Stock buy backs are simply a tax efficient return to investors that are an alternative to dividends.
They are tax efficient since dividends are taxed before they can be reinvested (back into the same stock or any other investment) whereas stock buy backs allow the investor, rather than the company, to decide when to incur the taxes which would be incurred by selling the appreciated shares.
Financially they are equivalent.
The only real argument against either buy backs or dividends concerns if the company is better off pursing this return of investment to shareholders or investing the money back into the business to pursue growth. Finding the balance between these two is critical for every company.
The other difference is that with a buy back your return is reinvested in the stock. The company could make a mis-step tomorrow and make it go away. With a dividend the return is liquid and risk free. If you are re-investing your dividends in a taxable account you should prefer buy backs instead. If you are hoping to use your returns for cashflow you will prefer companies that issue dividends. If you're investing in a tax-deferred or tax-free account then it shouldn't matter.
In the US in 2024 you can collect up to $94k in qualified dividends and owe no federal taxes.
Yes, the expected dividends, however growth in stock prices are due to /unexpected/ risk adjusted growth.
ISO options often have a 10 year period after vesting, it is unlikely to be predictable in pricing.
Also, the exercise amount has to be the current share price or higher or you pay gains on them.
Edit:
You see the same thing with unvested RSU’s if the company does not do something extra but not required.
Edit2:
The price you pay for the option on the open market accounts for it as best they can, but does not account for grants in ISO options and unvested RSU’s. Largely held by insiders. Hence the conspiracy theories.
Lots of words to explain that buybacks are nothing important, that they are the same as dividends... Without addressing why, if it is "the same", do those companies do it so much.
About 1/3 of the way down, there’s an explanation of the small tax advantages and the flexibility it gives the company (pausing a buyback program is not reacted to the same way as a dividend cut).
I think part of the problem with buybacks is simply that they are very opaque, even when they are working. With dividends, it is all very nice and tidy: your shares went down by $X and you got $X/share cash in your account. (Which you might then have had reinvested.) With buybacks... what did that $100B spent do for me, anyway? It is not so blindingly obvious, even if it's there if you look.
No, seriously, that's my argument: prove it, for any given buyback. It's not obvious!
Let's pick, totally arbitrarily (I searched "stock buybacks 2016" and this is one of the first things that came up), Disney's 2016 buybacks, totalling $7.5B. Let's say I owned 100 shares of DIS from 2010 to 2019. Make an argument for me that those specific buybacks increased my wealth. (Hopefully by about the per-share value of the buyback, as a dividend would have.)
I don't think it's obvious, even if it's true. Which is the problem. The opacity leads to skepticism leads to polemics.
The "Fool" says DIS is buying back its stock. On November 25 the stock price was $97, 3 months later it was $105. You could have made $800 by selling 3 months later.
This is incorrect. If the company is public, there is no way to buy stock from a particular set of shareholders without impacting the price of the stock owned by other shareholders. If you own stock in a company that is looking to give money back to shareholders, you definitely want them to do it via buybacks (rather than dividends) for the tax benefit.
As an 11,000 word explanation on what stock buybacks are, decent article.
What this article fails to do is repudiate the 'hook' espoused in the first paragraph. Workers are pissed because stock buybacks are highly visible reinvestments by companies of their profits unto themselves and shareholders. The single article source used to argue against flat-line wages through the ensuing decades (from 1997 no less) is all but worthless as it contains no real data, but only expositions without factual source claims. Regardless, flat-line wages ARE real and ARE felt by almost every single person. You would need to waste 11,000 words arguing against that to have better effect.
Finally, spending all that hot-air to explain buybacks and calling workers economically ignorant is lazy writing. No one cares if it's dividends or buybacks, they want to be paid more for the work output they provide. Buybacks are just highly visible and reinforce the point even more so.
Stock buybacks and wage increases are not necessarily related issues. A stock buyback is just a way to return money to shareholders. A wage increase is about paying your workforce appropriately. The only connection between the two is that they both involve a transfer of value from the company to a group of stakeholders but it is not as if the choice is exclusive or correlated.
Companies generally pay their workers more only if they have to (tight labor market, threat of stoppages, etc). Companies generally do stock buybacks if that is the best use of the cash at hand (ie there are no better investment opportunities for the capital available). The considerations are completely different.
> Stock buybacks and wage increases are not necessarily related issues.
Workers (or their union representatives) asking for wage increases are usually told "sorry, there's no money". If the company then does a share buyback, employees who haven't seen significant raises in years are going to take umbrage. In that context, that's why buybacks are such an issue: they're seen as a "fuck you" to underpaid workers.
"Sorry, there's no money" is not a complete statement. The more honest statement is "Sorry, there's no money for you".
Clearly, companies spend money on things (offices, factories, private jets, etc) other than salary increases all the time. The company has decided that its money is better spent on this thing rather than the other. Sure, workers might quibble about whether the money is better spent going to them but buybacks are not any different than any other thing the company is spending money on so it is not any more of a "fuck you" than other types of expenditure.
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[ 5.0 ms ] story [ 64.2 ms ] threadThey are tax efficient since dividends are taxed before they can be reinvested (back into the same stock or any other investment) whereas stock buy backs allow the investor, rather than the company, to decide when to incur the taxes which would be incurred by selling the appreciated shares.
Financially they are equivalent.
The only real argument against either buy backs or dividends concerns if the company is better off pursing this return of investment to shareholders or investing the money back into the business to pursue growth. Finding the balance between these two is critical for every company.
In the US in 2024 you can collect up to $94k in qualified dividends and owe no federal taxes.
This is where the executive compensation conspiracies come in, buybacks are better in this case.
Option strike prices can be adjusted for one off events like stock splits / reverse splits, special dividends etc.
Also, the exercise amount has to be the current share price or higher or you pay gains on them.
Edit: You see the same thing with unvested RSU’s if the company does not do something extra but not required.
Edit2: The price you pay for the option on the open market accounts for it as best they can, but does not account for grants in ISO options and unvested RSU’s. Largely held by insiders. Hence the conspiracy theories.
"Nothing to see here, move on you illiterates"
Ctrl-F “flexibility”
And so people become skeptical.
It raised the stock price so now you can sell and make some profit, before others sold and the price went down again.
The higher price also makes the company look more credit-worthy, so they could borrow money at a lower rate? And then but more stock ;-)
No, seriously, that's my argument: prove it, for any given buyback. It's not obvious!
Let's pick, totally arbitrarily (I searched "stock buybacks 2016" and this is one of the first things that came up), Disney's 2016 buybacks, totalling $7.5B. Let's say I owned 100 shares of DIS from 2010 to 2019. Make an argument for me that those specific buybacks increased my wealth. (Hopefully by about the per-share value of the buyback, as a dividend would have.)
I don't think it's obvious, even if it's true. Which is the problem. The opacity leads to skepticism leads to polemics.
> Make an argument for me that those specific buybacks increased my wealth.
Ok, I see November 25, 2016. https://www.nasdaq.com/articles/disney-stock-history-will-sh...
The "Fool" says DIS is buying back its stock. On November 25 the stock price was $97, 3 months later it was $105. You could have made $800 by selling 3 months later.
If this is true, then I'd prefer dividends. I can put the capital in another company if I choose.
Buybacks seem like another lever to help management class cash out as a company starts to slump.
What this article fails to do is repudiate the 'hook' espoused in the first paragraph. Workers are pissed because stock buybacks are highly visible reinvestments by companies of their profits unto themselves and shareholders. The single article source used to argue against flat-line wages through the ensuing decades (from 1997 no less) is all but worthless as it contains no real data, but only expositions without factual source claims. Regardless, flat-line wages ARE real and ARE felt by almost every single person. You would need to waste 11,000 words arguing against that to have better effect.
Finally, spending all that hot-air to explain buybacks and calling workers economically ignorant is lazy writing. No one cares if it's dividends or buybacks, they want to be paid more for the work output they provide. Buybacks are just highly visible and reinforce the point even more so.
Companies generally pay their workers more only if they have to (tight labor market, threat of stoppages, etc). Companies generally do stock buybacks if that is the best use of the cash at hand (ie there are no better investment opportunities for the capital available). The considerations are completely different.
Workers (or their union representatives) asking for wage increases are usually told "sorry, there's no money". If the company then does a share buyback, employees who haven't seen significant raises in years are going to take umbrage. In that context, that's why buybacks are such an issue: they're seen as a "fuck you" to underpaid workers.
Clearly, companies spend money on things (offices, factories, private jets, etc) other than salary increases all the time. The company has decided that its money is better spent on this thing rather than the other. Sure, workers might quibble about whether the money is better spent going to them but buybacks are not any different than any other thing the company is spending money on so it is not any more of a "fuck you" than other types of expenditure.
And seeing how 401k:s collectively (I assume) own a lot of stocks - wouldnt it follow then that buybacks takes value away from 401k:s?