4 ms·

Repurchases are done with post tax money. The reason why companies do that instead of dividends is because dividends are taxed for the investor again.

dgellow 7y ago
Could someone explains this like I’m five?
- dlp211 7y ago
  No because it's wrong. The correct way to say this is that by doing a buyback it allows stockholders to realize their taxes at a later point in time since capital gains are only realized at the time of sale. Dividends are immediately taxed at the capital gains rate which is the same as the LTCG rate.
  - georgeecollins 7y ago
    You are right about the buyback allowing shareholders to delay the taxable event. But you are wrong that dividends are taxed at capital gains rate. They are taxed as income. Capital gains are taxed at capital gains rate (almost always lower) and they gain can be offset by losses. This is the main advantage of stock buyback.
    - jonas21 7y ago
      I'm not an accountant, but I believe if the dividend comes from an American company, and you've held the stock for over 60 days, it's a qualified dividend and gets taxed at the long term capital gains rate.
- deleted 7y ago
  [deleted]
- cshimmin 7y ago
  Not an expert but I'll give it a shot: Company has extra money and wants stakeholders to get a cut. They can either give all the stakeholders some money based on how much stock they have (this is called paying dividends), or they can buy back stock, raising the stock price (reducing the amount of stock means a given stock now corresponds to owning a larger stake in the company). Dividends would be taxed as income for investors. The increased stock value would only be taxed if/when it was sold for a profit (capital gains tax). Edit: dlp211 points out the income from dividends is (generally) taxed at the same rate as long term capital gains.
- deleted 7y ago
  [deleted]
- rfrey 7y ago
  If there are 100 shares of a company worth $1000 each - the company has a value of $1000/share * 100 shares = $100,000. The company has $10000 in after-tax profit that it would like to distribute, and you own 1 share. Since the money will be gone, the company will be worth $100,000 - $10,000 = $90,000 after the distribution. - The company could pay a $100 per share dividend. You would get a $100 dividend but have to pay (say) 15% tax, so you now have $85 cash plus 1/100 of the company ($900), so $985. - OR the company could buy back 10 shares. Now each share is worth $90,000 / 90 shares, or $1000. You don't pay any tax, your share is worth the same, but now you have 1/90 of the company instead of 1/100, so a greater share of future earnings. In real life, the value of future earnings dominates the price (well, hope and greed do, but whatevs) rather than the cash-on-hand. The price should immediately go up once the buyback is announced to reflect that existing shareholders will get a bigger piece of the pie. That increase is not taxed until they sell, and the shareholder comes out ahead for the same cash distribution by the company.
  - gundmc 7y ago
    Fantastic and intuitive explanation. Thank you for this!
  - mav3rick 7y ago
    Really amazing explanation.
  - simonebrunozzi 7y ago
    Man, I hope you do this for a living. You're amazing. Super clear explanation.
    - milesward 7y ago
      I agree, he did great!
  - jbay808 7y ago
    This is a great explanation, but who would sell their share back to the company for $1000 if the value of the other shares will increase immediately after the buy-back? I assume that if it's expected the company shares will go up in value due to the buyback, then they will have to pay a premium and buy the shares at a price that is close to the post-buyback share value. So, perhaps at $1010/share. However, I think there's no premium price equal to the post-buyback share price that they can pay to buy back shares that doesn't result in the company total value increasing as a whole from the buyback. This seems to be a contradiction. I can only conclude that it isn't known that the buyback will raise share prices, because the loss of capital from the company should balance the increased fraction of future earnings that each share represents. (edit: rewrote post after working through its logic).

dgellow 7y ago

Could someone explains this like I’m five?

dlp211 7y ago
No because it's wrong. The correct way to say this is that by doing a buyback it allows stockholders to realize their taxes at a later point in time since capital gains are only realized at the time of sale. Dividends are immediately taxed at the capital gains rate which is the same as the LTCG rate.
- georgeecollins 7y ago
  You are right about the buyback allowing shareholders to delay the taxable event. But you are wrong that dividends are taxed at capital gains rate. They are taxed as income. Capital gains are taxed at capital gains rate (almost always lower) and they gain can be offset by losses. This is the main advantage of stock buyback.
  - jonas21 7y ago
    I'm not an accountant, but I believe if the dividend comes from an American company, and you've held the stock for over 60 days, it's a qualified dividend and gets taxed at the long term capital gains rate.
deleted 7y ago
[deleted]
cshimmin 7y ago
Not an expert but I'll give it a shot: Company has extra money and wants stakeholders to get a cut. They can either give all the stakeholders some money based on how much stock they have (this is called paying dividends), or they can buy back stock, raising the stock price (reducing the amount of stock means a given stock now corresponds to owning a larger stake in the company). Dividends would be taxed as income for investors. The increased stock value would only be taxed if/when it was sold for a profit (capital gains tax). Edit: dlp211 points out the income from dividends is (generally) taxed at the same rate as long term capital gains.
deleted 7y ago
[deleted]
rfrey 7y ago
If there are 100 shares of a company worth $1000 each - the company has a value of $1000/share * 100 shares = $100,000. The company has $10000 in after-tax profit that it would like to distribute, and you own 1 share. Since the money will be gone, the company will be worth $100,000 - $10,000 = $90,000 after the distribution. - The company could pay a $100 per share dividend. You would get a $100 dividend but have to pay (say) 15% tax, so you now have $85 cash plus 1/100 of the company ($900), so $985. - OR the company could buy back 10 shares. Now each share is worth $90,000 / 90 shares, or $1000. You don't pay any tax, your share is worth the same, but now you have 1/90 of the company instead of 1/100, so a greater share of future earnings. In real life, the value of future earnings dominates the price (well, hope and greed do, but whatevs) rather than the cash-on-hand. The price should immediately go up once the buyback is announced to reflect that existing shareholders will get a bigger piece of the pie. That increase is not taxed until they sell, and the shareholder comes out ahead for the same cash distribution by the company.
- gundmc 7y ago
  Fantastic and intuitive explanation. Thank you for this!
- mav3rick 7y ago
  Really amazing explanation.
- simonebrunozzi 7y ago
  Man, I hope you do this for a living. You're amazing. Super clear explanation.
  - milesward 7y ago
    I agree, he did great!
- jbay808 7y ago
  This is a great explanation, but who would sell their share back to the company for $1000 if the value of the other shares will increase immediately after the buy-back? I assume that if it's expected the company shares will go up in value due to the buyback, then they will have to pay a premium and buy the shares at a price that is close to the post-buyback share value. So, perhaps at $1010/share. However, I think there's no premium price equal to the post-buyback share price that they can pay to buy back shares that doesn't result in the company total value increasing as a whole from the buyback. This seems to be a contradiction. I can only conclude that it isn't known that the buyback will raise share prices, because the loss of capital from the company should balance the increased fraction of future earnings that each share represents. (edit: rewrote post after working through its logic).