Stock Buybacks!™ and the Monetization of Stock-Based Compensation
Epsilon Theory
November 9, 2022·Money
Publicly traded companies are announcing record stock buyback programs and Wall Street is celebrating them as shareholder returns. But for many of the largest tech companies, these buybacks are actually offsetting the dilution from massive executive stock awards, meaning the cash isn't returning to shareholders at all. It's being transferred directly to management while the market applauds.
- The sterilization shell game. Companies award enormous amounts of stock to executives, then buy back shares to keep the share count from expanding. What gets labeled as "returning capital to shareholders" is actually monetizing the compensation these same executives just received.
- The math reveals the transfer. At Meta, stock buybacks covered only 77% of newly issued shares over a decade. At Google, it's 63%. The remaining dilution is permanent shareholder loss, while the buybacks themselves are celebrated as shareholder-friendly moves.
- Wall Street enables the narrative. Analysts treat stock-based compensation as a "non-cash" item in their earnings models, downplaying dilution. Then those same analysts trumpet the buybacks as capital returns, allowing companies to hide a direct wealth transfer within acceptable financial language.
- The scale is staggering. Meta and Google alone have transferred more than $300 billion from shareholders to employees over the past decade through this mechanism. Companies are spending 60 to 77 percent of free cash flow on this sterilization, money that could go to actual shareholder returns or business investment.
- Different companies, radically different choices. Some companies use buybacks to genuinely shrink share counts and return capital, while others use them primarily to offset executive dilution. The difference suggests this isn't inevitable, it's a choice by boards and management about whose interests matter most.
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Comments
BOOM Ben --Fantastic work! Reminds me of the work you did on the AMA.
I would change only one word:
Step 4: Wall Street/CNBC Renfields trumpet the sterilizing stock buyback as “returning cash to shareholders”, encouraging shareholders to not only ignore the transfer of their money to management, but to embrace it.
Bravo! Adding Apple as an example of non-mendacity forces the reader to confront the cartoon version rather than hiding behind the uncritical popularity of the tool. I also think that the closing argument that even greater mendacity has been rewarded at a negative cost of capital seals the deal. I am sending this note to outside advisors of our endowment as required reading for their analysts who pick individual stocks on our behalf.
Thanks, Patrick! I’ll get you a PDF version of the note later today for easier distribution.
The fact that companies automatically pay the IRS in cash upon RSU vesting is an interesting one and not something I had realized. It seems almost as if these companies are taking a short position in their own stock, because on the grant date they are effectively making a promise to buy back a fixed percentage (say 30%) on the vesting date. The higher the stock price goes, the bigger the liability becomes.
My “favorite” is the “we are authorizing a buyback to offset dilution” canned justification… while at the same time reporting Non-GAAP to because “stock compensation is a non-cash figure”
Long the narrative, short the fact!
I asked my father (32 yrs as an advisor) what percentage of Meta’s FCF was used on buybacks and how much said buybacks shrank the float. When I gave him the actual numbers his jaw dropped. Normal investors have no idea how much they’re being played by some of these companies.
Fantastic observation that I had not considered.
Most institutional investors, too!
Great Note! None of the companies in this note have a high gross leverage or net leverage ratio but many companies do from issuing mountains of debt to buy back shares during the post GFC financial repression era. Not only taking shareholder money via sterilization but leaving them with a levered-up more vulnerable investment too. Alas the institutional bond investors fell over themselves to buy these deals because they were “10 bps cheap to secondaries” .
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