Ask HN: Why do so many large Tech companies buyback their stock?

[Arkadin]

If you look at the top companies who buyback stocks it is dominated by tech companies: #1 Apple, #2 Google, #3 MS, #5 FB, etc.[1] And if you look at a breakdown of what sectors do buybacks, you see that it is tech (32% of total S&P 500 buybacks) followed by finance (20% of total S&P 500 buybacks) and then drops off quickly to other sectors.[1]

What is it specifically about tech companies that causes them to do frequent, large stock buybacks? It seems like tech companies would have more R&D opportunities to invest cash than non-tech companies. Is it just because the profit margins are higher and they have more cash lying around then in other sectors?

Is it because of the employee compensation structure where the majority of employees receive stock and so stock buybacks ensure they can attract/retain talent (by ensuring stock prices go up)? If so why does (for example) Amazon not engage in stock buybacks?

If it was just being done to inflate executive compensation then why is the practice so concentrated in just the tech sector? Why don't other sectors do it more?

[1] https://www.prnewswire.com/news-releases/q1-2021-sp-500-buybacks-double-their-post-covid-low-companies-repurchased-36-5-more-shares-than-in-q4-2020--301312766.html

[JMTQp8lwXL]

It's a more tax efficient way to return value to shareholders without forcing shareholders to realize taxes immediately. Shareholders can choose to sell on their own timeline, thereby choosing when to realize any capital gains taxed paid.

A secondary reason would be lack of better options to spend the money on (no R&D investment opportunities).

Compared to other sectors, tech is more efficient with its revenue, so it leaves more money behind, which is available to use for buybacks.

[sohei]

This is the story people tell in business schools and economics departments, but there's more to it than that.

It's also a way to sterilize new issuance to employees, primarily senior management. In a very real sense, it can be a backdoor payment to management. Issue shares to management. Buy shares on the market. Net effect is cash to management.

If buybacks are funded by debt issuance, it's also a way to lever the company. Remember Apple and Carl Icahn? That particular episode looks a lot like greenmail. Apple bought back shares, mainly from Icahn, so that Icahn would go away. The buybacks weren't exclusively from Icahn, so it wasn't technically greenmail.

[simonblack]

It's a more tax efficient way to return value to shareholders

Only if you want to sell those shares in the very near future. A little while down the track when the stock price has dropped again, all that spent cash has just been frittered away needlessly, blown away in the wind.

[version_five]

> tech is more efficient with its revenue

Interesting way to put it

[yellow_lead]

Digital goods are less costly to manufacture on a per-item basis than widgets.

[mstibbard]

Stock buybacks are (generally) done by companies when they think their stock is undervalued.

Stock buybacks destroy the quantity of shares that are bought by the company. E.g., if a company had 1,000 shares outstanding and bought back 100 of them, there's now only 900 shares outstanding. This benefits shareholders (assuming they didn't sell into the buyback) because each share is now a larger holding of the company (1/900 > 1/1000).

This decrease in shares outstanding normally corresponds to a share price increase.

I'd speculate that tech companies do buybacks as a way to keep employee remuneration high (via stock) without necessarily needing to pay them a lot of cash.

[rishabhkaul1]

Also, this is an interesting perspective:

Source: https://www.behindthebalancesheet.com/blog-1/amazons-free-ca...

/For most companies, the cost of stock-based compensation is ignored by the street.

Hence the stock based compensation does not appear as a charge against adjusted earnings and it does not appear in the cash flow statement – it’s not a cash item. Clearly this overstates the true profitability and cash generation capacity of the company. The options represent a dilution in shareholders’ interests and many companies, especially in the US, buy back stock to offset this dilution – a real use of shareholder cash. The shares are generally issued at a discount and the buyback is done at market price, usually some years after the option was issued (options generally vest after a period of years). Hence there is often a real cash cost to the company, while shareholders always suffer a diminution of value./

[toast0]

Buybacks are economically equivalent to dividends for a company, however they don't come with an expectation of future buybacks like dividends can (where if you drop your dividend, a lot of investors head for the door; you can stop doing buybacks and nobody notices).

For a taxable investor, a dividend incurs an immediate tax, but a buyback doesn't; if you were going to reinvest the dividend, a buyback is better. If you wouldn't reinvest the dividend, you could sell x% of your shares and some of the proceeds would be return of capital, so assuming long term capital gains, that's also better than a dividend. In tax-advantaged, there's no real difference.

Spending on R&D vs dividend or buyback is a different issue. Tech companies tend to have pretty high profit margins, so maybe they ran out of things they'd like to spend money on... it's not the worst thing to return it to investors rather than horde it or spend it on foolish things.

[simonblack]

Companies that waste on stock buybacks those valuable funds that could have been better used to advance the company's core business, should be looked upon with suspicion. They are not being managed most capably.

[e1g]

Peter Thiel expressed the same sentiment against Google and friends, even calling them non-tech companies https://youtu.be/2Q26XIKtwXQ

The counter point is that nearly every one of these incredibly successful businesses is doing this, and they can’t all be incapable.

Money never sets the speed limit for these companies. Some amount of money in the bank is too much even for your grandest of plans. Once you have 10x that, what else do you do.

[duped]

They're dividends taxed at lower rates.

[fiftyacorn]

One reason is they can't find any decent investments so the buy back is the best value.