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It's the holiday season and everyone is getting ready to buy stuff. For a lot of people that means getting gifts and hitting end of your sales, But for companies it means a different sort of shopping spree.
Microsoft saying, look at all this cash we have, We're gonna boost our dividends sixty billion dollars of a buyback. This has been a year where sweetness for investors have played a really big role in coursely earnings. Right, Companies have either been looking to the dividend or to the buyback program.
Companies are buying back shares of their own stocks amid a challenging economy for individuals and families across the US. Some of the top earning companies in the country are flush with cash, and they're using this cash to do something that was once illegal but is now one of the more popular financial strategies across sectors.
So companies are taking hundreds or even thousands of shares of their stock out of the stock market, and they're doing this by buying them back. In the past few years, publicly traded companies in the US executed hundreds of billions of dollars worth of buybacks. November through December is typically the busiest period for them, and twenty twenty four is on track to be the biggest year for stock buybacks ever.
But David, I've been trying to wrap my head around why this strategy is so popular. The first time I heard about it, it sounded kind of like a weird move.
I mean, fair enough, because companies sold those shares to investors for a reason. They wanted to raise money to run their businesses and grow their businesses. So given that, it is a little jarring at face to see those same companies spending their own money to get those shares out of circulation.
But it all comes down to how this affects the value of those shares.
It does.
If there are fewer shares in circulation, that means each year that's out there is more valuable.
Means happier shareholders.
And often happier companies.
Okay, but there must be someone who's not winning in this scenario.
There is always a loser.
Stock buybacks have a lot of critics within government and among economists, and according to those critics, the losers are essentially everybody.
Else, everybody who's not a shareholder in the company or the company itself exactly.
I'm David Gera and I'm Sarah Holder. This is the big take from Bloomberg.
News today on the show stock buybacks, Why companies do them, why shareholders like them, and why regulators want to rain them in. Blu Wang is on the cross asset desk at Bloomberg News, meaning she covers the ins and outs and ups and downs of the stock market every day, and she's been writing about stock buybacks for more than a decade. I asked her to break down how and why they happen. We started with the how a buy back is.
When a public trade the company buying back their own shares on the open markets. The buy back shares from existing shareholders, just as regular investors typically do through a brokerage house.
So, just like a regular investor, the company reaches out to a Wall Street firm like Goldman Socks or Bank of America and asks to execute the trade. The company can ask to buy all the shares they want on a specific day, or they can buy back their shares over time on what they call autopilot.
So, for instance, if a firm wants to buy back ten million shares, the ten million share buybacks would be conducted on an interval, for instance, monthly basis, so each month one million buybacks. That's autopilot loss.
There are a few reasons why a company might want to buy back its own shares. The first can be explained by everyone's favorite economic concept, supply and demand.
Well, theoretically, you know, economics one oh one says when demand increases, the prices will go up. So buybacks theoretically represent a source of demand that would help prices go up. For instance, if a company's value is stable, if it's one hundred dollars company, just for the sake of a simplification, and if they are one hundred shares outside, then each year would be worth one dollar, and if you remove half of it then it would become two dollars.
Basically, when a company buys back its own stock, there are fewer shares out in the world. That means everyone's remaining shares are worth a little more or a lot more. That's obviously good news for those shareholders.
When the prices go up, they become richer, the holdings are becoming more valuable.
Higher stock prices also look good on company earning reports.
It helps earnings pressure or revenue pressure. Those financial performance metrics.
And higher performance metrics for companies can also mean higher compensation for executives.
Some of the executive's bonuses are tied to either shares performance or earnings pressure growth. So by artificially making the stocks more valuable or their earnings pressure better than whether it's looks, their bonuses would benefit from that.
How is this not market manipulation.
That's a very good question because for a long time, before the nineteen eighties, it was strictly restricted for the very notion that it could be seeing as stock madipulation, because basically what happened these companies came into the market and bid up their own stocks in potentially inflating the stock prices. But then came and begins and administration, they
started deregulating everything, and buy backs restrictions was loosened. Since then, you have seen a steady increase in buybacks at this rate this year could be a record.
Wow.
Why have they accelerated so much over the past few years.
Well, companies are doing well, they are making record profits, and the economy it despite a lot of concerns about the potential of recession. It hasn't happened, and companies that will wash with cash, so that kind of helped them to do more buybacks.
When Trump's corporate tax cuts went into effect in twenty eighteen, they helped fuel stock buybacks too, because when companies have more cash, they tend to spend it on buybacks. Goldman Sachs estimates that S and P five hundred companies will spend more than nine hundred and thirty billion dollars in cash on buybacks this year and more than a trillion
next year. When you see a stock buybacks bree from SMP five hundred companies, for example, what does it tell you about the stock market at that moment?
Well, I think I would break it out into two scenarios. One is, if it's a steady increase, as we just discussed, it usually happens when the economy is doing well, companies profitability is healthy, and companies just very confident that they'll be able to generate enough cash to maintain the same pace or even faster buyback programs. Another scenario is when the market is under stress, they have a big sell of and stocks tanked, and companies see value in their
own companies. They would swooping and scoop up their own shares on the tube. It's usually a sign a confidence that they don't necessarily see this kind of volatility is going to hurt a business. That's a good sign, not to mention that immediately provides a flaw for their share prices.
So buybacks they can be good for shareholders, good for executives and their stock options, good for the markets, and good for companies trying to lock in a better stock price. But these buybacks are not cheap, and critics argue that all the money companies are spending on their own shares could be used on other things instead, innovation within their own business, expanding their operations, giving raises to their workers.
That's the tradeoff a lot of companies need to make. Do you help boost the shareholder values via buybacks, or do you invest longer term by investing in plants, increasing workers wage on benefits that arguably would benefit the host society and the economy over the line run.
It's quite a trade off short term returns for shareholders or long term benefits for the economy at large. When we come back the push to tax buybacks at a higher rate and whether efforts to rain them in will make a dent at all. Companies flush with cash are using stock buybacks to increase value for shareholders and boost their stock prices. Since deregulation made buybacks like these possible, they've become an increasingly popular financial tool, but also a
controversial one. So I asked Bloomberg's lou Wing about more of the downsides. Who exactly does a stock buyback hurt? Who's losing when companies buy back their shares.
If companies don't invest for the long run, the whole society, the economy suffers because there is no prospect of growth. The other argument against the buybacks, it's on this concept of wealth gap. When you provide buybacks to the wealthy people, they benefit a lot, but it's actually left behind a
lot of the poor people. Just to put this in, the in the bottom half of American house hosts have roughly zero point four trillion dollars invested in equities, and that's a tiny fraction of the twenty trillion dollars owned by just the top one percent. So there is a big gap between the rich and pool.
And so these stock buybacks could help these wealthier shareholders who are super invested in the stock market, but it might not help the long term business growth which could impact more Americans.
Exactly, exactly.
So, are there any companies that are famous or infamous for using buybacks as a business strategy.
Well, I wouldn't say as a key business strategy, but we do see a lot of technology megacaps. They have tons of catching the balance sheets, so they do give out a big portion of the money to shareholders. Apple earlier this year announced one hundred and ten billion dollar buybacks.
What was happening that made them do that.
Well, they just have tons of cash there and they don't necessarily see the benefit of investing, you know, or buying up another company. So whatever research R and D requirement, there is enough to be funded, and they're under pressure by shareholders to boost their value to appease those kind of investors.
There are plenty of economic conditions where buybacks wouldn't be such a savvy move. Though. What does it say about the economy when there's a slowdown in stock buybacks?
Very good question. So when the company decides to suspend buybacks, usually it's when they see some troubles that had either a researching is looming or slow down or they have some business troubles, they would suspend buybacks in order to preserve cash, and that's not a good sign. For instance, during the pandemic, many companies affected by the lockdowns, for instance airlines, they suspend it buybacks in order to preserve
their cash. Remember, some of the companies do buybacks on the autopilot basis, So sometimes they announced the buybacks for instance, you know, as example, they plan to do this over the next couple of years, and they say, Okay, we're going to suspend buying our own shares, either on the quarterly or on their monthly basis.
So a company could have said in twenty nineteen, we're going to be doing buybacks for a couple of years.
Then the pandemic hits, they might have to cool it. Yes, on the Bible exactly.
Stock buybacks are here to stay, but there's been an effort to reign in the frenzy at the federal level. President Joe Biden and Senators Elizabeth Warren and Chuck Schumer have been vocal critics of buybacks. So has President elect Donald Trump, who in twenty eighteen called out companies for using some of the cash they saved from his tax cuts to fund buybacks.
So Democrats and Republicans have different opinions on a lot of but when it comes to buybacks, they seem to be on the same page, which is, buyback is not good for the long term prospect of the economy and companies should use profits to create new jobs. So in twenty twenty two, Congress voted to impose a one percent tax on buybacks.
And what did that tax do well?
The goal of that tax is to discourage buybacks, but that has done little. It's too little to make a minifold difference.
Biden had wanted even higher taxes on buybacks. In his twenty twenty three State of the Union address, he called for a quadrupling of the rate to four percent. But he's leaving office with a one percent tax in place, and with the Fed leaning towards cutting interest rates more and Trump proposing more corporate tax cuts, experts project another banner year for the buyback well.
Goldman Sax has a very optimistic forecast on buybacks. They're projecting fifteen percent of increase from this year, which we know is heading for another record.
Thanks for listening to the Big Take podcast from Bloomberg News. I'm Sarah Holder.
And I'm David Gera. This episode is produced by Julia Press and Alex Sekura.
Who also mixed it. It was fact checked by Adriana Tapia.
It was edited by Stacy Vanixsmith, Aaron Edwards, and Sid Verma. Naomi Shaban is our senior producer. Nicole Bimsterbor is our executive producer. Sage Bauman is Bloomberg's head of podcasts.
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