Category: Treasury Management / Revenue Management
Scope: Use a percentage of DAO proceeds to purchase Badger in open market and use it as a bonus dividend for Badger Setts.
Status: Introducing Idea to Community
Objective: Utilize a percent of the DAO’s earnings to purchase Badger in open market and distribute them as rewards to further incentivize Badger Setts.
Badger price and rewards are a key driver of TVL and attraction to our DAO. Using a similar policy employed by many publicly traded companies; Badger DAO will use a percentage of its monthly earnings to purchase Badger in the open market (stock buy-back) and reward people that are staked in all Badger setts (special dividend).
The whole DAO is likely to see benefits of the buy/back + dividend program but the following Setts will have direct APY boost.
Badger Only Sett
Why Stock Buyback?
“When companies have more cash than they can use for their current investment opportunities, they can either hold on to that excess cash, or return it to shareholders.( Amy K. Dittmar, “Why Do Firms Repurchase Stock?” The Journal of Business 73(3), July 2000, 333.) One way firms can return excess cash is to repurchase some of their own stock; this option is advantageous because the company does not have to commit to repurchases, allowing flexibility for timing and amount, and it doesn’t set up an expectation that the distribution will occur on a regular basis (like dividend payments). Economic literature suggests that we should expect firms with high levels of excess cash flow to repurchase stock.
Companies generally only consider engaging in stock buybacks when they have exhausted their investment opportunities and met their other obligations, meaning it is residual cash flow that is used for buybacks. In other words, buybacks allow firms to increase payouts when they have more cash than investment opportunities.
Imagine a company with $1,000 in assets, $100 of earnings, and 100 outstanding shares. Suppose this company does not have any investment opportunities and so chooses to repurchase 50 shares at $10 each. Once said and done, the company will have returned a total of $500 to its shareholders. This would reduce the company’s assets by $500, to $500, and reduce the number of outstanding shares to 50. In this hypothetical illustration, the company’s return on asset (ROA) has increased from 10 percent to 20 percent, and earnings per share (EPS) from $1 to $2, indicating that those who retained their shares now have a comparatively larger claim on the company’s earnings. Assuming that earnings don’t fall, shareholders who retained their shares this year could enjoy gains in the future and shareholders who sold their shares now have a combined $500.
Before Buyback After Buyback
Assets $1,000 $500
Earnings $100 $100
Outstanding Shares 100 50
ROA (Earnings/Assets) 10% 20%
EPS (Earnings/Shares) $1 $2
Table 1: How a Stock Buyback Impacts Financial Ratios
Recent Research into the Effects of Stock Buybacks
A recent Harvard Business Review article examined some arguments against stock buybacks and found the arguments to be lacking. The research found that stock buybacks do not deprive firms of capital that they would otherwise use to invest; rather, firms have plenty of cash flow for additional investment.( Jesse M. Fried and Charles C.Y. Wang, “Are Buybacks Really Shortchanging Investment?,” Harvard Business Review , March-April 2018, What the Argument Against Stock Buybacks Gets Wrong The article also shows that stock buybacks do not harm long-term economic growth. Instead, stock buybacks are a normal function of the economy, and they can facilitate long-term investment […].
The perception that the choice is between stock buybacks or investment is false(Nicholas Anderson and Erica York, “What the Main Criticisms of Stock Buybacks Get Wrong,” Tax Foundation, Aug. 6, 2018, https://taxfoundation.org/main-criticisms-stock-buybacks-get-wrong/.). Companies generally only consider engaging in stock buybacks when they have exhausted their investment opportunities: it is residual cash flow , or what is left over after companies have made their investments, that is used for buybacks. For companies with more cash than investment opportunities, the real choice is between buybacks or having the cash sit effectively idle.”
Why Open Market Purchases?
The Badger DAO recently reported that it earns close to $30M annually. Hopefully, this number continues to rise but as it does, we should put the earnings back to work rather than sitting idle.
Dedicating a certain percentage of these fees generated to open market purchases of Badger and then re-distributing them to holders of Badger Setts.
Open market purchases will drive market prices up and will reward stakers with higher returns without tapping into uncirculated Badger.
How should we do it?
As a community we should define a percentage of total fees to be allocated to the buy-back / special dividend plan.
As a starter we can hypothetically project to use 1/3 of the fees generated (or roughly $1MM/month) for a Badger buy back and then give a special dividend (emission) of those purchases to Badger holders.
Ex. $1MM / month or $250,000/week (approximately 33% of DAO’s Earnings).
Treasury would buy $250,000 of badger/week or $1MM a month and then evenly distribute the purchased Badger proportionally to all wallet holders of Badger Setts at the end of the period.
Week 1, Day 1: $250,000 of open market purchases; those Badgers get emissioned to Badger related Setts over the next 6 days or on the 6th day.
Week 1, Day 6: All open market purchases from week 1 have been rewarded proportionally to badger Sett holders.
Week 2, Day 1: $250,000 of open market purchases…
I believe the community should decide on the amount or percentage to put toward buy-backs and special dividends.
A starting point would be 1/3 or 33.33% of all earnings to go to buy-backs then a dividend.
Please share your feedback and guidance.