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Don't stock buybacks basically transfer wealth from the company to the shareholders? The major advantage this has over other means of transferring wealth is tha

Don't stock buybacks basically transfer wealth from the company to the shareholders? The major advantage this has over other means of transferring wealth is that shareholders get to realize their gains with only capital gains tax applied, rather then the much higher dividend tax rate.

JackFr 7y ago
> Don't stock buybacks basically transfer wealth from the company to the shareholders? That is to say from the shareholders to themselves.
csomar 7y ago
Plus they might chose not to get taxed by holding the stock.
jdsully 7y ago
No the shareholders own the company so they “own” the cash either way. Buybacks and dividends return control of the cash back to shareholders so they can allocate it elsewhere.
- walshemj 7y ago
  Not exactly a 10% buy back is not 100% guaranteed the same return as a 10% dividend - and this Ignores the time value of money.
  - aliston 7y ago
    Theoretically an x billion dollar dividend results in the exact same outcome for a shareholder as an x billion dollar stock buy back. Not sure the time value of money factors in.
  - nostrademons 7y ago
    Dividends are not guaranteed either - companies can and do suspend dividends whenever they have cash flow or profitability problems.
sib 7y ago
No - if the price is $X, then the shareholder is exchanging $X in shares for $X in cash. That's not a transfer of wealth.
dahdum 7y ago
Most dividends are qualified and thus taxed the same as capital gains.
- Scoundreller 7y ago
  Maybe to the IRS. But if you’re a foreigner owning US stocks, they’re taxed much differently. Right off the bat, the IRS withholds 15-30% of dividende paid to foreigners. Not so with cap gains. And, at least in Canada, US stock dividends are taxed at full personal tax rates. Cap gains are cap gains, foreign or domestic in Canada. So I’m all for cutting dividends and doing buybacks.
- walshemj 7y ago
  Not really dividends are taxed as income which Is normally higher than capita gains for good reasons. Your basically taking more risk with capital that income to reward you for putting your capital at risk
robocat 7y ago
Another advantage for many different kinds of shareholders (foreign, non-profit, tax-loss-holders, long-term-holders etc) could be that the taxation rules for buybacks are specific to the shareholder. Dividend and company taxes can really screw certain types of shareholders.
- Scoundreller 7y ago
  Very true for Canadians. It also depends on what kind of account the holdings are in. In retirement accounts, it’s all the same. In our « tax-free savings accounts », we still get hit by IRS withholding taxes that we can’t write off against any corresponding taxes (because there aren’t any). In a cash account, US dividends are taxed as if they were bond interest. Capital gains also let stockholders pick and choose which year to crystallize their gains. I don’t plan on selling some funds until I have a low tax year.
mpalczewski 7y ago
No tax rates are now the same(don't nerdify this, it's correct enough for the point). The reason is that dividends are sticky. You lower the dividend, and stock holders will notice(and sell). You buy back stock, and then later stop, few will notice. Buybacks support stock prices really well for executive stock based compensation, they can sell into the buying which they know exactly when it will happen.
- hrez 7y ago
  Executive stock based compensation also dilutes shares which buybacks balance back. Shareholders may get way less in value from buybacks than execs. on topic https://www.ft.com/content/0f863da4-0b6e-11ea-b2d6-9bf4d1957a67 https://www.ft.com/content/0f863da4-0b6e-11ea-b2d6-9bf4d1957...
- laurencerowe 7y ago
  While the tax rates are the same the result is different since a shareholder can chose when to realize the gain. If you model dividend reinvestment vs share buy backs this taxation deferral is quite significant for the shareholder due to compounding effects. A simplistic illustration: Tax rate on cap gains and dividends is 20%. Inflation is zero. Company earns 10% of its market cap yearly in profits. Company's market cap is static over time. Scenario A: returns profits as share buy backs. Scenario B: returns profits as dividends on which the shareholder pays tax and reinvests the rest in company stock. At the end of the scenario, sell all stock paying capital gains tax due (nothing to pay on scenario B since stock price has not changed.) Even though dividends and capital gains are taxed at the same rate, scenario A beats scenario B by 10% over 10 years and 45% over 30 years.
rumanator 7y ago
> Don't stock buybacks basically transfer wealth from the company to the shareholders? There's some confusion in your comment. The company is already property of the shareholder. The shareholder holds shares of the company. Thus, the assertion that stock buybacks transfer wealth from the company to the shareholder is a tautology because the wealth from the company is already the wealth of the shareholder.
- ethbro 7y ago
  In the individual case, some number of shares in the company is property of the shareholder. Perhaps more accurate would be to say they liquidate part of a company's wealth (the broader value of all assets owned by the company) into stock price (the value at which a share can be sold on the open market). From this perspective it seems fair to say that they transfer wealth from company control to shareholder control.
  - dodobirdlord 7y ago
    I think it is best to characterize it as being an opportunity for shareholders to part ways with the company, taking their share of ownership as cash and moving on. Of course, all of these characterizations are the same and describe the same event, but I find this one the least inflammatory. It makes it clear that no transfer of wealth is happening, that buybacks don't meaningfully effect share price, etc.
phkahler 7y ago
Don't stock buybacks basically transfer wealth from the company to the shareholders? No. It drives up the share price. That's nice for people who want to sell, but does little for the long term. A company that has dividends might be able to increase them if the number of shares is reduced, but buybacks are often done by companies that dont have dividends. There are companies doing both and I'm not sure what to make of that.
dragonwriter 7y ago
> Don't stock buybacks basically transfer wealth from the company to the shareholders? The major advantage this has over other means No, because the shareholders already have the wealth that is in the company, since stock is a form of wealth. It makes some part of the wealth shareholders already have liquid, though.
notSupplied 7y ago
No it is merely a act of divestiture of capital / wealth that shareholders already own. What is peculiar is that this act has nothing to do with running a company well in the long term, yet is the most immediate way executives can improve their "performance based compensation". Execs seem to have found a hack around stock based compensation that biases companies towards divestiture over investment, and the short-term minded shareholders are onboard with this scheme at the expense of long-term minded shareholders. This looks largely like a bug in the executive compensation system...I'm curious what kinds of fixes are going to come out of the world of MBA academia.

JackFr 7y ago

> Don't stock buybacks basically transfer wealth from the company to the shareholders? That is to say from the shareholders to themselves.

csomar 7y ago

Plus they might chose not to get taxed by holding the stock.

jdsully 7y ago

No the shareholders own the company so they “own” the cash either way. Buybacks and dividends return control of the cash back to shareholders so they can allocate it elsewhere.

walshemj 7y ago
Not exactly a 10% buy back is not 100% guaranteed the same return as a 10% dividend - and this Ignores the time value of money.
- aliston 7y ago
  Theoretically an x billion dollar dividend results in the exact same outcome for a shareholder as an x billion dollar stock buy back. Not sure the time value of money factors in.
- nostrademons 7y ago
  Dividends are not guaranteed either - companies can and do suspend dividends whenever they have cash flow or profitability problems.

sib 7y ago

No - if the price is $X, then the shareholder is exchanging $X in shares for $X in cash. That's not a transfer of wealth.

dahdum 7y ago

Most dividends are qualified and thus taxed the same as capital gains.

Scoundreller 7y ago
Maybe to the IRS. But if you’re a foreigner owning US stocks, they’re taxed much differently. Right off the bat, the IRS withholds 15-30% of dividende paid to foreigners. Not so with cap gains. And, at least in Canada, US stock dividends are taxed at full personal tax rates. Cap gains are cap gains, foreign or domestic in Canada. So I’m all for cutting dividends and doing buybacks.
walshemj 7y ago
Not really dividends are taxed as income which Is normally higher than capita gains for good reasons. Your basically taking more risk with capital that income to reward you for putting your capital at risk

robocat 7y ago

Another advantage for many different kinds of shareholders (foreign, non-profit, tax-loss-holders, long-term-holders etc) could be that the taxation rules for buybacks are specific to the shareholder. Dividend and company taxes can really screw certain types of shareholders.

Scoundreller 7y ago
Very true for Canadians. It also depends on what kind of account the holdings are in. In retirement accounts, it’s all the same. In our « tax-free savings accounts », we still get hit by IRS withholding taxes that we can’t write off against any corresponding taxes (because there aren’t any). In a cash account, US dividends are taxed as if they were bond interest. Capital gains also let stockholders pick and choose which year to crystallize their gains. I don’t plan on selling some funds until I have a low tax year.

mpalczewski 7y ago

No tax rates are now the same(don't nerdify this, it's correct enough for the point). The reason is that dividends are sticky. You lower the dividend, and stock holders will notice(and sell). You buy back stock, and then later stop, few will notice. Buybacks support stock prices really well for executive stock based compensation, they can sell into the buying which they know exactly when it will happen.

hrez 7y ago
Executive stock based compensation also dilutes shares which buybacks balance back. Shareholders may get way less in value from buybacks than execs. on topic https://www.ft.com/content/0f863da4-0b6e-11ea-b2d6-9bf4d1957a67 https://www.ft.com/content/0f863da4-0b6e-11ea-b2d6-9bf4d1957...
laurencerowe 7y ago
While the tax rates are the same the result is different since a shareholder can chose when to realize the gain. If you model dividend reinvestment vs share buy backs this taxation deferral is quite significant for the shareholder due to compounding effects. A simplistic illustration: Tax rate on cap gains and dividends is 20%. Inflation is zero. Company earns 10% of its market cap yearly in profits. Company's market cap is static over time. Scenario A: returns profits as share buy backs. Scenario B: returns profits as dividends on which the shareholder pays tax and reinvests the rest in company stock. At the end of the scenario, sell all stock paying capital gains tax due (nothing to pay on scenario B since stock price has not changed.) Even though dividends and capital gains are taxed at the same rate, scenario A beats scenario B by 10% over 10 years and 45% over 30 years.

rumanator 7y ago

> Don't stock buybacks basically transfer wealth from the company to the shareholders? There's some confusion in your comment. The company is already property of the shareholder. The shareholder holds shares of the company. Thus, the assertion that stock buybacks transfer wealth from the company to the shareholder is a tautology because the wealth from the company is already the wealth of the shareholder.

ethbro 7y ago
In the individual case, some number of shares in the company is property of the shareholder. Perhaps more accurate would be to say they liquidate part of a company's wealth (the broader value of all assets owned by the company) into stock price (the value at which a share can be sold on the open market). From this perspective it seems fair to say that they transfer wealth from company control to shareholder control.
- dodobirdlord 7y ago
  I think it is best to characterize it as being an opportunity for shareholders to part ways with the company, taking their share of ownership as cash and moving on. Of course, all of these characterizations are the same and describe the same event, but I find this one the least inflammatory. It makes it clear that no transfer of wealth is happening, that buybacks don't meaningfully effect share price, etc.

phkahler 7y ago

Don't stock buybacks basically transfer wealth from the company to the shareholders? No. It drives up the share price. That's nice for people who want to sell, but does little for the long term. A company that has dividends might be able to increase them if the number of shares is reduced, but buybacks are often done by companies that dont have dividends. There are companies doing both and I'm not sure what to make of that.

dragonwriter 7y ago

> Don't stock buybacks basically transfer wealth from the company to the shareholders? The major advantage this has over other means No, because the shareholders already have the wealth that is in the company, since stock is a form of wealth. It makes some part of the wealth shareholders already have liquid, though.

notSupplied 7y ago

No it is merely a act of divestiture of capital / wealth that shareholders already own. What is peculiar is that this act has nothing to do with running a company well in the long term, yet is the most immediate way executives can improve their "performance based compensation". Execs seem to have found a hack around stock based compensation that biases companies towards divestiture over investment, and the short-term minded shareholders are onboard with this scheme at the expense of long-term minded shareholders. This looks largely like a bug in the executive compensation system...I'm curious what kinds of fixes are going to come out of the world of MBA academia.