share repurchases

How 1% Tax on Stock Buybacks Affects You

by
How 1% Tax on Stock Buybacks Affects You 1

The Inflation Reduction Act has a lot of new features. One of the one that I keep hearing about is the new 1 percent tax on share buybacks and how that will affect investors. The 1% Share Buyback Tax Means Nothing There is a lot of noise around companies buying back their own stock after many (most?) companies acted irresponsibly with the money they earned, or were granted, during the pandemic by buying back their shares and then laying off people because they didn’t have enough money. It is no secret that I disapprove of companies buying their own stock. The practice is supposedly a way to return money to shareholders, but it is a very poor way of doing that. To make matters worse, most companies just turn around and reissue those shares in the form of executive stock option bonuses. It doesn’t take a Nobel Prize winning economist to see that share buybacks benefit company executives far more than they do shareholders. Take a look at the companies that have spent the last few years or decade buying back stocks and see if they performed any better than their competitors over the same time period. A majority of …

Read More

Share Buyback Myths

by
Share Buyback Myths 2

Arrgghhh! Share buybacks, or stock repurchases, are a tool that publicly traded companies use to manipulate their shareholders into making them think that they are working for them. Unfortunately, with big business schools still teaching a curriculum that starts with The Wealth of Nations and doesn’t much update from there, there are all too many stock analysts and pundits out there pushing share buybacks as good corporate governance. Returning Capital to Shareholders The gold standard of returning capital to shareholders is paying cash dividends. There is a catch though. You can’t use accounting to create cash that you pay out. The other catch is that shareholders don’t like it when you cut a cash dividend once you start paying it. In other words, if you are going to pay a cash dividend, you better really be in a good position. Share Buybacks Wasting Money Enter share buybacks. A share buyback is where a company takes the extra cash it has and instead of paying a cash dividend, which it can’t play around with, it buys back its own shares. A share buyback is supposed to happen when a company feels its shares are undervalued. That isn’t what really happens anymore. …

Read More

IBM Share Repurchases Continue

by

Just got the 2011 IBM annual report. It never ceases to amaze me how much money this company puts into share repurchases, rather than actual dividends. For 2011, the company boasts that they were “… able to return $18.5 billion to you,” the shareholder. Of course, a paltry $3.5 billion of that was actually returned to shareholders in the form of a dividend. The remaining $15 billion went into buying back shares, which does a lot more to make it easier for executives to meet various per share bonus targets than it does to enrich shareholders. Theoretically, shareholders benefit from fewer outstanding shares, but I bet most shareholders would have benefited more from a triple-size dividend payment. Any way, this is par for the course for IBM which spent $15 billion in 2010 and 2011, and $7.5 billion in 2009 buying back its stock. And, it isn’t done, yet. The board has already authorized the repurchase of $8.66 billion more stock, and there is little doubt the board will approve a new $15 billion or more in share repurchase authorizations for 2012. As a shareholder, you must factor this into your investment. Your dividend will be substantially lower than it should …

Read More