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> and puts upward pressure on share prices I am curious if there is evidence for this. I don’t see how distributing capital that could be used for growth press

> and puts upward pressure on share prices I am curious if there is evidence for this. I don’t see how distributing capital that could be used for growth pressures share prices up. People not selling back the shares are trading the current profits for a bigger share of future profits, which may never exist. So I am not sure on a risk adjusted discounted cash flow model there is any justification for increased price pressure. I always presumed that the main benefit of buybacks v dividends was being able to time capital gains for tax purposes. But this is all speculation too, no evidence behind my post.

projektfu 4y ago
There are two reasons in my mind why buybacks are different. The first is that buybacks are reported after the fact and do not directly alter the share price, rather they increase competition for the available shares and reduce dilution. Dividends immediately reduce the share price by the dividend although the price often moves up a little before the ex-dividend rate. The other reason is that there are very few stocks that are being valued by the market on any sort of model. That goes for cash flow models as well as other things like PE ratios, etc. We are in the tinkerbell regime, prices went up over the last 10 years because people are clapping louder. Obviously that is a controversial take but I am not predicting a reversal, just saying that the market overall is in a weird place.
- kgwgk 4y ago
  > buybacks are reported after the fact and do not directly alter the share price But the fact itself adds demand for the shares on the market, affecting the share price.
  - cormacrelf 4y ago
    There's also an open market buyback. And multiple ways of doing it off the open market, often known as a tender offer for a popular method where you get shareholders to bid on the lowest price they would accept within a range of premium buyback prices. Off the market, an offer does become public immediately, that is a necessary component of doing it at all. The sales do not. Directly is the wrong word, there's no more direct way to affect price than a bid/ask/sale of a share. The key is that the information about how much of the stock will actually get bought at what price is delayed on its way to becoming a price signal in the market. Here's an old-ish but good paper about it, showing how this delay can be exploited by those with inside information. Not a loophole but rather another thing to watch out for. https://chicagounbound.uchicago.edu/cgi/viewcontent.cgi?article=5061&context=uclrev https://chicagounbound.uchicago.edu/cgi/viewcontent.cgi?arti...
JamesBarney 4y ago
> I am curious if there is evidence for this. I don’t see how distributing capital that could be used for growth pressures share prices up. Say I have a company worth a $1,000,000 dollars that has a 1,000 shares each worth $1,000. Company comes into a giant one off windfall. They use that windfall to buyback half the shares. There are now there are only 500 shares that own a $1,000,000 dollar company so each share is worth $2,000. Or put another way .2% of future profits is worth more than .1% of future profits. > I always presumed that the main benefit of buybacks v dividends was being able to time capital gains for tax purposes. It's not about timing, it's simpler. Buybacks are taxed as capital gains, and dividends as income.
- rileymat2 4y ago
  This is not true, qualified dividends are taxed at the capital gains rate. Most are qualified. Also, with the windfall the $1,000,000 company is no longer worth that much, it is worth $1,000,000 + the windfall, so you will be buying back at a much higher rate.
  - JamesBarney 4y ago
    After the company spends the windfall it's only worth a million afterwards. But you're right about qualified dividends. I had no idea qualified dividends were taxed at the same rate as capital gains. I'd always hear that was why companies do stock buybacks. Thanks for teaching me something new. You're right it's about allowing investors to time their taxable events.
    - rileymat2 4y ago
      > After the company spends the windfall it's only worth a million afterwards. This is true. But look at a simple example, your example. Company Worth $1,000,000. 1,000 shares, each worth $1,000. Windfall Event: They get $1,000,000 of unexpected income. Now the company was whatever it was before + $1,000,000. Naturally, that means the company is worth $2,000,000. So the stock price is $2,000. Well, we buy back half the shares, but it is 500 shares at $2,000 a share. This costs $1,000,000. Now each share is worth $1,000 because the company has spent half its capital.

projektfu 4y ago

There are two reasons in my mind why buybacks are different. The first is that buybacks are reported after the fact and do not directly alter the share price, rather they increase competition for the available shares and reduce dilution. Dividends immediately reduce the share price by the dividend although the price often moves up a little before the ex-dividend rate. The other reason is that there are very few stocks that are being valued by the market on any sort of model. That goes for cash flow models as well as other things like PE ratios, etc. We are in the tinkerbell regime, prices went up over the last 10 years because people are clapping louder. Obviously that is a controversial take but I am not predicting a reversal, just saying that the market overall is in a weird place.

kgwgk 4y ago
> buybacks are reported after the fact and do not directly alter the share price But the fact itself adds demand for the shares on the market, affecting the share price.
- cormacrelf 4y ago
  There's also an open market buyback. And multiple ways of doing it off the open market, often known as a tender offer for a popular method where you get shareholders to bid on the lowest price they would accept within a range of premium buyback prices. Off the market, an offer does become public immediately, that is a necessary component of doing it at all. The sales do not. Directly is the wrong word, there's no more direct way to affect price than a bid/ask/sale of a share. The key is that the information about how much of the stock will actually get bought at what price is delayed on its way to becoming a price signal in the market. Here's an old-ish but good paper about it, showing how this delay can be exploited by those with inside information. Not a loophole but rather another thing to watch out for. https://chicagounbound.uchicago.edu/cgi/viewcontent.cgi?article=5061&context=uclrev https://chicagounbound.uchicago.edu/cgi/viewcontent.cgi?arti...

JamesBarney 4y ago

> I am curious if there is evidence for this. I don’t see how distributing capital that could be used for growth pressures share prices up. Say I have a company worth a $1,000,000 dollars that has a 1,000 shares each worth $1,000. Company comes into a giant one off windfall. They use that windfall to buyback half the shares. There are now there are only 500 shares that own a $1,000,000 dollar company so each share is worth $2,000. Or put another way .2% of future profits is worth more than .1% of future profits. > I always presumed that the main benefit of buybacks v dividends was being able to time capital gains for tax purposes. It's not about timing, it's simpler. Buybacks are taxed as capital gains, and dividends as income.

rileymat2 4y ago
This is not true, qualified dividends are taxed at the capital gains rate. Most are qualified. Also, with the windfall the $1,000,000 company is no longer worth that much, it is worth $1,000,000 + the windfall, so you will be buying back at a much higher rate.
- JamesBarney 4y ago
  After the company spends the windfall it's only worth a million afterwards. But you're right about qualified dividends. I had no idea qualified dividends were taxed at the same rate as capital gains. I'd always hear that was why companies do stock buybacks. Thanks for teaching me something new. You're right it's about allowing investors to time their taxable events.
  - rileymat2 4y ago
    > After the company spends the windfall it's only worth a million afterwards. This is true. But look at a simple example, your example. Company Worth $1,000,000. 1,000 shares, each worth $1,000. Windfall Event: They get $1,000,000 of unexpected income. Now the company was whatever it was before + $1,000,000. Naturally, that means the company is worth $2,000,000. So the stock price is $2,000. Well, we buy back half the shares, but it is 500 shares at $2,000 a share. This costs $1,000,000. Now each share is worth $1,000 because the company has spent half its capital.