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Can someone shed light on why companies do a stock repurchase?

by ultimoo 10y ago

xyzzyz 10y ago
It is a mean to return money to shareholders. The reason it is used over paying dividends is tax optimization. If you pay out the dividend, the shareholders need to pay income tax. If you do stock buyback, the shareholders need to pay capital gains tax, which is deferred until sale, and can even be offset by losses incurred on other capital holdings.
- kbutler 10y ago
  There is also a different level of expectation: investors expect dividends to continue and to increase year-by-year. Stock buybacks produce much weaker investor expectations. Oh, and stock-option holders (employees/management) benefit from share buybacks, but not from dividends.
hencq 10y ago
Basically a way to reward shareholders. They're more or less equivalent to dividend, but considered more tax efficient, because capital gains tax is lower than tax on dividends.
- sokoloff 10y ago
  Long term capital gains and qualified dividends (which is most of them) are generally taxed at identical rates. Capital gains have a choice of timing advantage over dividends. (You can choose to take them now, or next year if you don't want the income exposure this year.) The holding period required for long-term treatment is more than enough to qualify for the qualified dividend treatment.
  - Retric 10y ago
    This is misleading. A dividend is a taxable event, with stock buybacks people who hold the stock can defer taxes indefinitely. In theory, a hypothetical company with a 1$ dividend every year would see it's stock price rise and fall by 1$ through this cycle. A buyback would see a continuous increase in price.
    - sokoloff 10y ago
      It is misleading? How could I have made that not (or less) the case? I specifically called out that choice of timing in my second sentence and explained it further in my third.
      - Retric 10y ago
        There is a tax advantage, it is due do the zero tax rate on assets before they where sold. Sure, if you happened to want to cash out exactly the same amount or more than the dividend then it's the same. But that's not the general case.
- deleted 10y ago
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deleted 10y ago
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cft 10y ago
Recently to inflate the stock price. They take advantage of near zero interest rates to borrow and then repurchase stock, the resulting price increase more than covers the debt service fees.
Mikeb85 10y ago
To return money to shareholders. In the case of a stock buyback, it also reduces the amount of outstanding shares, which makes every other share more valuable.
samfisher83 10y ago
It has a tax benefit too. Dividends are taxed at a higher rate compared to capital gains.
- sokoloff 10y ago
  Not generally. https://news.ycombinator.com/item?id=12811433 https://news.ycombinator.com/item?id=12811433
  - tanderson92 10y ago
    There is the unmentioned benefit that if you die your stock receives a step-up in basis while you have no such choice with a qualified dividend. It's fair to say that a capital gain is strictly better tax-wise than a dividend. Qualified dividends are also a nuisance when you are trying to reduce MAGI for various reasonable tax-planning reasons.
    - sokoloff 10y ago
      I agree with that. What I was trying to correct was a common misconception that "dividends are taxed as ordinary income, and LTCG are taxed at a wildly different rate".
bjacokes 10y ago
The tax rate on capital gains is the same as the tax on qualified dividends. It's the timing of the taxation that differs. With dividends you pay tax now, with capital gains you pay when you sell the stock. Distributing cash via dividend or buyback usually happens when a company has more cash than they can productively use. There are a few advantages of distributing money via dividend instead of buyback: * With a share buyback, the company is actually making a bad investment if the stock ends up being overpriced. There are plenty of instances of companies buying back shares and then having the share price drop, because companies can't reliably time the market any better than the rest of us. * Investors receive a tangible reward when a dividend is paid. In theory, you can mimic dividends by periodically selling small portions of a non-dividend stock holding. However, this means that you're subject to fluctuations of the stock market, so your "dividend" sale might be 20% more or less depending on the month. Dividend-paying companies, on the other hand, typically aim to have predictably-increasing dividends. The predictability of dividends, however, is a negative if you're a company that doesn't want to set aside cash for investors on an ongoing basis, which is the case for many tech companies.

Can someone shed light on why companies do a stock repurchase?

by ultimoo 10y ago

Can someone shed light on why companies do a stock repurchase?

It is a mean to return money to shareholders. The reason it is used over paying dividends is tax optimization. If you pay out the dividend, the shareholders need to pay income tax. If you do stock buyback, the shareholders need to pay capital gains tax, which is deferred until sale, and can even be offset by losses incurred on other capital holdings.

kbutler 10y ago
There is also a different level of expectation: investors expect dividends to continue and to increase year-by-year. Stock buybacks produce much weaker investor expectations. Oh, and stock-option holders (employees/management) benefit from share buybacks, but not from dividends.

hencq 10y ago

Basically a way to reward shareholders. They're more or less equivalent to dividend, but considered more tax efficient, because capital gains tax is lower than tax on dividends.

sokoloff 10y ago
Long term capital gains and qualified dividends (which is most of them) are generally taxed at identical rates. Capital gains have a choice of timing advantage over dividends. (You can choose to take them now, or next year if you don't want the income exposure this year.) The holding period required for long-term treatment is more than enough to qualify for the qualified dividend treatment.
- Retric 10y ago
  This is misleading. A dividend is a taxable event, with stock buybacks people who hold the stock can defer taxes indefinitely. In theory, a hypothetical company with a 1$ dividend every year would see it's stock price rise and fall by 1$ through this cycle. A buyback would see a continuous increase in price.
  - sokoloff 10y ago
    It is misleading? How could I have made that not (or less) the case? I specifically called out that choice of timing in my second sentence and explained it further in my third.
    - Retric 10y ago
      There is a tax advantage, it is due do the zero tax rate on assets before they where sold. Sure, if you happened to want to cash out exactly the same amount or more than the dividend then it's the same. But that's not the general case.
deleted 10y ago
[deleted]

deleted 10y ago

[deleted]

cft 10y ago

Recently to inflate the stock price. They take advantage of near zero interest rates to borrow and then repurchase stock, the resulting price increase more than covers the debt service fees.

Mikeb85 10y ago

To return money to shareholders. In the case of a stock buyback, it also reduces the amount of outstanding shares, which makes every other share more valuable.

samfisher83 10y ago

It has a tax benefit too. Dividends are taxed at a higher rate compared to capital gains.

sokoloff 10y ago
Not generally. https://news.ycombinator.com/item?id=12811433 https://news.ycombinator.com/item?id=12811433
- tanderson92 10y ago
  There is the unmentioned benefit that if you die your stock receives a step-up in basis while you have no such choice with a qualified dividend. It's fair to say that a capital gain is strictly better tax-wise than a dividend. Qualified dividends are also a nuisance when you are trying to reduce MAGI for various reasonable tax-planning reasons.
  - sokoloff 10y ago
    I agree with that. What I was trying to correct was a common misconception that "dividends are taxed as ordinary income, and LTCG are taxed at a wildly different rate".

bjacokes 10y ago

The tax rate on capital gains is the same as the tax on qualified dividends. It's the timing of the taxation that differs. With dividends you pay tax now, with capital gains you pay when you sell the stock. Distributing cash via dividend or buyback usually happens when a company has more cash than they can productively use. There are a few advantages of distributing money via dividend instead of buyback: * With a share buyback, the company is actually making a bad investment if the stock ends up being overpriced. There are plenty of instances of companies buying back shares and then having the share price drop, because companies can't reliably time the market any better than the rest of us. * Investors receive a tangible reward when a dividend is paid. In theory, you can mimic dividends by periodically selling small portions of a non-dividend stock holding. However, this means that you're subject to fluctuations of the stock market, so your "dividend" sale might be 20% more or less depending on the month. Dividend-paying companies, on the other hand, typically aim to have predictably-increasing dividends. The predictability of dividends, however, is a negative if you're a company that doesn't want to set aside cash for investors on an ongoing basis, which is the case for many tech companies.