3 ms·

It is not the same. Dividends reward continued investors who also have a bigger incentive to care about long term health of the corporation. Buybacks reward tho

It is not the same. Dividends reward continued investors who also have a bigger incentive to care about long term health of the corporation. Buybacks reward those who deinvest (sell shares).

xwdv 6y ago
Why is that a bad thing? The money gets deinvested and then reinvested into other growth companies, giving them a chance to grow as well.
- take_a_breath 6y ago
  Is there evidence that the returns are “reinvested into other growth companies”? Why would a growth company return money to investors? They should be using that capital to grow.
  - ac29 6y ago
    Two reasons that come to mind: 1) Not all growth is easy or cheap. Investing $X to grow by Y% doesn't mean you can invest 2$X to grow by 2Y%. At some point the ROI is close to zero or even negative, though I would agree with risk-free interest rates also close to zero, nearly any positive ROI is better than cash distributions. 2) Some investors want a portion of profits to be distributed when a company is doing well. Investing in growth is a risk, distributing cash is not.
    - take_a_breath 6y ago
      Once the value of distributing profits outweighs re-investing in growth, you are no longer a growth company.
  - xwdv 6y ago
    Because you’re not going to be a growth company forever, and growth companies are where the money is at. So distribute your profits and let’s put that money into other companies ready to explode.
roenxi 6y ago
If the company jettisons 2% of its book value in a buyback, sell 2% of your shares. Practically speaking it isn't easy but there is no theoretical problem. It might have changed, but there was a time when companies would have to be stark raving mad to return money as an income stream rather than a capital return. It made no sense after accounting for the tax code.
deleted 6y ago
[deleted]
matwood 6y ago
The problem with dividends is they force a taxable event onto shareholders. Many shareholders prefer buybacks because it lets the shareholder control when to get taxed by selling shares. Either is a wash when it comes to caring about the long term health of the company. If all my gains are through buybacks I absolutely care about the health of the company at least until the point I sell.
dasudasu 6y ago
Not really. A buyback makes your shares inherently worth more on a per share basis. If you compare it to a reinvestment of the dividends (DRIP), then it's really equivalent, except that one is a taxable event but not the other. You're always free to sell shares in any scenario if you need the capital since the stock market is generally pretty liquid.

It is not the same. Dividends reward continued investors who also have a bigger incentive to care about long term health of the corporation. Buybacks reward those who deinvest (sell shares).

xwdv 6y ago

Why is that a bad thing? The money gets deinvested and then reinvested into other growth companies, giving them a chance to grow as well.

take_a_breath 6y ago
Is there evidence that the returns are “reinvested into other growth companies”? Why would a growth company return money to investors? They should be using that capital to grow.
- ac29 6y ago
  Two reasons that come to mind: 1) Not all growth is easy or cheap. Investing $X to grow by Y% doesn't mean you can invest 2$X to grow by 2Y%. At some point the ROI is close to zero or even negative, though I would agree with risk-free interest rates also close to zero, nearly any positive ROI is better than cash distributions. 2) Some investors want a portion of profits to be distributed when a company is doing well. Investing in growth is a risk, distributing cash is not.
  - take_a_breath 6y ago
    Once the value of distributing profits outweighs re-investing in growth, you are no longer a growth company.
- xwdv 6y ago
  Because you’re not going to be a growth company forever, and growth companies are where the money is at. So distribute your profits and let’s put that money into other companies ready to explode.

roenxi 6y ago

If the company jettisons 2% of its book value in a buyback, sell 2% of your shares. Practically speaking it isn't easy but there is no theoretical problem. It might have changed, but there was a time when companies would have to be stark raving mad to return money as an income stream rather than a capital return. It made no sense after accounting for the tax code.

deleted 6y ago

[deleted]

matwood 6y ago

The problem with dividends is they force a taxable event onto shareholders. Many shareholders prefer buybacks because it lets the shareholder control when to get taxed by selling shares. Either is a wash when it comes to caring about the long term health of the company. If all my gains are through buybacks I absolutely care about the health of the company at least until the point I sell.

dasudasu 6y ago

Not really. A buyback makes your shares inherently worth more on a per share basis. If you compare it to a reinvestment of the dividends (DRIP), then it's really equivalent, except that one is a taxable event but not the other. You're always free to sell shares in any scenario if you need the capital since the stock market is generally pretty liquid.