I think it's much more subtle point than buy-backs increase share price, otherwise it opens up some basic arbitrages. The point is, the share price already incorporates the value of the assets used for the buy-back, so buying back shares increases earnings per share but reduces asset values (and future earnings from leveraging those assets) and the two effects offset.

Simple example:

company A has 100 shares outstanding and only 1 asset: $100

The value of each share is $1.

It then decides a share buy-back is a good strategy, and buys back 50 shares for $50.

It now has 50 shares outstanding and $50 of assets.

The value of each share is still $1.

The buy-back has no effect on share price.

The question was about why buybacks are more tax efficient -- the answer is open-and-shut -- because benefit realization with buybacks is pushed to time of sale (in many cases far in the future), which is more advantageous than dividends which get taxed in the same tax year.

In any case -- to answer your question -- in your example, it would not have any effect on share price as it seems the company is just a holding company for $100. However, in the case of Apple they have other assets besides the cash (brand, intellectual property) and those assets produce more cash -- so all the cash the other assets generate in the future gets distributed to a smaller number of shareholders.

If the company has a market cap of $100 and $50 in cash (and $50 in discounted future earnings), and it uses all $50 to buy half its stock then the company now has $0 in cash and $50 in discounted future earnings, divided by 50 remaining shares is $1 per share, the same as the starting point.

On the point about taxation, if you have a choice between dividends or share appreciation, I agree with you that share value appreciation gives more flexibility to better manage tax liabilities.

But you answered as a fact that a share buyback increases share price, and sorry but I don't agree with that point - as demonstrated, for an asset holding company it is not the case.

And for a company with cash generation capabilities there is still a subtle point about whether the company can create more value with the cash than the shareholders; if the company can create more value than shareholders, then removing cash from the company via a share buyback should reduce share price. If it cannot, then removing cash from the company should increase the share price.

>> if the company can create more value than shareholders, then removing cash from the company via a share buyback should reduce share price.

Since Apple is simply hoarding the cash, we've already ruled this out -- Apple themselves admits they do not have any way to deploy the cash that would produce more returns than just stashing it in a 0.07% interest bearing account. The question then just comes down to how they disburse the cash (keep vs buyback vs dividends)

OK so in specific case of apple story is complicated by the onshore/offshore tax situation, but it could well be that they have more cash than they know what to do with - in which case returning it to shareholders makes sense instead of using it badly. But it is really not an obvious statement that buying back shares actually returns any value to shareholders.

In my view you really should qualify your earlier statement that "Buy-backs are more tax efficient because they increase stock price" as it is really not a generally true statement. If it was, I would be in the business of buying companies, then making them use any free cash to buy back some shares from me (my remaining shares then somehow go up in value), then selling the remainder back to the market. Free money, it would be great!

How about: Buy-backs are more tax efficient because they result in a higher stock price than an equivalently sized dividend.

Only if you assume that the share price always reflects company value.

The 80s were well known for corporate mavens buying undervalued companies, splitting them up, and selling the assets individually. The practice resulted in a net profit.

Sure - if a stock is undervalued, then anyone buying it should get a good deal.

But that's bit different from saying that a stock buyback will always increase share price.