Quote:
Originally Posted by Tyrone Slothrop
If a business is making money, and management doesn't think it makes sense to invest the money in making the business grow, there are three choices: (1) Put it in the bank, (2) Pay a dividend to investors, or (3) Buy stock back.
(1) doesn't earn the company much of anything and doesn't do anything for anyone except the bankers.
(2) and (3) both generate returns to existing shareholders, (2) by giving them cash and (3) by reducing the outstanding stock so that everyone owns a little more. (3) lets shareholders opt out by selling to the company, so in that way features more choice.
I don't think most investors are fooled into thinking that the buyback means there is more demand for the stock. It's a matter of public record. No one is being deceived about anything.
If management has that money and doesn't see a good way to use it to improve the business, giving it back to the shareholders is great. There companies (e.g., rhymes with Oogle) where the founders don't really need to answer to shareholders and can squander the company's money on vanity projects like high-altitude balloons that are never going to make money. Is that a good model?
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Except that 3 is usually selected solely because it’s the lazy path of least resistance. These businesses could innovate, could build planes that don’t crash, but why spend on that when you can jack your bonus, tied to share price, with a stock buyback?
What is IBM other than a small maker of niche software connected to a massive buyback machine? It’s a repository of cheap money buying it’s own stock.
And while these companies do this their actual products and services turn to shit. Boeing cut corners. Why? To gain a little bit of margin. Where might it have been had it instead invested in making a superior product? If it spent money wasted on buybacks on better R&D and production, it wouldn’t see all of its orders for planes being cancelled.
Wall Street is a casino. And now businesses are following suit. Who cares for succeeding by providing value when it’s so much easier to just borrow cheap money and buy your stock.
Don’t confuse Boeing with Apple. Apple does strategic buybacks out of funds on hand. Boeing and those like it often used borrowed money to fund buybacks.
The difference? Cook thinks for the long haul and is focused on products. Boeing is a financial company annoyed it has to make planes.
So yes, fuck Boeing. Let them burn. Ch 11.
