I saw this work of art on Twitter today, referring to Dropbox management using stock buybacks to sterilize their outrageous stock-based comp, and it made my day.
The Epsilon Theory notes I wrote about stock buybacks in 2019 are the most controversial thing we have ever published. They generated more anger, more arguments and more cold shoulders from the mainstream finance community than anything else we’ve done. Here’s my position:
When stock buybacks are used to sterilize stock-based comp (i.e., a company gives managers stock with one hand and buys it back from them with the other hand), no money is “returned to shareholders”. This is true whether or not management actually sells its shares into the buyback program.
Stock buybacks only “return cash to shareholders” to the degree that the buyback program reduces the sharecount. To the degree the buyback program does not reduce the sharecount, but simply sterilizes new issuance to management, it is purely a transfer of wealth from shareholders to management.
As the kids would say, it’s just math.
I think you would be AMAZED at the proportion of stock buyback programs that go towards sterilizing stock-based comp. I certainly was. I think it’s the greatest transfer of wealth in human history.
Not to founders. Not to entrepreneurs. Not to risk-takers.
Nope … to managers. To asset-gatherers. To fee-takers. To rent-seekers. To rakes.
Yep, Jamie Dimon is the rake. But then so is every S&P 500 management team. So is every Wall Street management team. That I’m aware of, at least. It’s the water in which we swim.
“Yay, Stock Buybacks!”
It’s amazing how many people get very angry at me when I say this.
Anyhoo … in addition to The Rake, here are the notes that started all the fuss.
— Ben Hunt | June 15, 2021 | 4:04 pm