******for some reason, my post got switched to an old file with bad information… I apologize. I hadnt checked it again till just now…This isnt the most updated version, but at least its better.
Again I apologize ***********
Props to Microsoft for announcing a 3 dollar per share special dividend. It’s not inconsequential that at about 32 billion dollars, it’s the equivalent of $300 per USA household. It has the potential to have a definitive impact on the economy. That is if the money doesn’t find itself in the pockets of fund managers.
In addition to the special dividend, which I love, Microsoft announced a stock buyback, which I hate. There is no better example of trying to manipulate earnings and stock prices than through the stock buyback, and there is no worse message to send to long term sharedholders than through the stock buyback.
To stock traders, the buyback makes perfect sense. If you buy stock in the open market, you help maintain the stock price. If you buy back shares of stock, you reduce the number of shares outstanding, which in turn increases the earnings per share.
This of course is completely contrary to every message that every company CEO, particularly Microsoft tries to send, that they are not trying to manage earnings or the stock price.
More importantly, it rewards the exact thing that should not be rewarded. It rewards people getting out of their investment, while not rewarding keeping the investment.
Sell the stock, you get paid. Keep the stock, you get nothing. Yes, I know that the stock price is supposed to go up for those who keep it, but there are no assurances that it will. The only certainty is that the seller has cash in the bank. The holder has the same amount of risk.
Shouldn’t continuing shareholders be rewarded rather than the sellers?
That’s why I am such a big fan of dividends. Dividends are the investors’ best friend for several reasons:
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The obvious, it’s cash in the bank
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It reduces your cost basis and rewards you for being a continuing shareholder
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It can put a cap on how much the company can dilute your holdings. When a company pays a dividend, it’s much more expensive just to issue stock and options to insiders. They have to consider the cash implications of each additional share or option issued. That’s a good thing. It keeps companies with legitimate dividends from going nuts.
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It creates a precedent of rewarding shareholders, hopefully with increasing dividends.
On the flipside, share buybacks are horrid for several reasons
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It allows companies to manipulate earnings per share. Buy back enough stock, and you will hit your Wall Street expectations.
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Companies will undertake risky cash management strategies to pay for the share buybacks. Since its one time, they can take greater risks
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Companies will undertake buybacks with CEO and management incentives and bonuses in mind. Hit those numbers, earn lots of stock and options.
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Companies will buyback stock so that they can re-issue it to themselves and employees. In essence they use the market as their personal and corporate piggybanks. They Buyback stock to push up earnings in hopes the stock goes up. Then they issue the stock to themselves. Then if the stock goes up, they sell the stock they awarded themselves to unsuspecting shareholders who have no idea the money they are paying for shares is going to insiders.
Stock buybacks are a very bad idea for investors and a very profitable idea for insiders and traders.
*****below is in response to some emails and comments this post has been getting********
You are assuming that once a buyback takes place everything else stops in time. It doesn’t.
First in a buyback, you have no idea what price they are paying, or why they choose to sell at a certain price. All you know is that they cant sell at the end of the day. So they may try to prop up the price, unsuccessfully. They may pay any price but the best price, and most likely they will, given how difficult it is to get the best tick.
2nd. No one knows when the buyback takes place. So ifyou wanted to generate cash from a transaction, you have no idea if you are selling into the buyback or not. Which in turn means you are creating incremental transactions that impact supply and demand, and therefore the price of the stock
3rd. Cash is the most valuable asset a company has, when you give it to people exiting the stock, or selling a portion of their holdings, you are diminishing the most valuable asset available to the remaining stockholders. No other asset a company can intrinsically create more cash with zero risk
4th. You are using earnings as if it is a number that has real meaning , whether to the company or to investors. It has value to neither. Earnings is supposed to reflect the results of operations. They don’t. Cash is the only variable that reflects the results of operations, and in giving it to people who are exiting the stock, you are rewarding the wrong people. Worse, if you think just because a company earned the same amount of money year over year, and there is a reduction in shares, you still have a very difficult time determining if the company’s cash position increased. Still worse. There is a better than even chance that the company handed out stock and options to employees, so whatever benefit you thought you got from the buyback, has been diluted away. The shareholders who sold their stock, got cash. The insiders who sold their stock got cash. You got diluted back to where you were , at best, with no cash in hand.
5th. Still on the topic of earnings, you are assuming that stock price is a function of earnings. Its not. It’s a function of the demand created for a stock. You could argue that stockbuybacks creates demand. I would argue its artificial demand that only reflects the inefficiencies of the market and the heard mentality of investors. Analogous to stocks going up after announcing a stock split.
How long that is sustained is a huge risk for a holder of stocks that has no dividends coming in. Just ask the holder of any Nasdaq tech stock the last 5 years.
Your position , prays that everyone follows the same investing rules in the same way so that everyone values stocks based on the same metrics. That works for spurts, but not over the longhaul. There are far more years in the historic database when stocks were valued as a multiple of dividends than as a multiple of earnings.
It also assumes that companies don’t create continual dilution. They do.
Bottom line is that there would be far less need for buybacks if companies didn’t dilute their shareholders with stock and options to insiders. Without this continual dilution, companies would only use buybacks to try to manipulate the stockprice, which, while not a good thing, would be far more obvious
Gold will go way up, maybe to $1,500 an ounce or higher because the dollar will fall for years. The dollar will keep falling and here is why:
The U.S. cannot sustain 800 bilion a year trade deficits. We cannot export our way out of this mess. The only answer is a sharply lower dollar to drive manufactruing home and to lower the trade deficit. The dollar has much farther to fall. What you are seeing is a long term effort (it will take 20 years) to get the trade deficit back under 1% of GDP. We are currently running a trade imbalance of nearly 6% of GDP. No nation can do this. The IMF would be stepping in to help any nation if its trade imbalance went to 6% of GDP becuase its currency would collapse! The U.S. is different, but still, we cannot sustain a trade deficit of this magnitude. People must understand that when we buy an item from say China, we pay in dollars. The Chinese company we just bought from them goes to an Exchange Bank in China and converts those dollars to Yuan. The Chinese banking system (Chinese Government) is now sitting on those dollars. They can either 1, buy oil, 2, buy Treasuries, 3. buy U.S goods, 4. buy U.S. Corporations, 5. other. Over time if we (the U.S. ) continue to run a trade deficit we could simply be completely bought and controlled by foreigners. Warren Buffet has explained the situation as being like a rich Texas farmer who loses a small piece of his land year after year and never notices for a while. When he then notices, tragedy sets in because he no longer controls his land. So in sum, we need to get the trade deficit way down. This is why the Fed has abandoned the dollar. It wil be going down for the next 20 years. That is how long it is going to take to correct this imbalance mess. Bottom line: Lower, much lower dollar will equal higher inflation and higher GOLD prices. Much higher!
Comment by Ames Tiedeman -
Zacks.com is a nice way to research dividend paying stocks. This service is free. They have an area to screen stocks and they list the highest paying dividend stocks. Do your research. A super high dividend can mean bad news if the dividend yield is up because the stock collapsed.
Comment by Ames Tiedeman -
Generally when a company buys back stock it is a good sign. Right?
Comment by Daily Quote Stock Blogger -
There is a better than even chance that the company handed out stock and options to employees, so whatever benefit you thought you got from the buyback, has been diluted away. The shareholders who sold their stock, got cash.
Comment by runescape money -
How long that is sustained is a huge risk for a holder of stocks that has no dividends coming in. Just ask the holder of any Nasdaq tech stock the last 5 years.
Comment by wow powerleveling -
I never thought about buy backs like that… it does always seem like companies are doing things for the short term rather than the long term investors.
Comment by funny shirts -
I would like to thank everyone who spent their time working on this site, everyone who publishes such interesting posts and gives us the opportunity to come here and voice our opinions. Thank you.
Comment by Polina -
Now I will go to your horrid reasons list why stock options are bad.
1. You want companies to increase earnings per share in any way they can (except increase debt). Buybacks are a wonderful way to do this.
Increasing reveues and earnings is not the name of the game, it is increasig eps and rps.
2. Many companies buyback shares without increasing debt, they use cash on hand. How is that risky cash management strategies?
3. How much a CEO gets in stock incentives has nothing to do with stock buybacks. Most companies that buyback stock generally give out fewer stock options and incentives than most companies. They respect the stock.
4. All stock options and stock grants are ownership theft and have nothing to do with buybacks.
Comment by Bill Berggren -
Lilly Dividends and cialis Buybacks
Comment by cialis -
Mr. Cuban
Could you just reiterate again why a company (Ie. Microsoft) would decide to implement a payout with a dividend increase, one-time special dividend and a buyback? Is it simply to make different types of investors happy?
Thank you.
Comment by marc palladino -
You are a moron! Dividends can be manipulated too. Many stocks can pay unsustainable dividends and go bust. Virtually no stock should be bought without a buyback program. You want to look at year-over-year change in shares outstanding. A good buyback stock buys back over 4 percent annually. A stocks value is a combination of eps, rps, assets per share, equity per share. chh eat cc xon hca are examples.
Comment by Bill Berggren -
What about your MAMA?
Can you comment on your divesture of Mamma.com and muse about if you were thinking of re-investing in them since they have declined in value tremendously since you liquidated?
Comment by Domai -
when does this three dollar special dividend take place?
Comment by flechettes -
Knowing very little about the market, is Microsoft going to pay $3 per share held? If so when does this happen. I need to buy Christmas gifts for my grand children!
Comment by Richard Arc -
The good thing for everyone is that millions of non-geek Tiger users are going to learn that syndication exists and that they can use it, with their choice of clients.
Comment by sound recorder -
anything you can do to share the beauty and experiences with others is a wonderful thing.
http://www.buy-computer.us/
Comment by poster art, posters -
I really agree with you.
Comment by pop music, classical music -
Issuing dividends.. They are doubly taxed, and having a large repo of cash is a wonderful thing. If anything you guys on this board should know, collecting interest in several billion $’s can result in substantial cash flow. Ridiclious move on microsoft imho. Just from the tax standpoint. I mean with 40 billion $ in cash, I know I sure as hell wouldn’t give it back to fund managers that already have tons of money. Ms should have bought up assets in Alcoa, lots of real estate in mainland china and all over india and nevada. Blah. g2g. That’s what I would have done, just bought tons of real estate, bauxite mines, and other mines and just sit on them. China, India are going to become serious players and the supply of precious metals and energy resources are gonna be seriously strained…
Comment by sir kaber -
Mr. Cuban,
I am a long-time Reader, first-time commenter, as they say might say on talk-radio. I love all your posts, but this one was uniquely ignorant. Stock buybacks are neither inherently good nor are they inherently bad–just like any other stock purchases. If a companies stock is low, then a stock buyback can simply be seen as a good investment, which will allow them to continue paying employees in the form of stock, make all-stock buyouts which are non-dilutive, or yes simply raise the EPS. If the price is high, however, it is like any other bad investment. If the share price falls after the buyback, then yes, this was a waste of cash. As a shareholder I would prefer buybacks because unlike Dividends I am not subject to a tax until I sell my share. For someone as familiar with the market, I am surprised by your stance.
Comment by Joseph W -
I know the title sounds scary, but let me explain somethings. First, I am not even going to address the buy-back issue I find that very irelevent being that I am a trader. I was really laughing it up with my trader friends when MSFT came out with that big news on the dividend. Wasn’t it funny how they did it before earnings. How come nobody questions that? Did anyone take the time to think that MSFT did that to let some hedgefunds trade around there stock by signaling a not so wonderful earnings report. Fact is the stock dropped after earnings. Fact is MSFT telegraphed that with the Dividend news before earnings. Fact is they suckered in the little guy with this big $3 dividend and sold you out to the hedgefunds. Oh, another fact, when MSFT actually pays that dividend the stock will drop $3 that day. Nobody gives money away for free gang! Fact is Mark Cuban mentions none of that, although this is my interpretation of the events. Ask Mark how CHTR is doing. With a guy that owns more then 5% of CHTR you think Mark would be irrate with the absouletly retarded action around dealing with the people that short that stock everyday. Watch Paul Allen screw everyone on that, and I use to champion that company. Sorry, no longer I fire stocks for such retarded behavior. I hate to say it but Allen should have sucked it up and listend to Cramer. For once Jim was right.
Comment by roberto pedone -
DoubleClick’s Concentration
By Rich Smith
July 27, 2004
Yesterday, we looked at a possible case of severe overreaction-itis affecting Wall Street. Analysts who had expected online advertiser DoubleClick (Nasdaq: DCLK) to earn $0.04 per diluted share (equal to its earnings in Q2 2003) punished the company for missing that estimate by driving its share price down to near green gene levels. The fact that the company had actually improved its operating efficiency by raising its gross and operating margins, however, was ignored.
That said, there was one facet of DoubleClick’s earnings report that deserves criticism: stock dilution. According to the company’s CEO, Kevin Ryan, DoubleClick has “invested in its business” by spending more than $59 million to repurchase stock over the past six months. The result has been that, in contrast with such serial stock diluters as Intel (Nasdaq: INTC) and Cisco (Nasdaq: CSCO), or Oracle (Nasdaq: ORCL) and EMC (NYSE: EMC), since Q2 2003, DoubleClick has experienced a real rarity in the tech world: stock concentration, the act of making each existing shareholder’s slice of the corporate pie a little bit bigger. To be precise, DoubleClick’s share count has declined by 2.8 million shares, or 2% of diluted shares outstanding. Or has it?
If you read the company’s first and second quarter earnings releases carefully, you will see that in Q1, DoubleClick bought back 1.9 million shares at an average price of $10.74 per share and in Q2, 4.7 million shares at an average price of $8.08 per share. Total shares repurchased: 6.6 million, or about 4.7% of diluted shares outstanding. Once more, just to be clear: The company bought back 6.6 million shares, yet its shares outstanding declined by only 2.8 million shares.
The situation seems remarkably similar to what we found when reviewing Symantec’s (Nasdaq: SYMC) claims that it, too, was enhancing shareholder value by buying back shares. Total diluted shares outstanding may have declined at DoubleClick — but the company issued new shares almost as fast as it bought up the old ones!
Moreover, consider this: DoubleClick’s shares sold for just $7 a share before Friday’s big drop. Yet the company spent $59 million to buy back 6.6 million shares at an average price of nearly $9 a share. So it is hard to argue that the buybacks created any shareholder value at all. Rather, they just wasted shareholder money in a vain attempt to mask the transfer of even more shareholder money to company insiders through dilutive stock issuances.
Comment by Mike -
You touched on a great point. I hate when companies buy back stock in an effort to play the “value game”. Boeing tried the same thing in an effort to raise the stock level in order to allow management to get major bonuses.
It would be nice to see the MSoft people offer bonds if they are going to buy back the stock. This way they can hold large sums of cash, and offer investors an alternative investment.
Finally lets applaud Gates for giving an extra $150 mil while Pres. Bush failed to cough up the rest of the money that he promised to fight AIDS in Africa.
Comment by slw`1234 -
Can you comment on your divesture of Mamma.com and muse about if you were thinking of re-investing in them since they have declined in value tremendously since you liquidated?
Comment by Logan in Austin -
The dividend is a positive if it doesn’t end up in the hands of fund managers? What’s that supposed to mean? Mutual funds own the majority of MSFT shares so they’ll get the majority of the dividend payment. They’ll pass on the dividend to their shareholders. No big deal. I just wonder where the paranoia comes from.
Stock buybacks are a good thing when a company comes to the conclusion that their own stock is a better investment than anything else they can find. MSFT has tried for years to diversify their business without much success. I applaud them for all three of their recent actions, raising the regular dividend, the special dividend, and the stock buyback.
Comment by rick -
Your thoughts are correct, I believe, only if you take a cynical view of management, ie they are actively working against you. If true, why have you invested even one dollar in this security? I personally won’t invest in a security when I believe management is dishonest, or too self serving.
I recognize the principle of SOTT (something off the top), and realize that managements are subject to human nature. Yet a considerable number of managers are not too overreaching.
My opinion of stock buybacks is simple; if the price is cheap, well below private market value, and the business has no better use for the cash or borrowing power, and can maintain a margain of safety, Buy. If the stock is fully priced or higher, again based on private market value, Don’t Buy. I think any responsible management should think this way. If management is not responsible, unless you smell a potential takeover, simply look for the best exit. If you sleep with dogs, you wake up with fleas
Comment by Sherry -
When I read your blog entry, Mark, I thought, did Mark really write this? Most of the time, you state your subjective opinion, and we can agree or disagree, but no one is necessarily right. But this time, you’re wrong objectively and that surprised me because I know you’re a smart guy. I really think you should consult an economist or two about what you wrote. Some people (like Stan Blue and Evan) correctly correct you on certain points.
Where did you get the idea that dividends reduce your cost basis? This is simply incorrect. Your overall premise that stock buybacks are horribly bad compared to dividends is also simply and objectively incorrect. They both basically do the same thing–they put money back into the hands of the shareholders.
Let’s take an example.
Dividend Scenario: Let’s say you own 100 shares of MSFT, which is trading at $10/share. MSFT announces a $1/share special dividend. The share price goes up to $11. After you receive the dividend, the share price goes back down to $10, but you’re happy because you have $100 more in the bank than you would have before, and the 100 shares you still own still are worth $10. You got more cash today than you expected which you can invest as you like (probably at a better ROI than what MSFT is doing with the cash today), so you’re happy.
Buyback Scenario: You own 100 share of MSFT, which is trading at $10/share and is therefore worth a total of $1000. MSFT offers to buy back shares, and the share price goes up to $11. You decide that you would be really happy if you had $100 extra cash in the bank, so you sell ~9.1 shares.
In both scenarios, at the end of the day, you have $1000 worth of MSFT shares plus $100 cash in the bank. As Vanya noted, it used to be that stock buybacks were much more tax-efficient than special dividends (and therefore much preferred to dividends), but now the two methods are about equal.
In either scenario, there is no reward for being “loyal” or penalty for selling. If you wanted to be loyal in the first scenario, you would simply reinvest the $100 cash in MSFT shares. If you wanted to be loyal in the second scenario, you would not sell any shares. In both scenarios, this “loyal” shareholder would end up owning $1100 worth of MSFT shares—-still better than when they started out.
The dividend scenario actually makes it easier to be a “disloyal” shareholder than the buyback scenario because in the dividend scenario, you cash out of the company without doing anything (you become a disloyal shareholder by default). In the buyback scenario, you don’t become disloyal unless you take action and sell.
In both the dividend and stock buyback scenarios, the price goes up for the same primary reasons: 1) time value of money (instead of waiting to get cash from MSFT, you’re getting it sooner), and 2) investors feel they can do a better job investing the cash than MSFT could. It is not because of artificial demand or dilution or whatever else you mentioned why buybacks are bad. So your love of one but hatred of the other doesn’t make a lot of sense to me.
Comment by Eric Tsuchida -
Marks take on buybacks and dividends are right on. EPS is BS. Cash is what matters and dividends are the way long term shareholders recieve their cash. Buybacks are the way cash is put into insiders hands through a shell game. If you doubt it have someone explain reload options to you.
Comment by Doug -
It has been analyzed, in more than one place, that this will have a nearly net neutral effect on MS and that the buyback is 1) giving money back to all shareholders, and 2) negating the delution of excercised options.
Snip from here:
http://tinyurl.com/5es7a
“And what kind of effect will it have on the company? In financial terms, not that much, despite the huge sums involved. For one thing, the $32-billion cash payout and the $30-billion stock buyback will almost cancel each other out. While the loss of more than half of the $56-billion in cash it currently has on hand will put downward pressure on the stock, the reduction in shares that results from the buyback will compensate for almost all of that pressure (fewer shares will mean a higher profit per share).
As Credit Suisse First Boston put it, the Microsoft news amounts to “Big numbers, little impact.” Once people’s eyes stop bugging out over the money involved, the impact on Microsoft is minimal. Even the share buyback isn’t that much larger than the ones the company has been doing for the past few years to compensate for the dilutive effect of issuing stock options. Last year, the company spent $6.5-billion to buy back stock (it has since changed the way it handles options).
Even the $30-billion cash payout isn’t as dramatic as it seems at first, when you consider that Microsoft generates more than $12-billion in free cash a year, thanks to its virtual monopoly on desktop operating systems. According to one estimate, after accounting for the effect of the special dividend (including the loss of interest income on that cash), the share buyback and the boost in the regular dividend, Microsoft will likely make about 5 cents a share less profit this year than it might have otherwise.”
Comment by Bob Goblin -
It used to be that buying back stock was a tax-advantaged way of returning cash to your shareholders — capital gains were taxed at 15% or so, and dividends at nearly 40%. Now dividends are taxed at the same rate as long-term capital gains, so there is really no tax reason to prefer a buy-back to a dividend anymore.
Comment by Vanya -
Who knows what’s Microsoft’s real logic behind the stock buybacks but I’ll even them kudos for the one-time dividend.
Comment by Free Cash -
buybacks are almost as asinine as reverse splits, they are there to help reduce liquidty of a stock and make it trade better. however the signal they send to professional investors is that a) the company cant find anyplace better to put cash whether in r+d or in acquisitions they feel that the company and/or industry is in a position that they cannot get better growth from and b) that management feels need to support their holdings in the companies equities.
fyi buybacks are the worst kept secret on wall street. when institutions are company buyers – they are dumb (not nimble) buyers when they operate and very visible on the floor of the new york stock exchange. also most buyside investors and brokers know which brokerage they are using.
prime example of buybacks as indicator of deterioating fundamentals in industry – check out CCU – stock has been a great short on way down, continues to be even as earnings reported this morning and radio/outdoor advertising is as dead as disco, mgmt knows this and continues to buyback stock.
i would argue that only time it would benefit companies is in very mature cyclical industries where companies tend to be higher dividend paying and buybacks are ways of supporting stocks during cyclical downturns – but this also helps management telegraph industry trends to investors.
Comment by oliver -
I’m a former Microsoft employee. Last year, Microsoft announced that they were no longer going to be issuing options to employees the way that they had in the past, but they were going to be issuing direct stock grants to all employees who qualified, not just executives.
I don’t know this for sure, but I hope that the buyback amounts are designed to just offset the dilution of these grants. If that’s the case then I don’t see how it’s a problem.
Comment by Skip -
You are assuming that once a buyback takes place everything else stops in time. It doesn’t.
First in a buyback, you have no idea what price they are paying, or why they choose to sell at a certain price. All you know is that they cant sell at the end of the day. So they may try to prop up the price, unsuccessfully. They may pay any price but the best price, and most likely they will, given how difficult it is to get the best tick.
2nd. No one knows when the buyback takes place. So ifyou wanted to generate cash from a transaction, you have no idea if you are selling into the buyback or not. Which in turn means you are creating incremental transactions that impact supply and demand, and therefore the price of the stock
3rd. Cash is the most valuable asset a company has, when you give it to people exiting the stock, or selling a portion of their holdings, you are diminishing the most valuable asset available to the remaining stockholders. No other asset a company can intrinsically create more cash with zero risk
4th. You are using earnings as if it is a number that has real meaning , whether to the company or to investors. It has value to neither. Earnings is supposed to reflect the results of operations. They don’t. Cash is the only variable that reflects the results of operations, and in giving it to people who are exiting the stock, you are rewarding the wrong people. Worse, if you think just because a company earned the same amount of money year over year, and there is a reduction in shares, you still have a very difficult time determining if the company’s cash position increased. Still worse. There is a better than even chance that the company handed out stock and options to employees, so whatever benefit you thought you got from the buyback, has been diluted away. The shareholders who sold their stock, got cash. The insiders who sold their stock got cash. You got diluted back to where you were , at best, with no cash in hand.
5th. Still on the topic of earnings, you are assuming that stock price is a function of earnings. Its not. It’s a function of the demand created for a stock. You could argue that stockbuybacks creates demand. I would argue its artificial demand that only reflects the inefficiencies of the market and the heard mentality of investors. Analogous to stocks going up after announcing a stock split.
How long that is sustained is a huge risk for a holder of stocks that has no dividends coming in. Just ask the holder of any Nasdaq tech stock the last 5 years.
Your position , prays that everyone follows the same investing rules in the same way so that everyone values stocks based on the same metrics. That works for spurts, but not over the longhaul. There are far more years in the historic database when stocks were valued as a multiple of dividends than as a multiple of earnings.
It also assumes that companies don’t create continual dilution. They do.
Bottom line is that there would be far less need for buybacks if companies didn’t dilute their shareholders with stock and options to insiders. Without this continual dilution, companies would only use buybacks to try to manipulate the stockprice, which, while not a good thing, would be far more obvious
Comment by Mark Cuban -
Huge props to you Mark for making fund holders aware of their potential dividends and ask to get what’s coming to them. That’s excellent!
Of course, at $300 per household, that might pay for a piece of MS software.
To me the buyback is a huge warning sign about the health of Microsoft. I can even hear the Lost In Space robot saying “DANGER WILL ROBINSON”. What is really going on at Bill Gatesworld?
Mark, what are you doing? Mentioning Microsoft in a Blog. Do you realize how many Unix/Linux beards are rustling, with moths and small woodland creatures over a chance to mouth off about the evil Empire. All I can say, is duck and take cover.
Mark you’re too cool!
Your fan always,
Mary
Comment by Mary -
Dividends do not reduce your cost basis. They reduce the share price. Even if they did reduce the cost basis, that’s not a good thing. That only means that you pay more in taxes when you sell. For instance, you buy MSFT @ 29/share and sell it two years from now for 40. You pay 15% cap gains tax on $11/share. A reduction in cost basis to 26 would mean you pay taxes on $14/share.
Also, as someone else mentioned, there are laws for mutual funds requiring that they pass along at least 95% of all dividends to shareholders. They can’t just “take” the money.
Comment by Evan -
“Stock buybacks are a very bad idea for investors and a very profitable idea for insiders and traders.” Uh, you’re wrong.
Before tax rates on dividends were reduced to 15%, it was extremely tax inefficient to pay out corporate earnings through dividends. The way it used to be, corporate earnings were taxed at 35%, leaving $65 out of each $100 in corporate earnings left over to pay to the shareholders. If the corporation paid those after-tax earnings to the shareholders in the form of a dividend, the shareholders paid tax at an ordinary income rate of 39.6% — which cut another $26 dollars out of the $65 they received, leaving a net $39 out of the corporation’s original $100 of earnings. In other words, dividends resulted in an effective tax of 61% on corporate earnings.
If instead the corporation bought back its stock in the market (thereby getting its after-tax earnings out to its shareholders), the gain realized by a shareholder on the sale was taxed at 20% — meaning a total effective tax rate of 48%.
In other words, paying out earnings by dividends was 27% more costly from a tax perspective than paying out earnings in the form of a share buy-back. (And this is ignoring the magnifying effects of state income taxes, especially in states like California and New York.)
Now that the tax rate on dividends has been reduced to 15% (and the capital gains tax has also been reduced to 15%), the impetus to send out earnings through buy-backs rather than dividends has been substantially eliminated.
However, I still favor buy-backs to reduce outstanding shares. If I’m a shareholder of a company earning $100 million with 100 million shares outstanding (which it uses to buy in, say, 10 million shares) and next year it earns $100 million again and my stake in the company has gone up 10% — I’m happy.
Earnings manipulation and insider profiteering are problems, no doubt, but they are not caused by share buy-backs.
Comment by Ray Balestri -
Dirk miss my Nashie. Dirk need drink with Canuck friend. Dirk tall for my age. Wish Shaq here. Unhappy now. Mark call me.
Comment by Dirk's Saurkraut -
I think the purpose of a stock buyback by MS is probably a good thing, they are taking the company in new directions beyond their current business outline. I’m going to offer a theory, that within the next year MS offers some stock buyouts for some media companies.
Perhaps I’m a little skeptical but I also noticed He is giving the money to the Bill and Melinda Gates Foundation…supporting at-risk families in Washington state and Oregon. The Bush re-election campaign? Can we offer up any conspiracy theories? :p
I wwould like to hear your views on Google’s IPO process, I haven’t had a chance to really dig deeper into the process but OpenIPO seems a very fair way of doing things, what do you think?
Comment by Kanes -
One more thing that just came to me: Would this type of divestiture have occured without the Bush administration tax cuts on dividends? Surely not.
Tax cuts remove limits on consumer spending, and investment in profitable companies. No question, no doubts about it.
Comment by Aaron Morris -
I think the money will find its way into profitable ventures no matter what.
Individual investors will either reinvest the funds in the market, which amounts to a transfer of payments from Microsoft’s (substantial) cash holdings to other growth firms that the market beleives in. The market and the economy see these as good things, positive sum games.
If they dont reinvest it, they will spend it. This is also a form of rewarding valuable firms who provided goods and services the market wants. Remember the funds will arrive just in time for the holiday shopping season!
The mutual fund companies and large institutional investors know that cash holdings are discounted substantially, so they avoid cash as well. Look for them to reinvest in growth firms to show high returns for their investors, and compete with the other funds to show how skillfully they manage their resources.
By the way, if you do the math, the 32Million equals about $109 for every man, woman and child in the United States. Not a bad little stimulus from a private firm. Perhaps for the first time since JP Morgan, a private firm is engaging in fiscal policy?
Now what about the large number of international investors in Microsoft stock? Does this constitute a net return of US currency to foreign direct investors?
Aaron Morris
Comment by Aaron Morris -
A dividend is tax inefficient versus a stock buyback. Unless the stock or mutual fund is held in a retirement account or by an off-shore holder, dividends are normally taxable in the CURRENT year. A stock buyback creates no current year tax liability (in theory, the resulting appreciation creates an eventual liability upon sale) and DEFERS the tax payment until a LATER sale year. Why wouldn’t you want to defer taxes until a later sale year? If you want cash (and taxes) now, sell some of your shares – voila, instant dividend. Otherwise, I like the buyback.
Comment by Stan Blue -
I work for a company with a long (167 year) tradition of employee ownership as a reward. I can tell you for certain that dividends are a huge incentive for employees when handled properly. In my company-supplied retirement savings, I have the option of automatically reinvesting them or paying them as cash. In my self-contributing ESOP, I have those same options. I have seen no better corporate example of using employee ownership to encourage long term investment and long term management thinking. Our balance of organic growth, prudent aquisitions, and fiscal responsibility has generated solid shareholder return for much longer than anyone reading this has been alive and will continue well beyond us. Mark’s comments fit perfectly into our “old school” thinking of how to properly balance and manage the needs of shareholders (big & small), employees, and top management. This works for us because in most cases, they’re all the same group of people!
Comment by Joe S. -
Given the corporate ethical environment of late, if there was ever one, I think Mr. Cuban offers his thoughts on the BEST way for the “little guy” to experience an actual gain on investments–that is, take the dividend now before your broker, adviser, CEO thieves it. Then again, as Mr. Cuban has pointed out time and again, if you don’t follow your own investments, you stand little chance at gaining. Thanks Mark. Not only will I call to inquire about MS in my funds, but I’ll also fire my broker for not giving the heads-up himself.
Comment by Mick -
I’d like to toss out a dissenting question on Microsoft. I know that the software business is not capital intensive, but if Microsoft disgorges a large amount of its cash, doesn’t it imply that they don’t see a lot of profitable opportunities to invest in it?
Buying back $30 billion of Microsoft stock is a statement that they see no better opportunities (that the government will allow them to do), than to concentrate on current organic opportunities. It implies that additional organic growth opportunities are limited, no?
Comment by Kevin Flick -
Wait a second:
1. “It allows companies to manipulate earnings per share. Buy back enough stock, and you will hit your wall street expectations.”
Earnings reports are adjusted to account for an increase or decrease in shares oustanding.
2.”Give cash instead of stock or options to employees”.
While I understand your economic and philosophical arguements on this point. What about an employees vested interest in the company and feeling of ownership?( Of course I am sure there are many an Enron, MCI Global Crossing, Etc, employee who would beg to differ) Performance based incentives go along way.If an employee is just a hired gun and has no incentive beside simple cash consideration what message does that send to the staff?
3.”What a concept. Reward your employees. Reward your shareholders. Protect your shareholders from dilution. Be careful in how you handle your cash”.
MS has done a pretty good job rewarding long term holders and employees. What is the actual cost of ownership for shareholders that bought MSFT in 198X ?
Vs. share price today?
Just some thoughts.
BTW can you put spell check in the response section? It would help me to look smater than I am. Thanks.
JFF
Comment by Dan -
I agree with Mark’s comments in general, but I don’t believe that a law should be enacted to restrict this behavior. Buybacks can be an excellent use of shareholder capital if the stock is undervalued enough to represent a compelling expected return on invested capital. Mr. Buffet actually said in early 2000 that he was considering a buyback of BRK when it was around $45k per share (if it were to go much lower), it is now at $90k per share.
Comment by James Dailey -
First, Mark, great column with many great points. I was especially pleased that you shared your promise that you won’t issue options if you take another company public. I think it’s worth noting that Berkshire Hathaway (indisputably one of the strongest corporations in recorded history — for its financial performance, among other things) doesn’t distribute options and when they acquire entities that have a compensation plan that includes options, they get rid of it (according to stuff I’ve read).
But I disagree with your absolute position on stock buybacks. A company’s duty to its shareholders is to maximize value for those shareholders. If the market is pricing the company’s stock dramatically incorrectly (i.e., at a steep discount to the intrinsic value of the entity), I am confident it is possible that spending that company’s cash to buy back that company’s stock at that price can be correct.
That said, I don’t think that’s what MSFT is doing spending company cash to buy back its stock right now. MSFT stock is not trading at anything resembling a dramatic or significant discount to MSFT’s intrinsic value.
Thanks for the Blog. Keep it up.
Comment by Garrett -
I realize that stock buybacks may not be the best use of cash, but I think Microsoft surveyed the business landscape about potential aquisitions and found that nothing at this time really interested it. Whether or not that is a valid conclusion is not the point, the point is that MSFT had to do something with its cash since letting it sit in reserves was doing litte to help shareholder value. I agree the dividend was the best idea, and I think boosting the reoccuring dividend got glossed over and is probably the most benficial in the long term. I think buying back stock in MSFT’s case is not as bad as you portray it because 1. your argument that risky cash management strategies are a negative really do not hold true in MSFT’s case since they will not have to issue debt to pay for this since they have an abundance of cash. and 2) because I believe that it is a bonus to long term shareholders that they now on a percentage basis own more of MSFT. Yes I realize this may be seen as a way to manipulate earnings per share, but isn’t this why earnings per share is such a highly regarded measurment(whether it should be or not), because it does measure how much the company is generating of income per share that you own. Since companies are penalized (and rightly so) for diluting shareholder value when they hold secondary offereings I believe they should not be penalized when they buy back stock and this should not be looked upon as a negative. Microsoft most certainly had to do something. Other than that Mr. Cuban, I’m a huge fan of yours as the Mavs owner and as a business man. I’d like to hear your comments if I am looking at this wrong since this is my first year out of college and I am still new to the business world.
Comment by Nick Price -
Mark, what about the fact that a company demonstrates ultimate faith in itself by buying back its own stock.
For example, let say that you own 51% of Dairy Queen. You increase Dairy Queens earning’s year after year, and thus make it more valuable. But to make an extreme point, Dairy Queen’s stock stays the same because investor’s miss it. It becomes undervalue. so you would want to buy more right? Well not according to your take on stock buy back.
Comment by Greg Wilson -
Is this a sign that MS thinks John Kerry will win in November and raise taxes on dividends?
Comment by Justin -
Any dividends received on a mutual fund’s holdings are paid to the investor. The investor has the option of receiving the dividend or re-investing it in more shares of the fund.
When investing in a mutual fund, you must tell the fund how to handle your dividends. You can change your election at any time.
The investor is taxed on the dividends whether they are received or re-invested.
Comment by Jim Erlandson -
Im a college student but have taken essentially the vast majority of my savings from summer jobs the past 4-5 years and tossed it into MSFT and ATT Wireless.
I’ve been waiting for the dividend for a while, very pleased.
Comment by Manu Narayan -
If you work off the assumption that people invest a certain amount of money in a corporation, and not purchase a certain number of shares, wont this money all go right back into MSFT stock? People who want $10000 worth of the stock will get their dividend, have their stock price reduced, and reinvest it in MSFT.
And even if that wont match exactly, it seems fair to assume it gets dumped back in the market somehow. People arent sitting around saying “I’d invest less and spend more on consumer goods except Microsoft isnt declaring large dividends.” Perhaps if Microsoft pays the dividend, somehow, to employees with not-fully vested employee shares/option it would, but otherwise not.
Comment by Doug -
Lots of companies pay dividends. Funds have long-standing policies for dealing with them, usually (or is it always?), by using the money to increase the fund holdings. I don’t see why the MS dividend should be treated any different.
Comment by janne -
Weren’t you on Dennis Miller awhile back advocating for the “good ole days” when government would tax companies like Cisco for any amount of cash in the bank over a certain amount? i.e. not being put back in the market?
How can you expect M$ to work with the government in anything. They spent years trying to break up his “monopoly” under the Clinton administration.
They don’t seem to have gotten any better in the Bush admin, as they are now going after Oracle.
This government doesn’t believe in free markets, but companies will gladly take part in the spoils, and deal with the regulation they can easily afford to comply with, to secure their place in the market without worry of competition.
Comment by Dallas Cubano -
Come on y’all… anybody who truly believes that this money will trickle down to the smalltime investor is truly out to lunch. Fund managers don’t play around, and they ain’t in the game to placate the little guy. Line their own pockets they will, to the tune of some big dollas.
Comment by Johnny Jags -
When I was self-directing my investments, I favored dividend-paying companies, even though most of what the “experts” favored companies that “reinvest their earnings.”
On the plus side of dividends, companies that pay dividends actually have to generate cash earnings to pay those dividends – at least in the long term. Too many companies have paper earnings and no more.
Supposedly, companies that don’t pay dividends put the money back into the company and increases earnings. This theoretically increases the share price. So, when you sell your stock, you get your “dividend” in the form of a higher share price and a capital gain. This supposedly was better for you than those taxable, old-fashioned dividends.
It seems now that those “reinvested earnings” largely went to pad the pockets of the insiders in many corporations.
I stopped managing my own investments and went with broker-recommended mutual funds. It’s not a fashionable choice, but I get a better return and don’t have to worry about it.
However, I already had scheduled an appointment with my broker for Wednesday, and I will be asking about the Microsoft dividend.
Comment by Tim Wood -