Floyd Norris mentions a wild data point:

“Over the last four years, since the buyback boom began, from the fourth quarter of 2004 through the third quarter of 2008, companies in the S.&P. 500 showed:

Reported earnings: $2.42 trillion
Stock buybacks: $1.73 trillion
Dividends: $0.91 trillion”

Geez, did these guys really spend every dime they made in profits on stock buybacks and divvies? That doesn’t really leave a lot of money to go back into R&D, new product development, are anything else innovative.


Shareholder Value
Floyd Norris
December 10, 2008, 11:31 AM


Category: Corporate Management, Dividends, Earnings

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

38 Responses to “Quote of the day: “Earnings, Dividends & Buybacks””

  1. grashopa says:

    All those buybacks were on borrowed money so that the firm could get to its optimal debt to equity ratio. I laughed at this during my MBA, but was unable to get anyone to understand the absurdity.

  2. Theodore D. says:

    Grashopa can you explain the absurdity a little more? Thanks. I understand it is just a way to play with the numbers without really doing anything positive to the company except changing a much watched ratio. Am I wrong? Thanks.

  3. wally says:

    Theo G:
    It had another effect – it supported stock prices in an era when a prime source of management income was stock options. In other words, management took a lot of that buyback money home.

  4. the0ther says:

    where is the line-item for midget hookers, donkey rentals, and cocaine-based entertainment?

    you KNOW these fucking clowns blew it all on the same stuff any of us would. they’re just like us, only greedier and less honest.

    sorry…i get so mad reading this blog sometimes.

  5. KVanHim says:

    There are a lot of non-cash items in that reported earnings number…you need to look at cash flow.

  6. Mannwich says:

    @theOther: Speak for yourself.

  7. leftback says:

    A lot of the profits were blown – an average night out at Scores would decrease profitability significantly.

  8. “you need to look at cash flow.”–that’s why “old-fashioned” Dividends are so, radically, out-of-style.

    Balance Sheets stretch, who can tell? Dividend checks bounce(?), who can’t tell?

    “Stock are a return of Capital to Shareholders, just like Dividends”–ever wonder how many times you’ve heard that? It’s, yet, another “Big Lie”-brick in the Poli-Sci-Fi Facade.

  9. WorldBeta says:

    One more reason looking at dividends as a predictive factor of future stock returns, rather than a more holistic measure of returning cash to shareholders, is misleading. A couple papers on Net Payout Yield and Total Assets are worth reading.


    Net Payout Yield paper:


    Total Assets Paper:


  10. –Stock are a return of Capital to Shareholders

    Stock buy-backs are a return of Capital…

    guess, I’ve heard it so often that I ‘automatically’ fill-in-the-blanks..

    or, differently, nice Clerical skills~

  11. DL says:

    Stock buybacks return money to shareholders without triggering a taxable event.

  12. AGG says:

    It all depends on whether they had sold puts on their stock before they started the buybacks. The SEC wasn’t watching so why not? It’s a goddamn free for all out there.

  13. Andy Tabbo says:

    Jeff Matthews of the NotMakingThisUp Blog does a terrific job of shredding these companies who appease Wall St.’s Finest by buying back shares. It really does boggle the mind the amount of stock buyback these guys do. Think about it….

    When a company management buys back its shares in the open market, it is asserting that they, the management team, has evaluated all sorts of options and decided that their own stock was the most undervalued asset in the whole wide world!! Why not give the money back to the investors and let them decide what to do with the cash?! With the tax treatment of dividends, I don’t believe there is any tax incentives to conduct buybacks v. issuing dividends?! I may be mistaken there.

    I think this is the real genius of Warren Buffet. While he is a decent stock picker, he’s a terrific manager of cash flow. Within Berkshire Hathaway, ALL of the Cash Flow from businesses gets allocated as he sees fits. This is the complete opposite of what these same companies would be doing if left to their own devices…they would probably be mowing money back into their own lousy businesses or buying back their lousy stocks.

    Because here’s the problem: management teams are inherently biased towards their operations. Everyone believes their business is great and should be invested in. However, the truth is most businesses are mediocre at best and money pits at worst. There’s only a few exceptional businesses out there!

    - AT

  14. DL,

    even you know the # of caveats that are imbedded in your statement.

  15. ButtoMcFarty says:

    I like my hookers full size thank you.


  16. leftback says:

    I am doing nothing today and will continue to sit until Mr Market busts a move. Would love to know what Borchers and AT think about this week.

    I think we will see some volatility back in the market this week but only after the FED statement. Until then i am sitting back and watching. i do not see much upside early this week, b/c we already know the good news (rate cut, no inflation) so I think it will be a spike up and then steady sell off at the news once we get to the usual resistance at SPX 905, and after that there is thursdays jobs number which will suck. so thursday we could have a mini blood bath, and that would be my entry point.

    After johnny retail has peed his pants and been cleaned out a bit, the big box buyers will come in at the usual supports, 870, but especially at 845, and then the mini-bull will resume – i think we can actually bust through 905 quite easily into EOY b/c energy is so cheap here and many people are waiting for a pull-back to buy.

    really do not like gold/silver this week until the CPI has been digested. on any sell back to $805-810/oz i like it a lot. not much support for the $ right here, could see more buying of JPY and EUR.

  17. ButtoMcFarty says:

    I’m starting to think the FOREX might be the closest thing to a true market that’s left.

    The equity markets are obviously jobbed.

  18. DL says:

    Mark E Hoffer @ 2:47

    I’m not sure what you’re getting at. I’m not a tax expert.
    But it seems to me that a capital gain is often more advantageous to the recipient than is a dividend (outside of a tax deferred account), since the timing of the realization of the gain is at the discretion of the stockholder. Moreover, a capital gain can be used to offset a capital loss elsewhere.

  19. DL says:

    Andy Tabbo @ 2:43

    My understanding is that you futures traders types have things pretty easy at tax time.

  20. VennData says:

    If Warren Buffet would have bought back stock in 1990 he’d have a twenty bagger.. even after the recent meltdown.

    Buybacks are good when they’re good, not when they’re not. The management incentive structure and financial bias of the indices make this example extraordinarily revealing. The S&P500 top managements are lemmings, crowd followers, who were given incentive to do something that wasn’t int the best interests of their firms.

  21. KJ Foehr says:

    There is a big difference between reported earnings and cash flow.

    Having said that, there were statements made during that time that there were no good places to invest the money within many businesses. I.e., we had reached supply-side saturation, and that overcapacity, worldwide, is what is going to contribute to deflation now.

    R&D? It’s easier to just let someone else do it and then buy them when it begins to payoff.

  22. Andy Tabbo says:


    Bigger picture, I think the Japanese Yen blew off last week into major long term targets. If not, it’s very close to peaking out, which should be very supportive of asset prices across the board. Additionally, the Ten Year bond is very close to my long term targets on the upside. So, when that thing finally peaks, and we’re close, then it should also be quite bullish for asset prices.

    Given the looks and views of those two markets, I’m forced to have a bullish bias on stocks and commodities.

    My most aggressively bullish count for SP March futures is that the 853-847 zone should hold as the 61.8/70.7% of Fridays leg higher. I will have a tight stop on that one. The best buy zone would be 792-808 as 61.8/70.7% of the entire move from 739-920 and an a=c down from 920.

    Lots “if/then” type thoughts at this point in the market…sorry…but that’s the way it is right now.

    - AT

  23. leftback says:

    @ AT – Agreed on the 10-year and bullish for stocks, so buy with one hand at 845, both hands at 800 is my reading of the charts right now. Look, I talked the market down by saying how boring it was. May nibble a bit here at my usual diet of commodity stocks.

  24. farmera1 says:

    STock buy backs are a very good way for Managerial Capitalism (*)to steal from a company, especially if the management borrows the money (often the case) to buy back the stocks, the stock price is goosed, the ISOs (incentive stock options) do very well thank you and the management gets rich. The owners not so much and the company and owners are left to deal with the debt. What a deal.

    *Managerial Capitalism is what John Bogle (founder of Vanguard Group and one of the brilliant honest men in the business) calls the current US system where companies are managed for the benefit of the management not the owners/stock holders. Bogle’s book, BATTLE FOR THE SOUL OF CAPITALISM is a great read on many of the ills in US companies.

  25. DL says:

    KJ Foehr @ 3:14

    “R&D? It’s easier to just let someone else do it and then buy them when it begins to pay off”.

    Easier, yes. But cheaper? Frequently not.

  26. jmborchers says:

    Left I shorted IWM with $55 Jan Puts this morning. Took about $200 profit and called it a day. I didn’t know what to make of this afternoon and tomorrow.

    If the market goes up tomorrow afternoon I’ll probably buy the same put option.

    My targets are S&P500 810ish and Russell 2000 420ish by 6 weeks time.

  27. jmborchers says:

    This kind of action right now is why I don’t want to trade this aft or tomorrow.

  28. DL,

    sorry, one too many assumptions projected into a 2-d space.

    with this: “Stock buybacks return money to shareholders without triggering a taxable event.”

    Stock ‘buybacks’, at best, increase EPS, only. Caeteris Paribus, that ‘should’ increase the share price..

    the, supposed, share price increase is the only benefit to shareholders, and it isn’t a given.

    “without triggering a taxable event”–the only way a shareholder can, interest-free, access his newly found ‘gains’ is by selling. Selling, with a ‘gain’ is a taxable event..

    and on like that, further points are made by: farmera1, above..

    as well, Bogle’s books, and others, of his, are def. worth reading..

  29. leftback says:

    @ JM: Don’t fight (or trade) the FED. Happiness is a lot of dry powder.

    I think you underestimate: a) the potential for EOY rally, and b) the size of hedgie redemption selling in ’09.
    Retest and/or new lows are in the cards – earnings will be weak and multiples will contract.

  30. jmborchers says:

    I have some lots of IWM long and sold some $49 calls against it which are nearly worthless now. They have 4 days left to go 10% up. I keep selling these on a monthly basis.

  31. DL says:

    Mark E Hoffer @ 3:46

    Of course, selling a stock creates a taxable event. But an increase in share price does not.
    Some people (not me) buy individual stocks and hold them for ten years or more. A person’s tax situation can change a lot in 10 years. (Not to mention the tax law itself).

  32. jmborchers says:

    The movement is SPY between 4:00 PM and 4:15PM is starting to suggest people are investing in the market again. This is the time that many 401Ks are settled.

  33. Bruce in Tn says:


    I agree 2009 should be continued weakness. The Mortgage Meltdown that Barry posted yesterday wakes you up to the size of the mortgage mess we are facing in 2009 and 2010.

    By the way, even the ratings agencies, although once again late to the game, have realized there is more mortgage weakness ahead.


    Fitch: Alt-A Mortgages Deteriorating More Rapidly than Expected

  34. ben22 says:

    jmborchers Says:
    December 15th, 2008 at 4:13 pm
    The movement is SPY between 4:00 PM and 4:15PM is starting to suggest people are investing in the market again. This is the time that many 401Ks are settled.

    Just remember also that this time of year many profit sharing plans are going to be deposited into q plans, many q plans have set allocation that most people keep the same all the time, it might skew what you think you see.

  35. ButtoMcFarty says:

    My one and only financial prediction for 2009. (New thread idea?)

    USD/JPY will close below 50 before the end of 2009.


  36. constantnormal says:

    There are companies that made money over that time frame, and did not blow it on stock buybacks and dividends. They might spend it on R&D, or maybe not. There are companies with cultures that draw the best out of their people. It shows up as increasing sales, if the company is successful.

    For these numbers to sum up the way they do, the companies that generate earnings without buybacks and dividends must be exactly offset by other companies that are liquidating the assets of the company (or taking on debt) to fund the buybacks and dividends.

    Color me skeptical.

  37. DL says:

    ButtoMcFarty @ 8:29

    You are one wooly bear.

    And what about the S&P…. 400…?

  38. ButtoMcFarty says:

    S&P at 400???

    maybe by way of 1400….

    USD/JPY below 50 is my only prediction.
    I tripled up my miniForex account today.

    Even blind donkeys and all….