3 ms·
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 sto
by 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 agoExecutive 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 agoWhile 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.