, those companies have a risk of failure because they\u2019ve used all their cash during buybacks.<\/p>\n<p><strong>Question:<\/strong> Interesting. At the end of the day, Martin, if I\u2019m ordinary Joe investor and I\u2019ve got my eye on a stock and the company has recently done some stock buybacks, do you think I should view that as bullish, or neutral or bearish?<\/p>\n<p><strong>Martin Hutchinson:<\/strong> I think you should be slightly bearish on companies that do buybacks. They\u2019re bad for individual shareholders because the individual shareholders get no direct benefit from buyback offers, which are generally made directly to institutions.<\/p>\n<p><strong>Question:<\/strong> What about the theory or the feeling that management is so bullish on its own company and prospects that it\u2019s eating up its own shares? What about that idea?<\/p>\n<p><strong>Martin Hutchinson:<\/strong> That\u2019s fine, but the management benefits more from the buybacks than the individual shareholders do, because they\u2019re the ones with stock options. They\u2019re extremely beneficial for company management.<\/p>\n<p>Personally, I much prefer steady dividends. I think in general, individual shareholders should prefer companies to pay the money out in dividends rather than in buybacks.<\/p>\n<p><strong>Question:<\/strong> Before we break, Martin, I\u2019ll give you the final word on stock buybacks. Give it to me. Boil it down for me.<\/p>\n<p><strong>Martin Hutchinson:<\/strong> I think there a great tool for management. Obviously, companies have to return cash to stockholders somehow sometimes. But I\u2019d much rather they did so in dividends as a stockholder.<\/p>\n<p><strong>Question:<\/strong> There you have it: Martin Hutchinson. He believes that stock buybacks are overrated. Thanks for your time, Martin.<\/p>\n<p><strong>Martin Hutchinson:<\/strong> Great to be with you.<\/p>\n<p><strong>Question:<\/strong> This is <em>Wall Street Daily<\/em>, signing off.<\/p>\n<p>Good investing,<\/p>\n<p>Martin Hutchinson<br \/>\nSenior Analyst, <em>Wall Street Daily<\/em><\/p>\n<p>The post <a href=\"https:\/\/www.wallstreetdaily.com\/2017\/05\/16\/hard-truth-stock-buybacks\/\" rel=\"nofollow\">The Hard Truth About Stock Buybacks<\/a> appeared first on <a href=\"https:\/\/www.wallstreetdaily.com\" rel=\"nofollow\">Wall Street Daily<\/a>.<\/p>\n<p>&nbsp;<\/p>\n","protected":false},"excerpt":{"rendered":"<p>By WallStreetDaily.com Avoid companies that disavow ethics. Volkswagen is buying its own cars back. Are all buybacks created equal? Also recommended: Gold mine lurking beneath the sea. You\u2019ll recall that Volkswagen admitted to rigging 11 million vehicles with software designed to trick emissions tests. Well, it\u2019s time for the company to make amends. A federal [&hellip;]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-106085","post","type-post","status-publish","format-standard","hentry","no-post-thumbnail"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/106085","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/comments?post=106085"}],"version-history":[{"count":2,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/106085\/revisions"}],"predecessor-version":[{"id":106097,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/106085\/revisions\/106097"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/media?parent=106085"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/categories?post=106085"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/tags?post=106085"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}