4 ms·

I used to also agree that all the arguments against buybacks apply to dividends, but I've since changed my mind. On the surface level, they are identical → cash

by gbasin 7y ago

I used to also agree that all the arguments against buybacks apply to dividends, but I've since changed my mind. On the surface level, they are identical → cash is transferred from company to shareholders. But the way the cash is transferred matters, and it has second order effects. Specifically, as it impacts stock options. Executives tend to be compensated with options. The more the stock goes up, the richer they get. Distributing $X in dividends should provide an equal total return to the average shareholder as spending $X on a buyback, but that buyback will do it by pushing up the share price. As the share price goes up more and more, execs with options have disproportionately more to gain than the average shareholder. They have a leveraged exposure to the price!

throw0101a 7y ago
> Specifically, as it impacts stock options. Then any regulations should focus on them. Why should I, as a 'retail investor', be punished for return on capital methods because of the chicanery of executives? I'm just going to DRIP any dividends anyway (until retirement) since I don't need income now. I want buybacks because that way I do not have a tax event that has (tax) drag on returns.
fountainofage 7y ago
Could you help me in understanding this? In my head if dividends are paid out, wouldn't this drive the stock price up the same as if a buyback happened? Or is this some sort of market inefficiency / irrationality where the market is rewarding stock purchase volume rather than just looking at the total expected value of the company? Edit: sorry about that, I get it now after thinking through it more. Let's say the stock is truly worth $100 (assuming we could figure that out). Then if the company does buybacks, the stock trades at $100 - great for the executive with stock options. However, if the company pays dividends, then the stock price is reduced by the expected value of those dividends. So total expected value is the same, and long term executive comp is the same because they get the dividends as well, but short term they would prefer the buyback because of the higher stock price. They only benefit the same from dividends if they have a long term view.
- Ntrails 7y ago
  There are 100 shares in the market I have $100 in cash, and $100 of Assets. My Company is worth $200 If I pay a $1 ps dividend, then the share price should halve, and the share owners get $1 each. If I buy back 50 shares, at $2 each, there will be 50 shares left at a value of $2 each. But now my earnings/share goes up as if by magic, and my options are worth more than in the dividend case. Also capgains vs income tax yada yada
  - fountainofage 7y ago
    Thank you! Posted at the same time as my edit! I forgot about the impact of reduced shares as well!
  - appleiigs 7y ago
    > But now my earnings/share goes up as if by magic, and my options are worth more than in the dividend case. That's not correct. The EPS increase is offset by reduction in company value due to less cash. https://business.financialpost.com/opinion/stock-buybacks-are-no-disease-heres-how-they-really-work https://business.financialpost.com/opinion/stock-buybacks-ar...
    - Ntrails 7y ago
      EPS does go up by magic, since it is earnings (not value) divided by shares (which have halved in number). The options bit is a slight fiddle, although empirical evidence supports it.
BurningFrog 7y ago
I don't think you changed my mind on banning buybacks, but I'm grateful for this insight!
- 73u4hdhdhe 7y ago
  For anyone curious, BurningFrog has over 10k karma but wants things he doesn't understand banned. That's HN in a nutshell these days.
  - BurningFrog 7y ago
    Guess I could have been clearer. I do not want to ban buybacks, but now I at least understand an argument for doing so.
crazygringo 7y ago
Yes, that is the main difference. To which my response is basically, yeah -- that's just a detail of how the compensation package got structured. I completely fail to see how that's problematic in any way. Some executives are compensated with RSU's. Some with options. If you're negotiating compensation and it's options, you'll take into account whether the company does buybacks or dividends when comparing offers. In the end the total package is the total package. So I just don't see anything "wrong" here.

by gbasin 7y ago

throw0101a 7y ago

> Specifically, as it impacts stock options. Then any regulations should focus on them. Why should I, as a 'retail investor', be punished for return on capital methods because of the chicanery of executives? I'm just going to DRIP any dividends anyway (until retirement) since I don't need income now. I want buybacks because that way I do not have a tax event that has (tax) drag on returns.

fountainofage 7y ago

Could you help me in understanding this? In my head if dividends are paid out, wouldn't this drive the stock price up the same as if a buyback happened? Or is this some sort of market inefficiency / irrationality where the market is rewarding stock purchase volume rather than just looking at the total expected value of the company? Edit: sorry about that, I get it now after thinking through it more. Let's say the stock is truly worth $100 (assuming we could figure that out). Then if the company does buybacks, the stock trades at $100 - great for the executive with stock options. However, if the company pays dividends, then the stock price is reduced by the expected value of those dividends. So total expected value is the same, and long term executive comp is the same because they get the dividends as well, but short term they would prefer the buyback because of the higher stock price. They only benefit the same from dividends if they have a long term view.

Ntrails 7y ago
There are 100 shares in the market I have $100 in cash, and $100 of Assets. My Company is worth $200 If I pay a $1 ps dividend, then the share price should halve, and the share owners get $1 each. If I buy back 50 shares, at $2 each, there will be 50 shares left at a value of $2 each. But now my earnings/share goes up as if by magic, and my options are worth more than in the dividend case. Also capgains vs income tax yada yada
- fountainofage 7y ago
  Thank you! Posted at the same time as my edit! I forgot about the impact of reduced shares as well!
- appleiigs 7y ago
  > But now my earnings/share goes up as if by magic, and my options are worth more than in the dividend case. That's not correct. The EPS increase is offset by reduction in company value due to less cash. https://business.financialpost.com/opinion/stock-buybacks-are-no-disease-heres-how-they-really-work https://business.financialpost.com/opinion/stock-buybacks-ar...
  - Ntrails 7y ago
    EPS does go up by magic, since it is earnings (not value) divided by shares (which have halved in number). The options bit is a slight fiddle, although empirical evidence supports it.

BurningFrog 7y ago

I don't think you changed my mind on banning buybacks, but I'm grateful for this insight!

73u4hdhdhe 7y ago
For anyone curious, BurningFrog has over 10k karma but wants things he doesn't understand banned. That's HN in a nutshell these days.
- BurningFrog 7y ago
  Guess I could have been clearer. I do not want to ban buybacks, but now I at least understand an argument for doing so.

crazygringo 7y ago

Yes, that is the main difference. To which my response is basically, yeah -- that's just a detail of how the compensation package got structured. I completely fail to see how that's problematic in any way. Some executives are compensated with RSU's. Some with options. If you're negotiating compensation and it's options, you'll take into account whether the company does buybacks or dividends when comparing offers. In the end the total package is the total package. So I just don't see anything "wrong" here.