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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 t

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.

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.