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Stock buybacks have gotten popular over dividends because Shareholders ask for it not management. For the average long term institutional investor, dividends ar

by pilom 10y ago

Stock buybacks have gotten popular over dividends because Shareholders ask for it not management. For the average long term institutional investor, dividends are taxed while increase in inherent value (as opposed to market value capital gains) is not taxed at all. So most large shareholders have been pushing companies to do share buybacks instead of increasing dividends for exactly this reason.

rm_-rf_slash 10y ago
You are correct. It might be preferable to amend the tax code to only tax the increase in value of shares purchased under a dividend reinvestment plan rather than the reinvested dividends themselves, as a way to discourage the buyback workaround. After all, I would be more comfortable with more shares at a lower valuation than fewer shares at a higher valuation, since Mr Market is an inconsistent figure and I would stand to gain more (from reinvested dividends) if the stock rises than lose (with buyback-inflated shares) if it falls.
gmarx 10y ago
I was struggling to think of how buying back stocks could fail to increase the value of the remaining shares. It would have to be that the cash was valued the same whether inside or outside the stock. Wouldn't paying massive dividends then decrease the value of the stock? Shouldn't we also be asking why unusually (I'm guessing this is unusual) so many companies are earning so much money yet see few worthwhile investment opportunities for the future of the company?
- rm_-rf_slash 10y ago
  My unsubstantiated theory is that neoliberal free-market propaganda is discouraging public investment in ventures that private industry would not risk on its own (like renewable energy), at a time when research is more important than ever to handle the needs of a larger-than-ever global population and rapidly advancing climate change. Some of the best technologies of the last 100 years have been born out of public investment. The need for intense number crunching during the Manhattan Project and the Apollo Program turbocharged computer research. The government's desire to have a self-repairing information network that could largely survive a nuclear attack led the development of what we have as the internet today. It is unfortunate that the free-market-at-all-costs crowd balks at the idea of the public spending a portion of their money on R&D because they cannot generate a private profit, even though public investment can create new platforms for investment, lower costs for consumers, and ultimately create a larger and wealthier customer base to sell more things to.
- pilom 10y ago
  When interest rates are so low (which encourages borrowing but discourages investment) and some people see a down market coming (which means having a big powder keg available to buy up competitors or whatever when the crash happens is a very valuable thing) I'm not surprised at all that large profitable companies are hording cash. People wonder why Apple isn't using it's cash to buy company X. It's b/c company X will be a much better buy if the economy tanks and takes most of company X with it. Same with saving money for investment. Apple has been known to loan $1B to partners to build plants for iPhone parts. In a crash when it's partners (and competitors) can't find investment dollars anywhere else, if Apple is able to invest then, all of a sudden they are in a fantastic position.
- marcosdumay 10y ago
  If they don't rise, it's because they would fall otherwise, everything being the same. What I got from the article is that the author seems to believe that the buy backs are only for getting the executives bonus sold in a way that does not devalue the stock, thus preserving the (undeserved) bonus. But this is only implied, not stated.

by pilom 10y ago

rm_-rf_slash 10y ago

You are correct. It might be preferable to amend the tax code to only tax the increase in value of shares purchased under a dividend reinvestment plan rather than the reinvested dividends themselves, as a way to discourage the buyback workaround. After all, I would be more comfortable with more shares at a lower valuation than fewer shares at a higher valuation, since Mr Market is an inconsistent figure and I would stand to gain more (from reinvested dividends) if the stock rises than lose (with buyback-inflated shares) if it falls.

gmarx 10y ago

I was struggling to think of how buying back stocks could fail to increase the value of the remaining shares. It would have to be that the cash was valued the same whether inside or outside the stock. Wouldn't paying massive dividends then decrease the value of the stock? Shouldn't we also be asking why unusually (I'm guessing this is unusual) so many companies are earning so much money yet see few worthwhile investment opportunities for the future of the company?

rm_-rf_slash 10y ago
My unsubstantiated theory is that neoliberal free-market propaganda is discouraging public investment in ventures that private industry would not risk on its own (like renewable energy), at a time when research is more important than ever to handle the needs of a larger-than-ever global population and rapidly advancing climate change. Some of the best technologies of the last 100 years have been born out of public investment. The need for intense number crunching during the Manhattan Project and the Apollo Program turbocharged computer research. The government's desire to have a self-repairing information network that could largely survive a nuclear attack led the development of what we have as the internet today. It is unfortunate that the free-market-at-all-costs crowd balks at the idea of the public spending a portion of their money on R&D because they cannot generate a private profit, even though public investment can create new platforms for investment, lower costs for consumers, and ultimately create a larger and wealthier customer base to sell more things to.
pilom 10y ago
When interest rates are so low (which encourages borrowing but discourages investment) and some people see a down market coming (which means having a big powder keg available to buy up competitors or whatever when the crash happens is a very valuable thing) I'm not surprised at all that large profitable companies are hording cash. People wonder why Apple isn't using it's cash to buy company X. It's b/c company X will be a much better buy if the economy tanks and takes most of company X with it. Same with saving money for investment. Apple has been known to loan $1B to partners to build plants for iPhone parts. In a crash when it's partners (and competitors) can't find investment dollars anywhere else, if Apple is able to invest then, all of a sudden they are in a fantastic position.
marcosdumay 10y ago
If they don't rise, it's because they would fall otherwise, everything being the same. What I got from the article is that the author seems to believe that the buy backs are only for getting the executives bonus sold in a way that does not devalue the stock, thus preserving the (undeserved) bonus. But this is only implied, not stated.