Gyroscopic Investing

melveyr wrote: Buybacks and dividends are the only methods to return value to the shareholders. If a company swore to never pay a dividend nor buyback stock (and the market fully believed them) the shares would be of no value. It wouldn't matter how much cash was on the books. Who cares if you never get a piece of it?

Buybacks and dividends are the actual return of value. Promises are nice too, but then the stock price is relying on faith (of future dividends/buybacks).

Let's assume that stocks didn't pay dividends; then it is the same concept as the MMT discussions that have been popping up on the forum. Governments issue currency (like a corporation issues stock) and then tax it to take it back (like a stock buyback). This underlying demand (or the market's belief of the underlying demand) provides the floor ensuring that the instrument has some value. Governments have a habit of issuing more than they buyback most years, and the instrument offers no promise of dividends (in corn, gold, wheat, oil or any other thing offering a use-value) leading to the long term decline of the instrument over time.

stone wrote: I can see how buybacks are an appealing way to spend money for the management. They mopp up all the new shares issued as employee stock options and, as smurff says, they protect against takeovers. I still haven't heard anything to explain why shareholders put up with them. Why not replace the management with a management that doesn't indulge in buybacks?

MachineGhost wrote:

stone wrote: I can see how buybacks are an appealing way to spend money for the management. They mopp up all the new shares issued as employee stock options and, as smurff says, they protect against takeovers. I still haven't heard anything to explain why shareholders put up with them. Why not replace the management with a management that doesn't indulge in buybacks?

The problem isn't buybacks per se, but the options issuance.  Shareholders en mass have not caught on to the fact that options issuance dilute the existing shares and that most buybacks are just to offset the issuance.  That's a relatively new concept in the grand scheme of things, only about 9 years old.

Steve Jobs was the worst rapist of shareholder value of them all through relentless options issuance to himself and his cronies.

MG

MachineGhost wrote:   Shareholders en mass have not caught on to the fact that options issuance dilute the existing shares and that most buybacks are just to offset the issuance. 

In a recent research report by Thomson Reuters they note that a company's stock buyback activity generally does not add value subsequent to the buyback. A reason cited is the fact companies generally have more cash on hand in good economic environments and this tends to be after the stock price has already reflected a more positive operating environment. The report concluded:

...most companies in the S&P 500 index have not been successful in adding value through stock buybacks in the time frames we observed. The positive correlation between buyback activity and price suggests a combination of poor market timing as well as policies that increase repurchases when firms have more free cash flow. This may be partially explained by the need for officers of public companies to make some use of the cash on hand, including keeping less of it due to the possibility of being taken over. The negative correlation between repurchases and forward returns shows that most buybacks did not pay off within the year after purchase.

Even for the market (S&P 500 Index) overall, the increased buyback activity occurs at ever increasing price levels.

Jake wrote: The way someone explained how to view share buybacks to me was that they are a sure sign that the management has no good ideas for growth. That kind of made sense to me, especially as I was working for a large corporation in 2008 that undertook a massive share buyback scheme in the 12 months leading up to the stock market crash. Ouch.