6 ms·

another reason is that they do not find good uses of capital so they give it back to shareholders to deploy elsewhere. you could just be out of good ideas

dsfyu404ed 7y ago
Or the definition of "good" is so stringent that it's hard to satisfy so you just give it back.
devoply 7y ago
there is also a term called bleeding the pig... where you load up a company with a lot of debt and eventually the company goes bankrupt... guess who doesn't lose out though. buybacks are taxed at a capital gains tax rate, whereas dividends are subject to ordinary income tax.
- chiefalchemist 7y ago
  Are there that many companies bleeding the pig? Possible. But how likely?
- throw0101a 7y ago
  > ... whereas dividends are subject to ordinary income tax. Not in Canada: > Unlike many other countries, dividends from Canadian based companies are eligible for a somewhat convoluted set of calculations that can fondly be described as the dividend gross up and tax credit system. The basic rationale behind this system is that dividends are paid by corporations after the taxman has already taken his cut. Therefore, if dividend payments were fully taxed in the hands of the investor as well, it would equate to a double taxation. * https://www.fool.ca/13-steps-to-financial-freedom/step-8-the-great-dividend-tax-advantage/ https://www.fool.ca/13-steps-to-financial-freedom/step-8-the... * https://www.investopedia.com/terms/d/dividendtaxcredit.asp https://www.investopedia.com/terms/d/dividendtaxcredit.asp It's slightly convoluted, but if you have investments in taxable accounts, then there's a bit of advantage in them than simply interest. Though capital gains in Canada is only taxed at half of one's marginal rate as well.
  - Scoundreller 7y ago
    Right, but this means, for Canadians, dividends paid by non-Canadian corps are taxed as regular income. Stocks to do buybacks instead of dividends are more valuable to us.
- akavi 7y ago
  In the USA, dividends on stock one has held for more than a year is taxed as long term capital gains. The tax advantage of buybacks is they allow the shareholder to choose when the taxes are incurred, not how they’re taxed.
chiefalchemist 7y ago
Perhaps. But that's not a sustainable business model. Numerous like-companies out of ideas? Then plenty of C level, leadership, and management is overpaid. The fact that they benefit for these stock buybacks only makes matters worse.
- skybrian 7y ago
  It's not literally "out of ideas". It's that your ideas don't require all that much money to implement compared to the amount of money coming in. Ideas for improving efficiency might pay for themselves quite quickly, putting you further in the hole. A nice problem to have. Maybe shareholders should benefit? (Side note: what does "sustainable" mean here? Usually that involves some kind of steady state, not growing indefinitely, which is always going to have limits.)
  - geohotter 7y ago
    Sure, shareholders should benefit in cases where too much money is coming in. However, isn’t the problem that the “money coming in” in this case is debt, not profit?
    - skybrian 7y ago
      Oh, I don't know but I can speculate. First, you'd hope they have profits, or they wouldn't be able to pay the bondholders? The question is, where do the company's future profits go? I guess you could think of it as being a bit more like a bank? A bank provides a service to its depositors, holding their money and paying a little interest. A company does something similar for its bondholders, at higher risk than bank deposits but lower than stocks. The company is for some reason deciding it wants to expand into the "provide a service to bondholders" business. It's a bit weird to talk about "providing bondholder value" but that's basically what they're doing, by staying in business, paying the interest, and rolling over the bonds. Stockholders get a one-time windfall when a company expands into this business, as the company for whatever reason doesn't actually need the cash. It's a bit weird to borrow money from bondholders for this purpose, but you could think of it as doing things out of order. Instead of borrowing money to grow the business, they grow the business first, then borrow the money. Less risky that way! You might also think of it this way: maybe some investors are looking for less risky investments. They would rather have bonds than stocks. Companies are responding to that. Maybe we should be worried about companies being more bank-like? Life is uncertain. Why are they making guarantees they might not be able to keep? We've been this way before with banks chopping up mortgages to make "safe" investments.

dsfyu404ed 7y ago

Or the definition of "good" is so stringent that it's hard to satisfy so you just give it back.

devoply 7y ago

there is also a term called bleeding the pig... where you load up a company with a lot of debt and eventually the company goes bankrupt... guess who doesn't lose out though. buybacks are taxed at a capital gains tax rate, whereas dividends are subject to ordinary income tax.

chiefalchemist 7y ago
Are there that many companies bleeding the pig? Possible. But how likely?
throw0101a 7y ago
> ... whereas dividends are subject to ordinary income tax. Not in Canada: > Unlike many other countries, dividends from Canadian based companies are eligible for a somewhat convoluted set of calculations that can fondly be described as the dividend gross up and tax credit system. The basic rationale behind this system is that dividends are paid by corporations after the taxman has already taken his cut. Therefore, if dividend payments were fully taxed in the hands of the investor as well, it would equate to a double taxation. * https://www.fool.ca/13-steps-to-financial-freedom/step-8-the-great-dividend-tax-advantage/ https://www.fool.ca/13-steps-to-financial-freedom/step-8-the... * https://www.investopedia.com/terms/d/dividendtaxcredit.asp https://www.investopedia.com/terms/d/dividendtaxcredit.asp It's slightly convoluted, but if you have investments in taxable accounts, then there's a bit of advantage in them than simply interest. Though capital gains in Canada is only taxed at half of one's marginal rate as well.
- Scoundreller 7y ago
  Right, but this means, for Canadians, dividends paid by non-Canadian corps are taxed as regular income. Stocks to do buybacks instead of dividends are more valuable to us.
akavi 7y ago
In the USA, dividends on stock one has held for more than a year is taxed as long term capital gains. The tax advantage of buybacks is they allow the shareholder to choose when the taxes are incurred, not how they’re taxed.

chiefalchemist 7y ago

Perhaps. But that's not a sustainable business model. Numerous like-companies out of ideas? Then plenty of C level, leadership, and management is overpaid. The fact that they benefit for these stock buybacks only makes matters worse.

skybrian 7y ago
It's not literally "out of ideas". It's that your ideas don't require all that much money to implement compared to the amount of money coming in. Ideas for improving efficiency might pay for themselves quite quickly, putting you further in the hole. A nice problem to have. Maybe shareholders should benefit? (Side note: what does "sustainable" mean here? Usually that involves some kind of steady state, not growing indefinitely, which is always going to have limits.)
- geohotter 7y ago
  Sure, shareholders should benefit in cases where too much money is coming in. However, isn’t the problem that the “money coming in” in this case is debt, not profit?
  - skybrian 7y ago
    Oh, I don't know but I can speculate. First, you'd hope they have profits, or they wouldn't be able to pay the bondholders? The question is, where do the company's future profits go? I guess you could think of it as being a bit more like a bank? A bank provides a service to its depositors, holding their money and paying a little interest. A company does something similar for its bondholders, at higher risk than bank deposits but lower than stocks. The company is for some reason deciding it wants to expand into the "provide a service to bondholders" business. It's a bit weird to talk about "providing bondholder value" but that's basically what they're doing, by staying in business, paying the interest, and rolling over the bonds. Stockholders get a one-time windfall when a company expands into this business, as the company for whatever reason doesn't actually need the cash. It's a bit weird to borrow money from bondholders for this purpose, but you could think of it as doing things out of order. Instead of borrowing money to grow the business, they grow the business first, then borrow the money. Less risky that way! You might also think of it this way: maybe some investors are looking for less risky investments. They would rather have bonds than stocks. Companies are responding to that. Maybe we should be worried about companies being more bank-like? Life is uncertain. Why are they making guarantees they might not be able to keep? We've been this way before with banks chopping up mortgages to make "safe" investments.