What’s the Big Deal About Stock Buybacks?

When a company makes money, and in particular when a company has cash on hand (free cash flow) from its operations, there are a limited number of things that the company can and should do with that money.

They could make charitable contributions, and they could contribute to the communities in which they operate and they could find other ways to be good stewards for society, joining the fight for diversity and the health of the environment and it can pay its employees well, and contribute to their health and retirement, etc, and many companies do some of that, for the goodwill of the community, if not true altruism.

But their main purpose, why they exist, why people own them (such as in their 401ks), is to make money.

And so the three main uses for their free cash are as follows: 

  1. Invest in the business to grow it
  2. Pay down debt, if they have it
  3. Return profits to shareholders

Companies do all of those things, but in particular, a lot of focus is put on the return of profits to shareholders because that is the real reason companies exist.

And there are two ways to do that

  1. Dividends
  2. Stock buybacks

Stock buybacks seem to be very political lately. I am a democrat. But I don’t agree with how this issue is framed, by democrats, as if it is a way to unfairly manipulate stock value, which, to me, demonstrates a lack of understanding. Or maybe some complain, not unreasonably, that it defers tax, because it can increase the value of the stock and that increase in net worth is not taxable until stockholders sell, while dividends are taxable immediately. But it also encourages some to sell (the company buys back from someone), and if they’ve held long enough to be in a gain position, that could accelerate tax. 

The real reason that corporations do this is because there are times when it is just a more efficient way to return money to shareholders than dividends.  When? When the company thinks the stock is undervalued.  Making that determination can be complicated, and subjective, based on factors such as the value of the assets, earnings, and growth potential. They could be wrong, but the management inside the company should know the company better than anyone. Assuming it is undervalued, buying back stock makes more economic sense than paying out dividends. Here is a simple, less subjective, example of why that’s true.

Assume that a company sells a million shares of stock for $1 a share.  Now the company is holding $1,000,000 in cash, and absent any expectation of earnings and growth, the shares should be worth $1 a share, because each share represents 1 millionth of a million dollars.  

But suppose for some reason the market doesn’t recognize that value and the market price is only .50 cents, meaning that if I wanted to sell my shares I can only find people willing to pay .50 cents for it. It doesn’t have to make sense. The market doesn’t always make sense. But let’s also assume that at some point in time, a time we’ll call “true worth,” all value will be recognized by the market and the stock will be at $1 per share.

If the company decided it didn’t need $1,000,000 and it wanted to return $500,000 to its shareholders, it could pay a dividend of .50 cents per share (technically if the company hasn’t made any money yet, that’s a return of capital, not a dividend, but nevermind that).  Now, after everyone gets their dividend, there are  1,000,000 shares and $500,000 cash in the corporation, so at true worth, each share will be worth .50 cents. Owners would have paid a dollar, got .50 cents back in cash, and still have stock worth .50 cents.  They haven’t made any money, they haven’t lost any money.

Let’s assume instead that the company took that same $500,000 and decided to buy back as much stock as it could at .50 cents a share, the undervalued market price, and give whatever is left as a dividend.  And let’s assume that shareholders were willing to sell 500,000 shares at that price, and the rest wanted to hold on.  So now the company spends $250,000 to buy back 500,000 shares. The owners that sold have lost money, but they didn’t believe in the company, and maybe they think they could have lost more, that was their choice. 

Those who remain are the ones who really believe in the company, and they now, collectively, own 500,000 shares of a company that has $750,000. At true worth, each share will be worth $1.50  If the remaining $250,000 is paid out as a dividend, they get .50 cents and then they still have stock worth $1 per share, because the company has $500,000 and there are 500,000 shares.  Either way they are 50% better off, and the company hasn’t even made any money, because it took advantage of being unappreciated when it returned value to shareholders.  

This doesn’t work if the shares are overvalued. If the company paid $2 a share to buyback shares, they’d end up with 750,000 shares outstanding with $500,000 and true value would be .75 cents a share, which would have rewarded those who sold, and punished the remaining shareholders, by pushing the true value down. That ultimately hurts shareholders including executives of the company that still hold shares (and most do – even though they might sell some from time to time).

Buying back shares when the stock is undervalued also helps the market recognize the true value, because it weeds out the owners that don’t see it, buying back, by mutual agreement, their shares, and leaving the owners who are committed, which in turn also protects against an opportunistic takeover from some big money source that recognizes the bargain. What if I noticed that I could buy a company that had $1,000,000 for $500,000? I could do that, screwing all the little guys who had this stock in their 401Ks and making $500,000 for myself. And then maybe I just raid the cash and fire all the employees. Is that what we want? 

Not this democrat.

Where Should We Draw the Line?

I’m losing patience. At first, I’m like, yeah, we, the US and the rest of Europe, shouldn’t engage with Russia directly. World war III. Nukes. All that.

I thought, this is a test. Can we isolate Putin with the heaviest sanctions ever? Can we show the world that we can end war without engaging in the war, without escalating? And I’m still worried about nukes, don’t get me wrong, but does the line we’ve drawn make sense?

We are giving weapons and aid to Ukraine. Putin already complains that we are escalating by waging “economic war.” We are clear about whose side we are on. It’s no secret to Putin. Ok, Ukraine is not part of NATO, and we have no pact that binds us to consider an attack on them an attack on us, but that doesnt mean that it isnt one. Putin’s invasion is an attack on the west. There is no other way to look at it. He attacked Ukraine because they are our friends. He attacked Ukraine because he thinks he can because they are not in NATO. He attacked them because they are a democracy, like us.

We are giving them weapons, but we balk at giving them planes. They use our weapons to kill the invaders, but we try to pretend we aren’t in this fight. The only reason he might not consider that an escalation is because he might think it’s not enough to defeat him. And what if he’s right? Are we holding back because we think Ukraine can win? What if we are wrong? Even if we’re right, how many innocent lives have to be lost that might not need to be?

Why do we draw the line at direct engagement with NATO? We could draw another line. We can say that we won’t go into Russia as long as Russia doesn’t attack a NATO country, but why shouldn’t we go into Ukraine? Putin did. They’ve invited us in. He wasn’t invited

The combined forces of NATO are vastly superior to Russia. But we’re being pushed around by a weaker opponent, because he’s a bully who threatens to use nukes.

Well, I ask this, what if he wins? Then the bully who threatens nukes is still around. And what if he starts losing without us in the fight, whose to say he won’t use nukes anyway. And then what are we going to do after its over.

I’ll tell you what. We’ll have to wait for the next time. Like we did the last time. Bullies don’t stop, until you make them.

So, yes, I’m scared. But he must lose.

And I don’t really understand the logical distinction between supplying Ukrainians with weapons and firing them ourselves, where one keeps us out of it and the other doesn’t? If we engage directly with Russian troops in Ukraine, when they have no business being there, how are we the ones escalating? Who started it?

Maybe there is hope that the sanctions will work, that the Russian people will rise up. Maybe we need to give it a little more time, I don’t know. But how much time does Ukraine have?

No Right to Cheap Gas

I am for managed capitalism, that is, I do not think the free market works, without regulation. I am in support of helping those who are in need, for whatever reasons, including gas prices when their level of poverty means they need it. But I am not for ensuring that everyone can have cheap gas whether they can afford it or not.

Gas should be expensive. Here’s why:

Believe it or not, oil and gas companies don’t generally want gas to be too expensive. 

They want to make money, as much as they can, of course, and for that they certainly like prices that are high enough, but not so high that there is demand destruction. Selling less oil at a ridiculous price doesn’t necessarily make them more money than selling more oil at a reasonably high price. Once people are pushed into alternatives, whether it is by finding ways to use less, because they simply can’t afford it, or by investing in solar, wearing sweaters, driving more fuel efficient cars (or electric), some of those changes could become permanent which then brings prices down anyway, and reduces demand long term. Eventually oil companies sell less at more reasonable prices.

They don’t want that, but we do.

It’s good for the environment, and it’s good politically because we are less dependent on Autocratic societies like in Russia and the middle east and Venezuela and Iran (and the undue influence of big oil in general, even here in the US). 

Historically, oil companies could control production to avoid going too far.

Things are different right now.  During the pandemic when oil demand dropped steeply, and the price of oil actually went negative (because people had bought futures and then couldn’t take delivery and had to pay people to take it), we saw a lack of investment in new production capacity. Those investments take time to pay off. Now that prices are so high that we might expect oil companies to increase production, they can’t, not without lead time, which is exacerbated by supply chain and labor issues that linger from the pandemic. 

So, even if the prices of oil justify it, the capacity to increase production isn’t there.  That’s why the price of oil was increasing as demand was ramping up post pandemic. Add Putin to the analysis, and the desire to get off Russian oil, and we’ve got a supply problem.

Is it gauging? Why do companies have to charge so much, just because they can? Here’s why. If they don’t charge what the market will pay, then we will run out of oil, short term. There has to be some demand destruction in order to wean out those who can change their behavior, so that there will be oil for those who can’t.  Because we have a supply problem.

The silver lining in all of this is many fold.

Solar, unfortunately, can never provide the amount of energy that we get from other sources, but it can provide a bigger percentage. Imagine if you can borrow money to put solar panels on your house, and your debt payments are less than the monthly energy bills you were paying. Even if that’s because your energy costs with fossil fuels has tripled, it pays for itself immediately. Suddenly everyone is doing it.

Demand destruction and the replacement of fossil fuels with other energy sources is not in the oil industry’s interest, but their inability to ramp up production in the short run creates a perfect opportunity for us to push it. The environment will benefit. Solar will benefit. Democracy will benefit. Oil will profit in the short run, but in the long run, they lose, and we win.

I’m not rich, but I can afford the higher fuel prices. I already drive a Honda fit.  I am happy to pay for a more sustainable future, and also to support Ukraine in this conflict (and whoever is next, if we don’t stop Putin now). If you drive a big truck, I’m sorry. Maybe next time you’ll buy something more fuel efficient.

For those who can’t afford to get to their minimum wage jobs, or pay for the inflation that high gas prices infect on so many other businesses, there has to be another solution. But that is a separate issue and speaks to the general availability of a living wage, and safety nets.  For companies that suffer from higher fuel prices, and potential wage increases, that can also hurt our economy.  I would support addressing all of that selectively according to need. Keeping minimum wage low to help companies that make billions doesn’t make sense. Companies that need it, could get wage help, if it’s in the interest of society to have those businesses. But, like cheap gas, why do we feel like we have a right to cheap labor, whether we can afford it or not?

Rise up, gas. The era of cheap energy is over. Good riddance.

We Are at War

We are always at war, a war of ideas, at least.

This conflict in Ukraine isn’t isolated. It is a recurring symptom of the world we live in. We are paying more attention to it, for a variety of reasons that can be debated. We can complain about why we haven’t cared as much about other peoples in the past, or other conflicts going on right now, but that doesn’t mean we shouldn’t care about Ukraine. You have to start somewhere. It’s not the first time Putin has done just this, and if we don’t stop him this time, it won’t be the last.

The ideologies behind the conflict in Ukraine, we fight here in the US too. Our previous president became our leader with the help of Putin’s meddling, and cozied up to him, and almost became president again, using the same kinds of tactics Putin uses, subterfuge, misinformation and force. And now he and some of his followers act like they are on Putin’s side, and maybe they are.

So the fight is here too, and it always has been. We, as a nation, are not innocent and have our own sins to answer for. But that doesn’t mean that we are hypocrites. A country is never truly united, nor should it be. We are also citizens of the ideas we support, allied globally with the like-minded, good and bad wherever they are. Russians protest this war. Germans opposed Hitler and were among his first victims.

We should not blame all white Americans for slavery, or the genocide of Native Americans, or Donald Trump. We shouldn’t blame all Israelis for Israel’s wrongs, or all Jews, certainly, without regard for where they live. 

But each of us must decide what side we’re on, and advocate, in some way, for peace, and freedom, and justice everywhere.

If we, as a race (the human race), are to rise to a greatness that often seems contrary to our nature, then we must at least acknowledge that the war (this war, that war) is never over.

The struggle continues

I’d like to believe, as MLK said, that the arc of the universe, though long, bends towards justice.

I’m currently reading An Indigenous Peoples’ History of the United States’ and it makes me feel like the bad guys win more than the good guys. I am white. I benefit from it. I live on land that was stolen. Blood land. But I don’t see that struggle or any others before or since as white vs people of color. We each choose our side. We decide whether we will fight for, quite simply, good or evil. Those are the teams.

I hope it bends towards justice, all I know is that history repeats itself. But as Vince Lombardi would have said, as long as time hasn’t run out, then our side hasn’t lost.

An old friend of the family, a political activist her whole life, but in NYC asked me about Stacey Abrams chances, here where I live, in Georgia.

I told her that if there weren’t voter suppression, Stacey Abrams would have won the last time. More recently, we elected two democratic senators, but since then the new voter suppression law has passed and this sort of thing has been going on not just in the south but in every swing state, north or south, for decades, and not enough people have taken notice until now. I hope its not too late. So, Stacey’s chances would be good, if the election isn’t stolen which it might be. But she leads that fight, and at the very least she will shine a light on it.

I’ve thought for years that eventually we would overwhelm the suppression with enough votes and by the time we were in charge, Democrats would have a super majority. But it’s now clear that Republicans see the writing on the wall and are willing to do almost anything to maintain power, including a coup. And if they have enough support among the merciless types that have darkened much of this country’s history, it could be violent and it won’t be easy to stop.

So, it is war, I told her. A war of ideas, and hopefully not a real war, but not so different from the challenges every generation faces. If the arc is to bend towards justice, this is one of those times that we have to fight to push it there.

And (I hope), we will.

I can do this

I can keep a journal and a blog of whatever is on my mind on any given day. I can do it. Maybe some days I’ll be exposed as a fraud, or a baby, or a woose (these are my biggest fears), but other days it will be good, looking back on it many years later. At the time, I might not be able to tell the difference.

Will I be honest? Why shouldn’t I be? What could I possibly admit that would make me seem so different from who I was before I admitted it? We are the same before and after our drivers license expires (though one time a friend of mine couldn’t use his license at an airport as identification because it had expired).

It is a new year.

We all know that people don’t keep resolutions. It’s become trendy to resist resolutions, because they don’t get kept, so why try?

Because. I’m going to see what happens. The point is not to keep them, the point is to try.

I don’t publicize mine, because I don’t want to be “held accountable.” I’ll fail, if I feel like it. I’ll change my resolutions, or do something other than what I said, and I’ll add more as I go.

Writing wasn’t one of the originals. But, what’s stopping me from writing again? It’s the perfect time, because I’m not watching TV (a resolution), so I have to find something else to do besides reading and yoga and playing the drums.

So, I read a book. It doesn’t matter which one, just that I read it. I pushed through. It was work. This book was well researched, thorough but really really detailed. At times I told my wife that I really didn’t like it and she would say, “why are you still reading that book you don’t like.”

“It has it’s moments,” I said once. And anyway, all books take effort, if I quit because it was hard to read, I wouldn’t read anything. It was, in fact, a very interesting story.

Nobody Knows Us

I have wanted, my entire life, to be understood. It fueled a desire to express myself, artistically through acting, music, photography, and writing. 

But I was misguided. Because no one can know us. We don’t even know ourselves.

I wanted it so that people would encourage me in the right ways. I thought that if they understood me, they wouldn’t judge me, they would just love me, and help me to be the person that I wanted to be. Why did I think they would do that? And I was so afraid of their judgment I rarely dared to be honest. 

Better to just accept that no one can understand. If someone wants to try, then let them in. But they won’t.

I don’t think that we can begin to understand ourselves until we stop caring what other people think. And we should relieve them of the responsibility for saving us. They have themselves to worry about.

Please live

Some of us trust big pharma, or scientists, but we are mostly not scientists. So, it is still about faith. Beyond our limited effort and capability to actually understand the science, we have to choose who to trust.

I often come down against the norm when I take positions against fluoride, and statin drugs, and anti-depressants. And I’m an anti-vax sympathizer.

But I’m not against vaccines. I am for the right of people to choose for themselves, and I am personally selective. I prioritize the vaccines that protect me from death or debilitation. It’s not my goal to avoid discomfort. To the extent that there is any risk to vaccines, I figure the more you take the greater the risk.

That’s why I don’t get the flu shot, or the shingles vaccine. I’ll take my chances.

But this I know:

4 million people have died of covid out of about 200 million cases.

I know some.

3 billion people have been vaccinated. How many deaths depends on who you ask, but it’s comparatively few.

And I don’t know any.

I don’t believe that people should be forced. If we want to get this done right, our challenge is to convince them. This is as true for vaccines, as it is for everything else. If we want the society we deserve, then we need to get people on board.

I don’t know if anyone can be convinced of anything these days. But I have faith that it’s possible.

So, I am here today simply to say, please live. Live to fight another day.

Fuck the Filibuster

Through gerrymandering and voter suppression republicans have secured super majorities in state legislatures where the actual majority of citizens support democrats. They are using that control to further suppress votes in order to limit the popular majority’s federal control to four years. And they are using the filibuster to prevent the passing of legislation that would prevent that.

I used to be for the filibuster, because I worried that if the republicans got control of everything that would be the only way to protect the country. But that’s not primarily how the filibuster was used, and now I think that the only thing we would be protecting ourselves from is finding out how bad the republican party really is. If in fact, the majority chooses unilateral republican rule, let them fail. If I’m wrong, then great. If they really screw things up, then their supporters would find out once and for all and the backlash would set things straight. There’s risk to this, but there’s more risk to actually letting them take control without a majority. If you believe that the minority rule the republicans might actually achieve is better (and you might), then you aren’t for democracy (and you might not be).

There is nothing in the Constitution that requires or ever intended to require a 60% majority to pass laws. There are checks and balances, but the filibuster wasn’t one of them. It came about as an unintended consequences of congressional rules of order, and has historically been used by the minority to hold on to and advance anti democratic and often racist causes.

Can the majority make the wrong choices? Most definitely. If you’re worried about the potential tyranny of a majority, you should be, but we have protections against that built in to the constitution. The bill of rights and later amendments are essentially anti democratic limits on the majority. They establish that even the majority are not allowed to do certain things, among them limit free speech, and enslave a minority. These limits are enforced by the supreme court, whose justices are appointed for life so that they do not have to be beholden to the majority. Yes, this protection has been weakened by the republican’s effective obstruction of Obama’s appointment, but that is one more reason not to fear a democratic monopoly on the house and executive branch. The Supreme Court won’t be liberal for awhile.