7 ms·

So why not just issue dividends and avoid the downsides?

by amiga_500 7y ago

jdminhbg 7y ago
The tax code penalizes dividends by taxing recipients at the time they're paid.
- dlp211 7y ago
  The same "penalty" applies to the capital gains realized by the sellers when the buyback happens and future sales. The only substantial difference is the ability to choose when to realize those gains by the other shareholders. It's a bad argument and buy backs should be made illegal again.
throw0101a 7y ago
> So why not just issue dividends and avoid the downsides? As another replier pointed out: dividends create a tax event if the shares are held in a taxable account (in US: not IRA, not 401(k)). Sometimes people (pensions, trusts) don't want those types of events and would rather choose when to invoke tax events by selling only when they need to for income purposes.
- AznHisoka 7y ago
  But so what if it creates a taxable event? Let's put aside what is good for you in the short-term, for a second. If a company does buybacks, and even borrows money for them, it might boost their stock in the short term, but it doesn't make their company better long-term, because they aren't investing that money into R&D, and it puts them in a possible cash crunch in the future (ie airlines today). As a thought experiment, what if instead of the company buying back stock, it's the US government. What if they decide to spent $500 billion buying 10% of every stock out there, instead of giving $1000 to every American citizen b/c of the virus. The first benefits people in the short-term, and doesn't create a taxable event. The second benefits people in the long-term, but might be a taxable event.
  - travisjungroth 7y ago
    You're comparing buybacks to everything else. The person you were replying to was just answering why buybacks are now more popular than issuing dividends. The overwhelming reason is taxes.
    - deleted 7y ago
      [deleted]
    - jsight 7y ago
      I think his point is that buybacks should be no more relevant than dividends. This pop-culture meme that "dividends are irrelevant" is not unique to dividends at all.
  - colinmhayes 7y ago
    Companies exist to create value for shareholders. That is done via dividends or buybacks. If companies do neither and aren't in a growth stage like amazon was investors would get pissed and there would probably be a hostile takeover. Shareholders prefer buybacks because of the tax advantage.
    - throw0101a 7y ago
      > That is done via dividends or buybacks. Nope, dividends (and buybacks) are irrelevant: only total return matters: * https://www.pwlcapital.com/the-irrelevance-of-dividends-still-a-non-starter/ https://www.pwlcapital.com/the-irrelevance-of-dividends-stil...
      - colinmhayes 7y ago
        The amount the company pay shareholders, and what people believe the company will pay shareholders, is what defines a companies price. If the a company never pays dividends or does buybacks its value will plummet. It's idiotic to say well dividends and buybacks are irrelevant: only total return matters because future dividends and buybacks are the only factors that play into total return.
- amiga_500 7y ago
  They should remove that "choice" from them and make them pay their taxes on dividends.
  - throw0101a 7y ago
    When a share buyback occurs the seller creates a taxable event for themselves through capital gains. It's just buybacks are considered 'better' because the event is the choice of the seller, and occurs when it is for them. A dividend is 'thrust' upon a shareholder whether they want it or not. (And not investing in dividend-paying companies can be a non-starter: the company in question may be quality one that is worth owning (regardless of dividends, or buybacks)). The problem is not buybacks or dividends: it is (a) possible executive chicanery, and (b) a lot of the general public not having the means / spare cash to get their foot in the door in investing.
    - amiga_500 7y ago
      How many people are reeling from dividend taxable events, and do we really need to look after them? Can't they just plan ahead? I'd bin buybacks and let these guys plan ahead.
      - throw0101a 7y ago
        Hard to know: pensions, trusts (private or for foundations), you indirectly by holding an index fund (the fund handles it on your behalf, but it can still create a drag on returns).
airstrike 7y ago
To add to the other answers: because dividends are more commonly issued as a matter of policy – although special dividends do exist, they are far less common. Share buybacks, in theory, signal to the market that management (who possesses inside knowledge) believes the stock is undervalued, which is often a self-fulfilling prophecy...
- elliekelly 7y ago
  > Share buybacks, in theory, signal to the market that management (who possesses inside knowledge) For this reason alone I struggle to understand why stock buybacks are allowed.
  - throw0101a 7y ago
    That is not what they signal: buybacks say "we have this cash that we can't find an internal use for, so we're returning it to the owners of the company". They are a form of returning capital, no different than dividends. If a company cannot figure out a way to use all the cash it has available internally (e.g., not enough R&D for all the cash), then why shouldn't it be allowed to return the cash to the owner of the company? How many years did AMZN produce 'zero profit' because they were funneling every penny back into the company? Was that a bad decision?
    - airstrike 7y ago
      The argument goes: if they thought the stock was overvalued, they would not buy it back and would let the cash sit on the BS until a more opportune time came along.
  - mason55 7y ago
    Because insider trading laws in the United States have nothing to do with "fairness" (note that this isn't true in other countries). In the US insider trading laws are about misappropriation of information and the victim is the company. The company cannot commit "insider trading" against itself. Insider trading laws in the US are all about "you were entrusted with this information and by using it for your benefit you harmed the company." For example if you know of a coming acquisition and you buy a bunch of short-dated out of the money call options then you're going to push up the price of the acquisition target and cost the company money. The crime you committed (in the view of the US government) is not "unfair trading" it "theft" in that you gained at the expense of the company. That said, I don't think share buybacks would be considered any kind of insider trading anywhere in the world.
kgwgk 7y ago
What downsides?
xkjkls 7y ago
Lighter taxes.

So why not just issue dividends and avoid the downsides?

jdminhbg 7y ago

The tax code penalizes dividends by taxing recipients at the time they're paid.

dlp211 7y ago
The same "penalty" applies to the capital gains realized by the sellers when the buyback happens and future sales. The only substantial difference is the ability to choose when to realize those gains by the other shareholders. It's a bad argument and buy backs should be made illegal again.

throw0101a 7y ago

> So why not just issue dividends and avoid the downsides? As another replier pointed out: dividends create a tax event if the shares are held in a taxable account (in US: not IRA, not 401(k)). Sometimes people (pensions, trusts) don't want those types of events and would rather choose when to invoke tax events by selling only when they need to for income purposes.

AznHisoka 7y ago
But so what if it creates a taxable event? Let's put aside what is good for you in the short-term, for a second. If a company does buybacks, and even borrows money for them, it might boost their stock in the short term, but it doesn't make their company better long-term, because they aren't investing that money into R&D, and it puts them in a possible cash crunch in the future (ie airlines today). As a thought experiment, what if instead of the company buying back stock, it's the US government. What if they decide to spent $500 billion buying 10% of every stock out there, instead of giving $1000 to every American citizen b/c of the virus. The first benefits people in the short-term, and doesn't create a taxable event. The second benefits people in the long-term, but might be a taxable event.
- travisjungroth 7y ago
  You're comparing buybacks to everything else. The person you were replying to was just answering why buybacks are now more popular than issuing dividends. The overwhelming reason is taxes.
  - deleted 7y ago
    [deleted]
  - jsight 7y ago
    I think his point is that buybacks should be no more relevant than dividends. This pop-culture meme that "dividends are irrelevant" is not unique to dividends at all.
- colinmhayes 7y ago
  Companies exist to create value for shareholders. That is done via dividends or buybacks. If companies do neither and aren't in a growth stage like amazon was investors would get pissed and there would probably be a hostile takeover. Shareholders prefer buybacks because of the tax advantage.
  - throw0101a 7y ago
    > That is done via dividends or buybacks. Nope, dividends (and buybacks) are irrelevant: only total return matters: * https://www.pwlcapital.com/the-irrelevance-of-dividends-still-a-non-starter/ https://www.pwlcapital.com/the-irrelevance-of-dividends-stil...
    - colinmhayes 7y ago
      The amount the company pay shareholders, and what people believe the company will pay shareholders, is what defines a companies price. If the a company never pays dividends or does buybacks its value will plummet. It's idiotic to say well dividends and buybacks are irrelevant: only total return matters because future dividends and buybacks are the only factors that play into total return.
amiga_500 7y ago
They should remove that "choice" from them and make them pay their taxes on dividends.
- throw0101a 7y ago
  When a share buyback occurs the seller creates a taxable event for themselves through capital gains. It's just buybacks are considered 'better' because the event is the choice of the seller, and occurs when it is for them. A dividend is 'thrust' upon a shareholder whether they want it or not. (And not investing in dividend-paying companies can be a non-starter: the company in question may be quality one that is worth owning (regardless of dividends, or buybacks)). The problem is not buybacks or dividends: it is (a) possible executive chicanery, and (b) a lot of the general public not having the means / spare cash to get their foot in the door in investing.
  - amiga_500 7y ago
    How many people are reeling from dividend taxable events, and do we really need to look after them? Can't they just plan ahead? I'd bin buybacks and let these guys plan ahead.
    - throw0101a 7y ago
      Hard to know: pensions, trusts (private or for foundations), you indirectly by holding an index fund (the fund handles it on your behalf, but it can still create a drag on returns).

airstrike 7y ago

To add to the other answers: because dividends are more commonly issued as a matter of policy – although special dividends do exist, they are far less common. Share buybacks, in theory, signal to the market that management (who possesses inside knowledge) believes the stock is undervalued, which is often a self-fulfilling prophecy...

elliekelly 7y ago
> Share buybacks, in theory, signal to the market that management (who possesses inside knowledge) For this reason alone I struggle to understand why stock buybacks are allowed.
- throw0101a 7y ago
  That is not what they signal: buybacks say "we have this cash that we can't find an internal use for, so we're returning it to the owners of the company". They are a form of returning capital, no different than dividends. If a company cannot figure out a way to use all the cash it has available internally (e.g., not enough R&D for all the cash), then why shouldn't it be allowed to return the cash to the owner of the company? How many years did AMZN produce 'zero profit' because they were funneling every penny back into the company? Was that a bad decision?
  - airstrike 7y ago
    The argument goes: if they thought the stock was overvalued, they would not buy it back and would let the cash sit on the BS until a more opportune time came along.
- mason55 7y ago
  Because insider trading laws in the United States have nothing to do with "fairness" (note that this isn't true in other countries). In the US insider trading laws are about misappropriation of information and the victim is the company. The company cannot commit "insider trading" against itself. Insider trading laws in the US are all about "you were entrusted with this information and by using it for your benefit you harmed the company." For example if you know of a coming acquisition and you buy a bunch of short-dated out of the money call options then you're going to push up the price of the acquisition target and cost the company money. The crime you committed (in the view of the US government) is not "unfair trading" it "theft" in that you gained at the expense of the company. That said, I don't think share buybacks would be considered any kind of insider trading anywhere in the world.

kgwgk 7y ago

What downsides?

xkjkls 7y ago

Lighter taxes.