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it's essentially a forced reinvestment in the same company, which is good for shareholders who believe the company is undervalued and already hold stock. How i
by xyzzyz 7y ago
it's essentially a forced reinvestment in the same company, which is good for shareholders who believe the company is undervalued and already hold stock.
How is it a "forced reinvestment"? Buyback requires two parties to the transaction, the company is buying shares, but someone has to sell them. This can be you. It would be forced reinvestment if the company just kept cash and never returned it either through buyback or dividend, which incidentally is what most people grinding against airline stock buybacks seem to be suggesting.
Really, stock buybacks and dividends are mostly equivalent, with the exception of the tax treatment, which is the whole reason why companies increasingly prefer the buyback route.
- clairity 7y agonot every shareholder participates in the decision-making behind a buyback, and in some cases they can't all participate in the buyback itself (especially with majority privately-held entities).
- xyzzyz 7y agoWe are talking about publicly traded companies here. You can always participate in the buyback: just sell your shares, they're publicly traded, so there should be no difficulty. It doesn't matter much who's on the other side of your trade, as the arbitrageurs will ensure that the buyback is priced into the spot price.
- clairity 7y agomany companies have multiple types of stock, and only publicly trade a portion of their shares (i.e., not treasury stock) and often only certain classes of their stock. sometimes they trade less than half of the total shares, which is how you can have majority privately-held companies trading shares publicly.
- d1zzy 7y agoAlso, to avoid insider trading issues, companies restrict the times in which shares are allowed to be traded by employees.
- jessaustin 7y agoPlease tell us you're not a corporate accountant. Cash is an asset, and is the definition of "liquid". Shares are not. Excessive dividends prior to a downturn would be just as dumb as excessive stock buybacks.
- dmurray 7y agoInstead of buybacks being a "forced reinvestment", it would be more accurate to say dividends are a forced divestment. If the company spends $1/share on buybacks and you hold 100 shares, you can either keep the shares or sell $100 worth and get cash instead. If the company gave you a $1/share dividend, you couldn't use that to buy $100 worth of stock, because taxes.