Nowadays, as you say, there is no difference in tax rates for qualified dividends. However, one big remaining benefit of buybacks is that a dividend forces one to incur a taxable event when the dividend is issued, even if one chooses to immediately re-invest the dividend in the company (as many people still in the accumulation phase of investing do). On the other hand, a buyback does not force those people to sell.
On the other hand, a buyback should lower the market cap of a stock, so cap-weighted index funds ought to sell and re-balance when a buyback is issued, so most index investors would seemingly end up selling. However, they end up being able to avoid most of the capital gains taxes by re-balancing through redemptions and heartbeat trades.
You got it backwards. If a stock is priced fairly, a buyback is value-neutral. Reduction of the cash on hand is offset by the increase of future cash flow per share. It's dividends that reduce the market cap.
Perhaps you are thinking of share price instead: there it is true that dividends reduce share price, while buybacks are share-price neutral at least theoretically, though it is commonly believed by many people that they do affect price.
(Hence, under that same theoretical model, market cap must decrease if share price remains the same because market cap is total number of outstanding shares * share price. So if the former decreases while the latter stays the same, market cap must have decreased.)
Uhh...what?
Buybacks are a return of value. Share prices adjust accordingly to the updated proportion of outstanding stock.
Might want to select a new username, friend.
That said, this is all under a theoretical model (as in Miller-Modigliani theorem). In practice/empirically, there is reason to plausibly believe that e.g. the decision to announce a buyback has a signalling effect and so can increase share prices.
Unlike dividends, they don't return money to all shareholders, but to those who sell shares, which are the wealthiest, unnecessarily increasing inequality.
Excessive buybacks and underinvestment are a big reason why Intel failed. Gelsinger (CEO) talked about this publicly. It's not just "returning money to shareholders", because it leads to perverse incentives and underinvestment. Under Otellini, Intel returned 109% of its profits to shareholders.
Why would you say they're pumping up the stock price, rather than just raising the price? Is it a temporary pumping effect, like an Elon Musk tweet from 2017, or is it actually increasing the value of the remaining shares?
The reason stock buybacks are viewed somewhat negatively is because it’s a lazy way to increase share value. Preferably executives would use the money to come up with new products/services to increase revenues. But if we’re talking about huge mega corporations, who already spend a lot of money on R&D, capex and/or acquisitions, then using some additional cash flow on buybacks makes sense.
In Intel’s case, the buyback merits some discussion because it is implied that government subsidies are being used to buyback shares which is not the intention of the subsidy.
Edit: IMO, I don’t think Intel underinvested, I believe they invested in many failed ventures and under their past and current leadership they are not able to grow the company in any meaningful way.
This seems like a good incentive. Executives of course don't have to have any shares, although they probably will, but that's not "toxic".
I know that toxic is now the blandest word in the language due to overuse, but even given that this seems distortional.
At any point, there are people trading, buying and selling those 100 shares. Buyer 51 comes along and wants to buy a share. He can only buy a share if one of the 50 owners are selling. So, he has to offer a price that'll convince one of the 50 to sell.
XYZ Corp decides to do a buyback. They buy 20 of those shares. In that moment, they will certainly create a spike in demand for the 20 shares.
But later on, now there are only 80 shares out. When buyer 52 comes along to buy a share, there are fewer shares, and fewer sellers. He might have to offer more than Buyer 51 to actually get a share for that reason.
By buying that one share buyer 52 gets ownership of 1.25% of the company. Buyer 51 only got 1.00% of the company when they bought their share. You need to take that into account when comparing share prices.
Seems like everything is working as intended. What do you think that companies are supposed to do with their profits? Why do you think shareholders buy stocks in the first place?
With hindsight it's clear that it would have been better for shareholders if Otellini had reinvested more profit into R&D rather than returning it to shareholders. Intel has now lost their process node advantage to TSMC. Their CPUs are not competitive on power efficiency with AMD and Apple. This is leading to smaller profits and ultimately a worse outcome for shareholders.
They are a form of manipulation we don’t normally care about. Definitely not illegal.
By this definition, productivity is manipulation. Or tax optimization is manipulation. Or IPOs are manipulation.
Typically this word is used to indicate unethical and illegal behavior. Not just typical organizational behavior.
That's false reasoning in so many level. Take every of your arguments and do counterfactual and you see.
> leads to perverse incentives and underinvestment
Investing is not alternative to paying dividends in any well managed company. Companies invest if they see better ROI for the investment than elsewhere. They give money back to shareholders (either dividends or buybacks) when they can't do better than markets.
Intel SBC was 3.2 billion in 2023, and there haven't been any buybacks I think the last 2-3 years? Quite a bit of dilution which doesn't really make long term investors happy.
This is all about buyback versus dividend. How it is that people are thinking wrong counterfactual?
Stock prices are also effected by dividends:
> Dividends can affect the price of their underlying stock in a variety of ways. While the dividend history of a given stock plays a general role in its popularity, the declaration and payment of dividends also have a specific and predictable effect on market prices. After the ex-dividend date, the share price of a stock usually drops by the amount of the dividend.
* https://www.investopedia.com/articles/investing/091015/how-d...
This has been know since (at least) 1955:
There are less shares outstanding afterwards, but there is also less cash, so if executed at fair prices there is no reason for the stock price to move.
Just think through an example of a simple company which is a pot of $1000, and can get 10% returns on it. There are 100 shares, so if investors want 10% returns, shares should trade at 10$ (P/B = 1). If the company repurchases half the shares, there will be only 50 shares but the company only has 500$ now, making each share still worth 10$ for 10% hurdle rates.
So a more realistic example would be a company with 100 shares, $1000 of cash, and $1000/yr stable income.
So before a buyback, 1 share grants you the benefits if whatever the company does with $10/yr of income. Whether it be dividends, reinvestment, etc.
If the share price is $25 and they spend half their cash on hand to buy 20 shares back, now one share gets you $12.50/year of income. Thus the share is worth more than it was before.
Disclaimer: Armchair finance / economics knowledge. Hope the above is correct.
You have absorbed modern market brokenthink.
Companies are for creating goods or services to sell to other parties. They existed long before the idea of shareholders. Following your logic, companies pre-VOC had no existing purpose.
Out of autruism? If not, it's to make money for owners. Shareholders are sort of owners thus to make money for shareholders.
>> For the first companies, the privilege of incorporation, often via royal charter, was granted selectively to facilitate activities that contributed to the population’s welfare, such as the construction of roads, canals, hospitals and schools. Allowing shareholders to profit was seen as a means to that end. Companies were deeply interwoven within the country’s or town’s social fabric, and were meant to contribute to its collective prosperity. <<
https://qz.com/work/1188731/the-idea-that-companies-should-b...
If you don't care, why participate in a conversation about it and ask a sibling reply for a counterpoint?
The argument is that the company exists to benefit society.
Profit exists as a side effect of having investors.
But the outcomes are not the same. Tracing the conversation back, the top level comment pointed out that we should expect companies to give their profits to investors because they operate for profit. A company that exists to benefit society would be expected to put its profits towards bettering society, or at least towards its own ability to do so.
I argue that benefits to society are a side effect of profit-seeking, which capitalism takes advantage of to great effect. A company with no interest in improving the world will nevertheless wind up doing so, because they'll make money in exchange for providing utility, because the system is designed that way. Expecting a company to behave to benefit society instead of for profit will give you bad predictions when the two are at odds.
This is not an even comparison. A business that produces the minimum amount (0) of product/service should be compared against a business that produces the minimum amount (-$assets) of profit, which corresponds to 0 revenue. Neither business can be run, but the former can at least sit on its assets or pivot into actually making something.
A business can also produce too much and collapse (see Atari and DeLorean), but it can't collapse from too much profit.
It makes more sense to put the emphasis on profit, I think.
Production is essential to a business and profit is not, strange as that may seem.
This was not intended to be one or at best in the following sense. Making products and making profits are two features of businesses, the first one is essential, the second one is dispensable. No products, no business. No profits, no problem. Even more, no profits is where every business would ideally be, in a functioning market competition should drive the margins towards zero, the price should be equal to the costs of production.
Sure, but the owners (sole proprietors, shareholders, partners, etc.) of most companies want to make profit selling those services and goods. The more money you make the more you can grow the company or reward yourself (as owner).
1. Company issues stock in order raise capital
2. Company uses capital to grow business
3. Company returns money to stock purchases as risk-reward for purchasing stock
Buy-backs are what a company _should_ do once the capital it raised has had a positive ROI
Just allows owners to time the tax hit.
And here I thought Intel was for producing computer chips. Silly me. I forget the entirety of human history was just an elaborate pyramid scheme.
Usually when people buy shares they are going to try and get the most shares for the least amount of money, but the incentives are a bit different for stock buybacks. I don't know if buybacks are large enough to "move the market" but I'd be curious to see details on how exactly orders are placed.
I'm a big believer that we need more non-profits that simple exist to employ people and provide goods and services. I realize this is just a charity and depends on the good will of people with capital.
The only reason stock buybacks are thought of in negative light is that they seem to be a way for companies to not pay taxes... but the tax law is not companies' fault! It is our fault for the tax law to be this way!
It seems to me that in that case, tax law is their fault.
Its a form of stock manipulation if you mean that buying stock increases the value of the stock. It doesn't mean its a form of manipulation in some kind of illegal unethical way that i think this comment thread is trying to make it sound.
Once you cancel the stocks you bought back, the rest of the shares will hold a more significant percentage of the company and increase in value.
But this is one part of the equation. The other part is that your stock is inside a market, and buyers and sellers combined determine its price. If you keep buying your stock, you create buying pressure, helping keep the price from falling.
The difference from actual price manipulation, is that the price change in issues and buybacks is a permanent effect of the material change of the number of outstanding shares, not a fledging effect of the change in trade volume, i.e. the intrinsic value of the stock goes up or down.
edit: of course buybacks, like dividends, decrease the value of a company, and issuing stock increase it, so it is not clear cut.
Stocks are supposed to be a share of ownership in a company, and the price goes up and down because being an owner of a company goes up and down in desirability, based on how well the company is doing.
Just like with buying your own book, buying your own stock artificially increases the desirability.
companies can create new stock anytime out of thin air, and that decreases the price. why can't they do the opposite?
some owners of the company decide to buy stocks from the others, thus consolidating ownership. that's what stock buyback is.
note, the argument for taxing buybacks is completely different, and valid. (and it might make sense, it might not, it depends on the circumstances. externalities tax (pollution, tax on induced traffic, etc), LVT (land value tax) and wealth tax would be much better, than taxing transactions.)
So at any point, a company can devalue existing shares that people have already purchased? That also sounds like a problem.
companies on stock exchanges usually do stock splits, etc. (and based on bylaws majority or 2/3rs or more of existing owners need to approve.)
Following your example, it'd be like the author of a book buying the book they wrote from someone else. If the author chooses to pay someone else 1000$ for their book, they can, but they will be wasting money.
A company doing a stock buyback is trading off their own capital (they have to spend it, it's not an infinite money glitch where they buy it from themselves) to get back shares of the company itself at the then-market-price. The market chooses whether that's a good trade. It may not
What's the best-seller list in this case?
Bought back shares strictly increase the price for existing shareholders as it takes them off the market. The entire concept is mainly due to stupidity in tax law that ends up double taxing direct dividends.
Ignoring inflation if a company issues the same inflation adjusted dividend forever say 1% at current prices. In theory the stock should stay roughly the same over the next hundred or thousand years. However, with a buyback the stock would increase constantly forever with endless stock splits.
The second option is great for long term owners in terms of taxes, but it’s also manipulation of the stock price.
The exact same company can be a great investment at 10$, and a terrible investment at 10,000$. You can’t separate stock price from if something is a good investment or not.
The example I gave was low risk 1% dividend, that’s not a stock I would want to own. Net result the company, which has inside information, should expect the price to correct ie fall at some point and thus be a poor investment until that point. That doesn’t prevent them from buying it because the goal isn’t a positive ROI.
CEOs are constantly attempting to manipulate the stock price by trying their best to do a good job.
Otherwise it's taxed as income.
Yet, this is clearly a form of stock manipulation, as it's an action to manipulate the share price.
Whilst it is stock manipulation, it's debatable if it should be legal.
I believe it should be legal, it's an efficient way to increase share value without adding to someone's income, thus often carries no immediate taxable obligation.
However one could argue that these methods of moving wealth around without taxable events triggering adds to the fuel for calls to tax unrealised gains on all stock.
So in the long run we are all worse off.
Those laws will likely come regardless, as a way to fight the billionaire class, so stopping stock buybacks at this stage is unlikely to do anything.
Rule 10b-18 is designed to prevent companies from using buybacks to manipulate the market, stating that share buy backs must meet 4 conditions:
1. all shares must be purchased during a single day and from a single broker or via a single deal
2. larger companies cannot authorize buybacks within the last 10mins of the day and smaller companies can't authorize them within the last 30 mins
3. companies have to buy back their stocks at a price lower than or equal to the highest independent bid
4. companies can't buy back more than 25% of the average daily volume
That's what shareholders want you to think. But societally and economically companies are mostly for everything else. If no company ever paid a single dividend or never bought back any of its stock nothing bad would happen. There are a lot of companies doing exactly that.
But if companies stopped doing everything else they do that they are supposedly not for, the economy would end.
Short of some entity buying all stock and taking the company private (to then withdraw profits), there would be no way to return profits to shareholders.
The companies currently not doing those things are in a growth phase, with the expectation that in the future they probably will be issuing dividends/buybacks.
Berkshire-Hathaway has only paid dividends once since Buffet took over, and is the highest priced stock listed on the NYSE.
And they are not wrong. As long as the name on the token takes a prominent place in public consciousness people will flock to it and early investors will be able to sell it for more. If you want to see what's sufficient for people to invest in something look at shiba inu crypto token or WIF.
Who would create a company for 100k if it can sell it to gamblers for millions when it goes public? Plenty of people. There's whole industry of angel investors fuelled by thay dynamic.
And here I thought companies are there to provide me, the consumer, and the customer, with useful products and services.
If the purpose is return of money to shareholders, then the best strategy is to over leverage the company, spend every penny on stock buybacks, then default on all obligations to suppliers, pension funds and customers.
Because you can fund stock buybacks with debt, but you could not do that with dividends.
We have made economic destruction profitable and it’s happening across our economy - water companies in UK are going bankrupt because they have huge debt that they took out just for stock buybacks, and not for anything else, and now interest rates are up. Same thing happened with airlines, and many other firms.
> Because you can fund stock buybacks with debt, but you could not do that with dividends.
There are plenty of companies with large debs that pay dividends on the US market, such as Ford.
The overleveraged self-destruction is bad, but that tends to be a feature of private equity deals where there is a single majority owner doing it on purpose (e.g. Maplin, Jaguar Land Rover). Harder to do with a publicly owned company where the investors can see what you are doing and may sue you.
The UK water companies should never have been privatized in the first place. They're dysfunctional because water isn't a normal market and arguably can't be, so they're ripe for this kind of looting of the state by capital depletion.
That's debatable in many instances of the modern economic system. Of course, some instances of capitalism focus on that particular goal you've mentioned, but that wasn't always the case and it still isn't, depending on the socio-economic circumstances.
1. They only make sense when the stock is undervalued and aren’t purely driven by taxes. If the stock is undervalued, then investors benefit by owning more of the company for less. If the stock is overvalued, then investors don’t benefit. The overall value of the price compared to its long term real value is important. There is a basic problem with this, because company executives probably never want to admit that their stock is overvalued.
2. Companies with strong incomes relative to their price can afford to do buybacks or with strong cash positions are the ones that make sense to do buybacks. Companies like this might be overvalued. When you see companies internet companies with zero income doing buybacks it makes very little sense and only established companies. Companies with strong financial positions relative to their stock price are more likely to be undervalued.
3. Because of the discounted cash value of income model for dividends where the value of a stock is based on future income and cash flow, dividends generally have to be stable and regular to ascribe significant value to a stock, which is why companies that have built up large cash balances but don’t expect to regularly pay dividends opt for buybacks, because they don’t want to create the constant pressure to regularly pay dividends.
2. Zero income stocks can still do buybacks when they're returning capital raised from shareholders to shareholders (this is essentially just partially reversing a funding round, which again undoes some of the dilution).
3. Companies can be deemed to be significantly valuable without paying any dividends. Companies that have a long history of paying dividends but then suddenly stop tend to be in distress, which is then reflected in their share price.
Discussing only the tax strategy as is happening in this thread is really stepping over some really important strategic operational factors.
This is actually a new idea. Prior to a change by the Reagan administration in 1982, they were considered to be an illegal form of market manipulation. Dividends served the purpose of dumping excess funds to shareholders.
That is one theory of corporate governance:
* https://en.wikipedia.org/wiki/Shareholder_value
* https://en.wikipedia.org/wiki/Friedman_doctrine
There are others:
* https://en.wikipedia.org/wiki/Stakeholder_theory
* https://corpgov.law.harvard.edu/2012/06/26/the-shareholder-v...
* https://sloanreview.mit.edu/article/the-shareholders-vs-stak...
This could not be further from the truth. Companies - and actually the entire economy - only exists for one purpose, to satisfy the needs of the people, to efficiently produce good and service that people need or desire. Profits are just means to the end, a control signal to steer the economy. Not that they are not important, but they are not why we have companies.
(Not an expert on the US tax system as I'm a Brit, but it seems that the tax treatment of dividends depends on how long the stock is held, and can be taxed at income tax rates, while stock buybacks result in inflating the stock value which is always CGT. Not sure what the tax treatment is for institutional investors?)
NB that "returning money to the shareholders" is ultimately what companies are for, and we should completely expect them to do this because without it investors wouldn't invest in the first place. It's infinite zero-dividend growth that's weird (Amazon).