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Well but that just confirms my whole point. In a buyback the company invests its cash into stock instead of distributing it as dividend. It therefore makes an i
by rsp1984 11y ago
Well but that just confirms my whole point. In a buyback the company invests its cash into stock instead of distributing it as dividend. It therefore makes an investment decision for the investor, who never gets to see any cash.
The whole point of giving out dividends as a company is saying to an investor "here, you can invest this cash better than we can". If you're not giving out dividends you think you have better investment foresight than your investors, which may often be true.
What you as a company then do then with the cash, whether you're investing it in R&D, personnel, etc.. or buy stock doesn't change the mathematics of things for the investor, even if the stock you buy happens to be your own stock.
- phamilton 11y agoYep. Except for the fact that without taxes the investor can just sell the stock if they disagree with the investments the company is making, resulting in the same cash return as a dividend. In my example with the buyback, if the investor sold 0.11% of the company after the buyback, the result would look just like what would happen if they did not reinvest the dividend. 1% of the company and $10k cash.
- rsp1984 11y agoOk, but it's not the buy-back that increases the per-share value for the selling investor, it's the fact that the company has generated positive Free Cash Flow that it is free to invest.
- phamilton 11y agoTrue, though investors often discount cash on hand ("a bird in the hand is worth two in the bush") because of the uncertainty of ever seeing that money. YHOO is probably the easiest example as of late, with their massive goodwill write downs of acquisitions. So the act of either a dividend or a buyback removes that uncertainty and can result in an increase in per share value.