When Apple buys back $100 billion in stock, what is actually happening?

By Song at Manhattan Project Fund, Translated by YY

Recently, the Elastos community has been actively discussing how to deal with 16.5 million ELA. Specifically, the question is whether it should be burned or be used for the CR. There is no consensus at the moment. As a member of the Elastos community, I am expressing my opinions in this community discussion.

According to Tencent Financial reports, Apple has been buying back stock at an extraordinary rate since 2012. The buyback amount of each quarter often exceeds $10 billion. By the end of 2019, Apple spent a total of $328.1 billion in stock buybacks.

Let’s take a look at the strong momentum of Apple’s stock:

What is a stock buyback?

After US stock companies (including Apple) buyback their stocks, they generally cancel these outstanding shares and reduce the total number of shares (Sound familiar? This is what we often call “burns”).

Why would a company buy back its own stock?

Let’s not guess the reason and just focus on the results. In my opinion, there are two major results of U.S. stock buybacks:

To manage the market value of the company. The purpose of this is to gather consensus, boost confidence, and push up stock prices. To pay back long-term investors. Buyback is the only way to transfer wealth from the company to shareholders without any loss. Under U.S. tax laws, shareholders are required to pay taxes on dividends received from a company. However, when a company has stock buyback, its share price increases. In this way, shareholders have additional income but without tax liability. In addition, the company’s share buybacks and write-offs reduce the total number of shares and the existing shareholder’s share ratio will directly increase, thus enjoying more benefits from the company’s future growth.

Investors in U.S. stocks are mainly institutional investors. They make long-term investments and those who buy back the most are long-term investors. In addition, top management and key personnel of U.S. companies also have more incentives for call options. When the stock price continues to rise, their call options will become more valuable.

In this regard, both investors and companies have incentives for stock buybacks. Besides Apple, U.S. stock giants are rushing to buyback shares and the total amount of stock buybacks in 2018 is more than one trillion US dollars. At the end of 2018, Ping An Insurance of China even issued a stock buybacks plan. The total amount of the proposed buybacks does not exceed 10% of the total issued share capital of the company and the maximum amount of buybacks may exceed 100 billion yuan.

No matter whether they are at home country or abroad, the giants are all using stock buybacks.

When Apple is buying back hundreds of billions of dollars in stock, we are still discussing how to do market value management.

The quality of an enterprise’s operations not only comes from its activities, but also its capital management. Without good capital operations, there will be no enterprise.

“Market value management” itself is a neutral term. Market value management starts from a listed company stabilizing and enhancing the company’s market value. It creates this through the company’s operational management, adequate capital, and good investor relationships. The three major links of Market value management are: value creation, value management, and value realisation, which enable the company’s value to be seen in the market, and, accomplish comprehensive management activities that maximise the company’s market value based on the company’s intrinsic value.

Domestic regulation encourages listed companies to conduct reasonable market value management. In 2014, the State Council issued Circular No. 17 – “Several Opinions of the State Council on Further Promoting the Healthy Development of the Capital Market”. The so-called Article 9 of the New Articles proposed to “encourage listed companies to establish market value management systems”.

In the framework of transparency and compliance, market value management is not only allowed but encouraged.

In that case, why are there exceptions in the blockchain industry? The market value management in the blockchain industry is both reasonable and necessary. Without market value management, the project’s market value and underlying value are critically lost. How can the community consensus be solidified? Where should we begin to discuss future development?

How is market value management done?

There are many applications in both the domestic A-share markets and the blockchain industry where market value management is crudely treated as equivalent to price management.

For example, listed companies illegally issued good news prior to unlocking majority equity shareholders, manipulating the stock price. As the majority shareholders reduce their shareholdings on good news, the stock price behaves abnormally. Some blockchain projects and their major investors have aggressively pumped their token price and after retailers have entered the market, they dumped the tokens to reap huge profits. Some of them even engaged in pyramid selling schemes.

Reasonable and compliant market value management, however, usually includes the following: value creation, value realisation, and value management.

Value creation refers to strengthening the company’s operational management, improving profitability, and improving the company’s intrinsic investment value.

Value realisation refers to the realisation of the company’s value by strengthening investor relationships and wise positioning in the market for value.

Value management refers to listed companies or their shareholders actively managing their own value in a compliant manner to maximise shareholders value. For example, when the market overestimates the value of a company, measures such as issuance of new shares, stock acquisitions, capital injections and spin-offs are used to convert the market value premium into shareholder wealth; when the market underestimates the value of a company, measures such as stock buybacks, major shareholders increase of holdings, issuance of convertible bonds, implementation of equity incentives, and other measures are undertaken to create a conducive business environment for sustainable development.

Take the Bank of China as an example. It has continued to use a variety of strategies and measures for effective market value management since its listing. It has actively managed a variety of measures such as mergers and acquisitions, rights issuance, convertible bond issuance, buybacks, preferred stock issuance, and high dividend payout levels for seamless and effective market value management.

The token burn should be adopted we should use it to embark on a journey to build new Internet

Returning to the present moment, can CR’s 16.5 million ELA be burned, and will the tokenomics be adjusted? If CR’s 16.5 million ELA is not burned, but released onto the market, it may cause an irreparable disaster.

The stock market is also facing the situation of lifting market bans on restricted shares. The price of commodities will be affected by market supply and demand. As a special commodity, the price of stocks are also subject to market supply and demand factors. China has had several waves of “state-owned shares” and “large and small” lifting of market bans. According to a fund company’s research on 1,496 lifting of bans on restricted shares, the conclusion is: 1) stocks with a high proportion of lifting bans performed worse and 2) the performance of additional issuance of restricted shares were negative.

If lifting a ban on restricted shares accounts for more than 10% of the outstanding shares, it will still have a negative impact on the stock price. If it is a direct issue of lifting the restricted shares, the probability of underperforming the market one month after lifting the ban is relatively large.

According to the existing plan, CR’s 16.5 million ELA releases 1.65 million ELA per year, and, together with 30% of the additional ELA issuance (i.e. total supply of 33 million * 4% annual inflation), amounting to 396,000 ELA at CR’s disposal, it is a total of 2.046 million ELA per year. There are currently 16.5 million ELA in circulation in the market with an annual increment of 12.4%. These ELAs could be distributed to community contributors by CR, resulting in greater selling pressure, which is not good for community members, investors, and funded projects.

In summary, a token burn is a more responsible behavior which is more beneficial to the ELA ecosystem. It is also the only way to jointly build a new Internet.

If there is no market value, there is no possibility to realise the future; If there is no token burn, there is no momentum for future development.