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> This is why companies have stock buy-backs, in order to pump up the share price. Why does this matter to them? Stocks are very strange to me.. when I think

by rifung 10y ago

> This is why companies have stock buy-backs, in order to pump up the share price. Why does this matter to them? Stocks are very strange to me.. when I think of owning a business, I'd hope to get some share of the profits, which as I understand it, is dividends for stocks. This being the case, I always thought stock buybacks were a long term investment in the sense that the company would pay more upfront so they'd have to pay less dividends. This makes sense except that companies seem to barely pay dividends now, I'm guessing because it's unfavorable due to tax reasons. This makes it seem like there's a strange disconnect between owning a business and deriving income from it, because now most people only buy hoping to sell at a higher price to others. But why do other people buy it at a higher price if the company doesn't pay more dividends? I find it all very strange.. Why does a company care about its stock price? Is it just to please shareholders? Prevent buyouts? Make it easier to compensate employees?

kgwgk 10y ago
About the last question, all of the reasons you mention are valid (also management compensation is sometimes linked to share price). Dividends and buybacks are essentially interchangeable as far as the shareholders are concerned. Simplifying a bit (ignoring taxes, transaction costs, discount on cash on the balance sheet, etc.), if you own 10% of a company valued at $100mn (i.e. you have $10mn in shares) and the company has $10mn in cash that it wants to return to shareholders it can either distribute dividends (so you get $1mn in cash and your shares are now worth 10% of $90mn) or it can buy back 10% of the outstanding shares. You could sell all your shares (you get $10mn in cash), keep all your shares (now they are worth 11.11% of $90mn, i.e. $10mn) or sell part of your holdings (and hopefully you'll believe me if I tell you that the stocks you keep plus the cash you get will make $10mn in total).
- WalterBright 10y ago
  > Dividend and buybacks are essentially interchangeable as far as the shareholders are concerned. But they are taxed differently, which is a huge deal for long term investors. Long term gains are taxed at lower rates and compound pre-tax, while dividends incur annual taxes at ordinary income tax rates.
  - kgwgk 10y ago
    Correct. This is another reason why buybacks are popular. On the other hand, some people might prefer to get steady income by default without having to liquidate periodically parts of their portfolio. And long term investors might not be happy when a company spends money buying back its shares at high valuations (of course they could sell if they think the shares are overvalued, but we are talking about long term investors).
  - TuringNYC 10y ago
    There are other reasons than steady income that investors sometimes prefer dividends: 0. dividends force companies to be regimented about consistently creating income and not just sway with the overall market. 1. the shares are held in tax-deferred/tax-free accounts, so they taxable events don't matter to them. they prefer the tangible (dividend) to intangible (share increase from buyback)

by rifung 10y ago

kgwgk 10y ago

About the last question, all of the reasons you mention are valid (also management compensation is sometimes linked to share price). Dividends and buybacks are essentially interchangeable as far as the shareholders are concerned. Simplifying a bit (ignoring taxes, transaction costs, discount on cash on the balance sheet, etc.), if you own 10% of a company valued at $100mn (i.e. you have $10mn in shares) and the company has $10mn in cash that it wants to return to shareholders it can either distribute dividends (so you get $1mn in cash and your shares are now worth 10% of $90mn) or it can buy back 10% of the outstanding shares. You could sell all your shares (you get $10mn in cash), keep all your shares (now they are worth 11.11% of $90mn, i.e. $10mn) or sell part of your holdings (and hopefully you'll believe me if I tell you that the stocks you keep plus the cash you get will make $10mn in total).

WalterBright 10y ago
> Dividend and buybacks are essentially interchangeable as far as the shareholders are concerned. But they are taxed differently, which is a huge deal for long term investors. Long term gains are taxed at lower rates and compound pre-tax, while dividends incur annual taxes at ordinary income tax rates.
- kgwgk 10y ago
  Correct. This is another reason why buybacks are popular. On the other hand, some people might prefer to get steady income by default without having to liquidate periodically parts of their portfolio. And long term investors might not be happy when a company spends money buying back its shares at high valuations (of course they could sell if they think the shares are overvalued, but we are talking about long term investors).
- TuringNYC 10y ago
  There are other reasons than steady income that investors sometimes prefer dividends: 0. dividends force companies to be regimented about consistently creating income and not just sway with the overall market. 1. the shares are held in tax-deferred/tax-free accounts, so they taxable events don't matter to them. they prefer the tangible (dividend) to intangible (share increase from buyback)