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It's not just executives and directors who benefit from buybacks. It's shareholders. I've personally benefited, and I'm not in the 1%. Anyone who has an index f

It's not just executives and directors who benefit from buybacks. It's shareholders. I've personally benefited, and I'm not in the 1%. Anyone who has an index fund or mutual fund in their 401k benefits from buybacks. So, you could make a case that buybacks (when used intelligently) benefit retirement accounts, which is a kind of public good. Now, the question is, how long do the benefits last? And are buybacks always beneficial? I think that's debatable. There's data on both sides of that argument, but I do think that most companies don't use buybacks judiciously. Berkshire Hathaway does-- buying back only when they have cash that can't be put to a better use, and only when their share price is below intrinsic value. But most companies are using leverage to fund buybacks, which is a short-term way to benefit shareholders at the cost of long-term deterioration of the balance sheet. I certainly hope we don't outlaw buybacks, but I think there's a case to be made that they shouldn't be done via leverage. Good luck trying to legislate that behavior, though. Money has a way of finding loopholes, and such legislation will almost certainly have negative, unintended consequences.

gamblor956 7y ago
Companies do buybacks instead of dividends because it benefits the company tax-wise, not because it benefits the stockholders. From an investor's perspective, they're taxed the same.
- clairity 7y ago
  it also helps investors (who held the stock) in that share values go up a little bit, tax-deferred.
  - deleted 7y ago
    [deleted]
- ummonk 7y ago
  Not really. As an investor you get more tax-flexibility with buybacks, since you can decide when you sell your stock. Lets you defer taxes, unlike dividends, which get taxed even when you reinvest them.
  - gamblor956 7y ago
    With a dividend, you get an amount of income, X, and you get to keep the stock and sell it in the future for even more money, Y. Yes, you get taxed on it both times. But you get two payments of income: X and Y, both taxed at capital gains rates. With a buyback, you might get X income. But in order to get you X gains the company needs to pay Z (current share price), which is always more expensive than paying a dividend (generally for dividend paying companies, a share trades for 10x-100x the amount the dividend would be for). So the company either pays 100x or it buys back less stock, rewarded fewer investors. Additionally, any shareholder that participates in the buyback is now closed off from getting income Y for any stock sold back. Alternatively, if you don't participate in the buyback, you must hope the company maintains or grows its share price, or else your gains fall below X and you're no longer deferring tax, you're just losing money. (IOW, for the same amount of cash, a buyback is several times less efficient at returning gains to investors as a dividends. And this means that rather than increasing the price per share, buybacks frequently have the opposite effect, or no effect, because the company also has significantly less cash on hand after the buyback. Then why do companies love buybacks? Executives love buybacks because it lets them exchange their equity compensation out-of-schedule. This is the primary driving force behind the rise of buybacks. The reason they open buybacks to the public is to avoid running afoul of SEC insider trader regulations.)
- christophilus 7y ago
  As an investor, I vastly prefer buybacks to dividends, unless I'm in a tax-efficient account.

gamblor956 7y ago

Companies do buybacks instead of dividends because it benefits the company tax-wise, not because it benefits the stockholders. From an investor's perspective, they're taxed the same.

clairity 7y ago
it also helps investors (who held the stock) in that share values go up a little bit, tax-deferred.
- deleted 7y ago
  [deleted]
ummonk 7y ago
Not really. As an investor you get more tax-flexibility with buybacks, since you can decide when you sell your stock. Lets you defer taxes, unlike dividends, which get taxed even when you reinvest them.
- gamblor956 7y ago
  With a dividend, you get an amount of income, X, and you get to keep the stock and sell it in the future for even more money, Y. Yes, you get taxed on it both times. But you get two payments of income: X and Y, both taxed at capital gains rates. With a buyback, you might get X income. But in order to get you X gains the company needs to pay Z (current share price), which is always more expensive than paying a dividend (generally for dividend paying companies, a share trades for 10x-100x the amount the dividend would be for). So the company either pays 100x or it buys back less stock, rewarded fewer investors. Additionally, any shareholder that participates in the buyback is now closed off from getting income Y for any stock sold back. Alternatively, if you don't participate in the buyback, you must hope the company maintains or grows its share price, or else your gains fall below X and you're no longer deferring tax, you're just losing money. (IOW, for the same amount of cash, a buyback is several times less efficient at returning gains to investors as a dividends. And this means that rather than increasing the price per share, buybacks frequently have the opposite effect, or no effect, because the company also has significantly less cash on hand after the buyback. Then why do companies love buybacks? Executives love buybacks because it lets them exchange their equity compensation out-of-schedule. This is the primary driving force behind the rise of buybacks. The reason they open buybacks to the public is to avoid running afoul of SEC insider trader regulations.)
christophilus 7y ago
As an investor, I vastly prefer buybacks to dividends, unless I'm in a tax-efficient account.