Hacker News Reader

Comment by sirspacey | Hacker News Reader

When you have an absolutely massive amount of cash, like Apple, there are near term and long term benefits to a buy back.

Near term, buy backs stabilize your share price. Share price is a major driver of many incentives inside Apple as well as perceptions without.

Long term, Apple is betting their shares will increase in value.

Investors are not rational or accurate in their assessments of a company’s performance (why market “expectations” is the bar, not performance), stock markets are not perfect information systems, and most finance professionals regard stock price as the final say on a company’s performance & value.

Put together, this means a company’s best defense (when as successful as Apple) against being under-priced in the stock market is to buy back their own stock. To do that, you need a massive cash war chest or sources of cash like PE/hedge funds/etc. so far only companies with the first option live very long.

View on HN

The answer is far simpler and less cynical.

The business has cash saved up. It has 3 options. Give the cash to the business’ owners, spend the cash on improving the business (such as R&D), or keep the cash sitting around.

And businesses often times do all 3 in varying amounts.

However, for a publicly listed business, giving cash to the business’s shareholders is taxable income. An equivalent way to reward shareholders without requiring shareholders to pay tax now is to buy outstanding shares and hence causing the price to go up because the supply of shares relative to demand goes down.

Also, if a publicly listed business awards equity to employees, such as RSUs which tech companies famously do, then buying back shares simply negates the effect of that since giving the employee equity increased the supply of shares relative to demand.

Long term, buybacks aren't about supply/demand -- they increase a share's percentage ownership of the business.

Primarily they are used to reward executives who have options and therefore get a disproportionate gain on the buyback.

Please explain the math that concludes someone that holds [stock] options disproportionately gains from a business buying back shares (presumably relative to other shareholders).

There isn’t any. The poster above you is incorrect.

It happens when they have a pay package that is dependent on moving the share price. So it’s not about stock market math but the explicit agreement between the company and the executive.

Pay packages are incorporated into income statements. Reducing cash spend now in lieu of equity is priced in.

An executive is also just an employee. So I am not sure what you are implying there. If it’s malfeasance between the shareholders, board of directors, and c suite, you will have to be more explicit.

The question has a flawed premise. An option/RSU holder is not a shareholder before they exercise their options or vest their RSUs, thus should not be getting a dividend allocation (i.e. a non-zero allocation to an option holder is a disproportionate allocation). In a buyback scenario, you are essentially issuing a dividend not to the current shareholders, but splitting that cash among all authorized and not-yet-issued shares (incl. RSUs and options).

I don't know about you, but I get dividend equivalents when RSUs vest to cover precisely this scenario.

When RSU vests, it is no longer an RSU. Not sure why you would call it “dividend-equivalent” as they are regular dividends at that point (unless your broker lends them out in which case you might get substitute payments in lieu.)

I'm just using the terms that show up on my etrade plan confirmations. In lieu of actual dividends, the terms of the grant say the company will issue RSU dividend equivalents, commensurate with what the dividend would have been had it been purchased on the grant date (or something similar, I don't have that paperwork at hand).

I suppose that might be some special amendment in your specific RSU plan electing to pay some cash on top, not inherent to the nature of an RSU, which is certainly not a stock (i.e. on the corporate financial reports that payment would not be showing up as a dividend).

> thus should not be getting a dividend allocation (i.e. a non-zero allocation to an option holder is a disproportionate allocation)

This is ignoring the fact that existing shareholders benefited by not having to pay the employees more cash in lieu of the options/RSU. For example, existing shareholders could have benefited from higher dividends due to higher cash flow, or greater appreciation in stock price due to bigger stock buybacks due to higher cash flow.

The two effects should cancel each other out.

> not having to pay the employees more cash

I acknowledge there is an effect on employee compensation. How it actually plays out is not a simple linear one though (esp. since the comp decision is made at grant time and the impact is seen a while later with different assumptions). The induced incentives and behavior can be different depending on the model chosen.

> The two effects should cancel each other out.

Not sure the math is as clear cut as canceling each other. Maybe. Probably not.

They have RSUs.

> When you have an absolutely massive amount of cash

Apples cash pile (~70bn) is very diminished from their hoarding / tax dodging days when it was >200bn. This cash is of course offset by ~100bn in debt that they have, most of which was issued at around 2% and when rolled over in the coming years will be reissued at >5%.

Reply on news.ycombinator.com