The greater problem is that corporations run themselves incredibly cash light. The American consumer is encouraged to keep an emergency fund, but American corporations seem to be completely panicked in every crisis, often then requiring government assistance.

And why should they do otherwise? They're bailed out every time things go south.

And that's the problem. We need to find ways to solve the moral hazard, and also insure that economically necessary industries have necessary restrictions so that they can survive downturns.

So why not just issue dividends and avoid the downsides?

> So why not just issue dividends and avoid the downsides?

As another replier pointed out: dividends create a tax event if the shares are held in a taxable account (in US: not IRA, not 401(k)).

Sometimes people (pensions, trusts) don't want those types of events and would rather choose when to invoke tax events by selling only when they need to for income purposes.

But so what if it creates a taxable event? Let's put aside what is good for you in the short-term, for a second.

If a company does buybacks, and even borrows money for them, it might boost their stock in the short term, but it doesn't make their company better long-term, because they aren't investing that money into R&D, and it puts them in a possible cash crunch in the future (ie airlines today).

As a thought experiment, what if instead of the company buying back stock, it's the US government. What if they decide to spent $500 billion buying 10% of every stock out there, instead of giving $1000 to every American citizen b/c of the virus. The first benefits people in the short-term, and doesn't create a taxable event. The second benefits people in the long-term, but might be a taxable event.

You're comparing buybacks to everything else. The person you were replying to was just answering why buybacks are now more popular than issuing dividends. The overwhelming reason is taxes.

I think his point is that buybacks should be no more relevant than dividends. This pop-culture meme that "dividends are irrelevant" is not unique to dividends at all.

Companies exist to create value for shareholders. That is done via dividends or buybacks. If companies do neither and aren't in a growth stage like amazon was investors would get pissed and there would probably be a hostile takeover. Shareholders prefer buybacks because of the tax advantage.

> That is done via dividends or buybacks.

Nope, dividends (and buybacks) are irrelevant: only total return matters:

* https://www.pwlcapital.com/the-irrelevance-of-dividends-stil...

The amount the company pay shareholders, and what people believe the company will pay shareholders, is what defines a companies price. If the a company never pays dividends or does buybacks its value will plummet. It's idiotic to say well dividends and buybacks are irrelevant: only total return matters because future dividends and buybacks are the only factors that play into total return.

> If the a company never pays dividends or does buybacks its value will plummet.

AAPL went public in December 1980. It paid dividends from 1987 to 1995. It then restarted in 2012. Steve Jobs returns to Apple in 1997. Somehow I see AAPL rising in value during its non-dividend paying years.

AMZN when public in May 1997, and has never paid a dividend. AMZN has done some share buybacks in its history, but has not since 2012. Somehow I see AMZN rising in value.

See also the history MSFT: somehow it has had a good total return despite not doing buybacks or dividends for most of its existence.

There is no explanatory power in dividends or buybacks when it comes to stock returns:

* https://en.wikipedia.org/wiki/Factor_investing

* https://www.pwlcapital.com/the-irrelevance-of-dividends-stil...

The value of an asset is how much it will pay out. If a company never pays its shareholders deciding instead to burn profits it becomes worthless. Apple has value because people believe that at some point in the future apple will decide to give its hundreds of billions of dollars in cash back to investors. Amazon was in a growth phase which is why investors were/are ok with profits being reinvested. Shareholders would not allow that strategy to continue indefinitely. Eventually they've got to see a return.

> The value of an asset is how much it will pay out.

No, the value of an asset is how much you will get for it.

Steve McQueen's 1968 Mustang Fastback from the movie Bullitt has neither dividends nor buybacks, but it was auctioned in January 2020 for US$ 3.4M.

* https://en.wikipedia.org/wiki/Bullitt

Paul Newman's personal "Paul Newman" Rolex Daytona sold for US$ 17.75M:

* https://www.hodinkee.com/articles/paul-newman-rolex-daytona-...

> Eventually they've got to see a return.

They can see a return at any point: sell your shares for more than you bought them for. Boom: capital returns.

Dividends do not matter:

* https://canadiancouchpotato.com/2011/01/18/debunking-dividen...

A dollar in your pocket is a dollar in your pocket regardless of whether it came from dividends or sell your shares:

* https://www.moneysense.ca/magazine-archive/the-income-illusi...

You are performing what is called "mental accounting":

* https://ritholtz.com/1982/11/explaining-investor-preference-...

* https://www.etf.com/sections/index-investor-corner/21413-swe...

* https://en.wikipedia.org/wiki/Mental_accounting

Chiming in here after reading this entire thread to say that you are definitely missing the point of the above commentator.

"the value of an asset is how much you will get for it."

and the price of an asset is an estimate of its value. projection of future dividend/buybacks is an important part of determining that value. the idea that its irrelevant to pricing is ludicrous.

> If a company does buybacks, [...] because they aren't investing that money into R&D [...]

False choice: a company can do R&D and do buybacks (or dividends).

The capital return is for excess cash that has no internal use. AAPL spent US$ 4.2B (7.9% of revenues) on R&D and had a dividend.

Sometimes there's a limit to how much you can do: companies have a finite number of employees after all, and there are only a finite number of projects that you may be able to handle at one time.

They should remove that "choice" from them and make them pay their taxes on dividends.

When a share buyback occurs the seller creates a taxable event for themselves through capital gains.

It's just buybacks are considered 'better' because the event is the choice of the seller, and occurs when it is for them. A dividend is 'thrust' upon a shareholder whether they want it or not. (And not investing in dividend-paying companies can be a non-starter: the company in question may be quality one that is worth owning (regardless of dividends, or buybacks)).

The problem is not buybacks or dividends: it is (a) possible executive chicanery, and (b) a lot of the general public not having the means / spare cash to get their foot in the door in investing.

How many people are reeling from dividend taxable events, and do we really need to look after them? Can't they just plan ahead? I'd bin buybacks and let these guys plan ahead.

Hard to know: pensions, trusts (private or for foundations), you indirectly by holding an index fund (the fund handles it on your behalf, but it can still create a drag on returns).

To add to the other answers: because dividends are more commonly issued as a matter of policy – although special dividends do exist, they are far less common.

Share buybacks, in theory, signal to the market that management (who possesses inside knowledge) believes the stock is undervalued, which is often a self-fulfilling prophecy...

> Share buybacks, in theory, signal to the market that management (who possesses inside knowledge)

For this reason alone I struggle to understand why stock buybacks are allowed.

Because insider trading laws in the United States have nothing to do with "fairness" (note that this isn't true in other countries).

In the US insider trading laws are about misappropriation of information and the victim is the company. The company cannot commit "insider trading" against itself. Insider trading laws in the US are all about "you were entrusted with this information and by using it for your benefit you harmed the company."

For example if you know of a coming acquisition and you buy a bunch of short-dated out of the money call options then you're going to push up the price of the acquisition target and cost the company money. The crime you committed (in the view of the US government) is not "unfair trading" it "theft" in that you gained at the expense of the company.

That said, I don't think share buybacks would be considered any kind of insider trading anywhere in the world.

I'm a securities lawyer. I'm well aware this is not insider trading nor did I ever say anything at all related to insider trading. The opinion I expressed was one of policy, not criminality.

My issue is that the transaction goes against the concept of a fair market where everyone has equal access to information. When a company buys back stock the market takes it as a "signal" that the shares are undervalued for reasons that are unknown to the public. Maybe management is aware of key information and the shares are indeed undervalued but that isn't always the case. It seems to me that stock buybacks serve a mixed purpose of paying a dividend while also artificially boosting market "confidence" in the short-term.

I'm of the opinion that the market shouldn't be manipulated by subtle hints from management that way.

I'm not the person you are replying to, but either way, thank you for that post. That is an element that I've never thought of in that way and I can see where it presents a problem.

I will add that in general I am not fond of the limits on direct sharing that seem to be the result of our current approach to securities regulation.

> When a company buys back stock the market takes it as a "signal" that the shares are undervalued for reasons that are unknown to the public.

Does not the company have to pre-announced its plan to run a buyback program (both in the amount and time frame)? Does not pre-broadcasting that achieve the result of making sure everyone has the same information?

Executives also have to file ahead of time paperwork to say that they're buying (selling) stock in the company that they run IIRC.

Is that not sufficient to allow the trading public to make decisions on?

Announcing it ahead of time doesn't make a difference because the market still doesn't know what the material information is or even whether it exists. It's like management saying "I know something you don't knowww ;)" and leaving the market to sort out whether or not that's a meaningful and reliable piece of information.

My point is that there often isn't any material nonpublic information underlying the buyback so it only serves as a way to juice the stock price in the short-term by manipulating the psychology of the market. It's also worth noting that these transactions were illegal until Rule 10b-18 specifically exempted them from market manipulation and deception rules.

That is not what they signal: buybacks say "we have this cash that we can't find an internal use for, so we're returning it to the owners of the company".

They are a form of returning capital, no different than dividends.

If a company cannot figure out a way to use all the cash it has available internally (e.g., not enough R&D for all the cash), then why shouldn't it be allowed to return the cash to the owner of the company? How many years did AMZN produce 'zero profit' because they were funneling every penny back into the company? Was that a bad decision?

The argument goes: if they thought the stock was overvalued, they would not buy it back and would let the cash sit on the BS until a more opportune time came along.

The tax code penalizes dividends by taxing recipients at the time they're paid.

The same "penalty" applies to the capital gains realized by the sellers when the buyback happens and future sales. The only substantial difference is the ability to choose when to realize those gains by the other shareholders. It's a bad argument and buy backs should be made illegal again.

What downsides?

Lighter taxes.