Dividend and share buybacks are the same end result, just different mechanisms for enriching shareholders.
If you didn’t keep enough cash on hand (because you were shoveling profits out the door), you lose your ownership interest (insolvency with no bailout).
These are very reasonable conditions for a nation state bailout.
This is a fair point, and I would be supportive of carving out an exemption to ensure the ownership value in retirement plans for workers is not wiped out and they’re made whole.
Gee, I don't know, I guess I'm concerned that retired people don't get their major source of living income ripped out from under them just because of an ill-conceived notion that "dividends are only for rich people".
This is implying you could keep enough cash on hand. Outside of tech giants, how many companies keep enough cash reserves to survive months without revenue?
There is a wide expanse between running your business razor thin as a profit extraction machine and keeping 12 months of cash reserves. This policy simply looks upon the former as a poor choice.
Almost no one keeps 12 months of cash reserves. Apple, with is famous cash hoard, is around that mark.... I can't think of other large companies offhand that are.
That was only used as an example as the other extreme.
Edit: Very few business have that cash on hand, but will usually have access to credit revolvers that could carry them through this. I am aware of many firms that have drawn down their entire revolver.
And I'm aware of a bunch of companies that are explicitly not drawing on their available revolvers because the banks involved are not necessarily in a position to provide that liquidity right now... This is the issue with a systemic problem that affects the entire economy, which is quite different from a single company being affected. And note that even "cash on hand" would be in practice money markets or bank accounts, which would make drawing it down look a lot like a bank run.
Now whether we should be bailing companies out, that's a separate question.
Fundamentally, if 2020Q1/Q2 GDP is effectively down 30% or whatever the number is, and we want to "replace" that loss, it's hard to see where that sort of money can come from except "all of us" in various forms (higher taxes due to government bailouts, higher prices, higher inflation, etc, etc). The main question is where the incidence of the economic pain will fall. Letting companies go out of business places that incidence partially on the shareholders and partially on the ex-employees and partially on the ex-customers. Unemployment insurance and the like can partially help the employees in the short term. The shareholders seem to get little sympathy, understandably, though note that they include things like pension funds and whatnot. Customers (who can no longer get the goods the company used to provide) may be just out of luck or other companies might at some point spring up to address the demand. In the short term they are just out of luck.
It seems to me that a lot of economic readjustment will take place no matter what, with open questions about speed and smoothness.
Perhaps this should be a cost of doing business in the future? We all pay for this anyway, so why should taxpayers face all the risk and none of the reward.
The problem then comes (regrettably) when national/regional/local government next tries to get another round of capital-intensive fixed investment form the captains of industry.
They find themselves talking to themselves for the money.
There is a middle ground between having enough cash reserves to survive for months, and not having cash at all because everything has been bled out in dividends and buybacks; namely, having enough cash reserves to survive for some time, but not for several months.
Because your competitor who ploughs all their money into growth and rewarding shareholders would crush you within a year. Everyone loves to watch their 401k go up every quarter but hates the reality of how that happens. Sort of like people who love cooking meat but are disgusted by an image of a slaughterhouse.
No, I don’t think the two are the same. Like I said, dividends are usually the “salary” an employer takes at the end of the year. It could be $1, it could be $100,000, but it all depends upon how the business did. This is exactly how everyone is constantly complaining that a business should be operating - pay all the employees, then the owner/CEO/etc. takes part of what is left over.
Depends on scale. American Airlines in the US used 80 percent of their profits for several years for share buybacks ($12.5 billion from 2010-2019). Not R&D, not salary increases for workers. Does that deserve a bailout that preserves existing ownership? That’s the target. That sort of behavior should be nuked from orbit.
I’d agree it’d be different if your business is small (less than $10M/year in turnover); you’d look at the books with a less critical eye.
Why? Where exactly is the tipping point where dividends/buybacks become unacceptable? Unless you want to completely outlaw dividends and share buybacks (in which case you might as well do away with public companies), you're inherently putting the government in the position of defining completely arbitrary rules about how profitable a company is allowed to be.
Yes, that is the role of government, deciding who does and does not get a bailout based on criteria developed by policy makers, using taxpayer funds. Bailouts are not entitlements.
A key point missing is defining that criteria in advance. If your market economy rewards buybacks heavily and you didn't know it was a moral hazard, why should your company (and its employees & shareholders) suffer? I can see banning future buybacks until the gov't loan is repaid though.
Bailouts might be necessary, but they absolutely should not be expected. And if the are needed, we should take a piece of your equity for our troubles. If you don't agree to that, which is your right as a business, make do without.
That’s the point. You are assuming that every applicant is AA size... the reality is that 99% of businesses are not, and you’re killing those business, their employees, their owners, and their families.
I don't think anyone has clarified the actual rules in play here. Why should the taxpayer bail out firms which go on to pay dividends within 5 years? Why shouldn't the state simply take stock as a guarantee for loans in these companies?
Dividends are how an company owner gets the profits from his investment. A salary is how a worker gets paid. In small companies, these may be the same person, but the nature of the financial flow does not change.
When a company requires more cash, in times of need, it can issue debt or raise capital. Capital is usually paid last, in the pecking order. If government is lending to companies, it is reasonable to require them to avoid depleting its cash reserves paying capital.
If you didn’t keep enough cash on hand (because you were shoveling profits out the door), you lose your ownership interest (insolvency with no bailout).
These are very reasonable conditions for a nation state bailout.