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> To the investors there is! I thought we agreed that the difference to investors is that selling shares back to the company is better from a tax perspective t

by kgwgk 4y ago

> To the investors there is! I thought we agreed that the difference to investors is that selling shares back to the company is better from a tax perspective than receiving a dividend. > If you spend $1bln buying back shares, that isn’t money in their pocket until they sell. In aggregate, they just sold $1bn. Individually, they can sell the proportional part. (Ignoring the second-order effects due to the uncertainty about the timing of the buybacks.) > And if they sell, they don’t get any future ‘growth’. Just like when they get the dividend and they end up owning the same share of the same company. The difference is that they pay less taxes. > And if the company/economy doesn’t do well next quarter, they’re losing it in the form of decreased stock value, or even implosion/complete loss. This seems more of a reason to avoid companies that do not distribute money (either in the form of dividends or buybacks), doesn't it? > A dividend is direct cash in the bank. Much lower (zero) ongoing risk of losing that payment. But it gets taxed directly at a higher rate. Selling the stock to the company is also cash in the bank - and it doesn't get taxed at a higher rate. Whatever the relevance of "they don’t get any future ‘growth’" argument it's unrelated to the difference in rates between income taxes and capital gain taxes. For the sake of the argument, let's say that both tax rates are equal. If company A distributes $1bn and company B doesn't would you still say that investing in company A the investros "don’t get any future ‘growth’"? In that case your preference for 'growth' companies is not based on the fact that dividends are taxed at a much higher rate than long term capital gains.

lazide 4y ago
I think several things are getting confused here. I’m mentioning two factors: 1) tax efficiency 2) actual risk of losing money/extracting value from their holdings. If an investor wants reliable, regular income, stock buybacks aren’t helpful. Dividends are. Enough to be worth using less tax efficient structures. However if an investor wants a maximally large portfolio at a indefinite future point, they generally don’t care about dividends. In fact if they want maximum tax efficiency above cash flow (which such investor generally wants), and are comfortable with risk, they want to avoid dividends. Stock buybacks ARE more tax efficient than dividends, but also higher risk. In theory (and usually in practice even more so), buying back the $1bln increases the value of ongoing remaining stock holdings by $1bln. However, unlike a dividend, that doesn’t get converted into cash. It turns cash into increased scarcity for equity ownership in the company. Depending on expected future earnings multiples (cough inflated P/E) this can swing widely, but also provide ‘leverage’ for a company doing this. Which increases ongoing dependence on management of the company, market perception of the companies worth, etc. which increases actual risk to the investor going forward. It is far more tax efficient though. Which if ‘everything always goes up’ is not a big deal, and often desirable. If someone is making sure they have cash in a bank account every month so they don’t need to be eating cat food, less so. Does what I’m saying make more sense in that context? I suspect that the ‘market goes up’ + automation of trades has also made dividends look less necessary. It’s been awhile since we’ve had a good stock market crash.
- kgwgk 4y ago
  > In theory (and usually in practice even more so), buying back the $1bln increases the value of ongoing remaining stock holdings by $1bln. That's absolutely wrong. (If that's - in some sense - correct, it will also be true that distributing $1bn in dividends the company increases the value of ongoing remaining stock holdings by $1bln.) Anyway, the question was if the tax treatment of dividends relative to capital gains gives investors a strong incentive to prefer 'growth' companies that do not ever return capital to the owners rather than 'not-so-much-growth' companies that pass a substantial part of their cashflows ot the owners. And the answer is 'not as much as you implied' because there are also companies that distribute money using a mechanism that is not affected by the tax treatment of dividends so investors can avoid dividends without being restricted to 'growth only' companies.
  - lazide 4y ago
    Mind providing some references as to how removing $1bln of shares from the market doesn’t increase every remaining shareholders value by $1bln, assuming market cap stays the same (which it generally does, independent of another variable)? Even if the shares are not destroyed, the assets of the company now include those $1bln shares and are non-voting. Every other shareholder now has their actual voting power/control/share increase proportionally. Take the hypothetical case where all but 1 share was bought back by the company. The owner of the one remaining non-bought back share is now the controlling shareholder and that share should be valued at the prior market value of all public shares, modulo what everyone things about it’s new future in such a scenario. Dividends do not work the same way, and would not do the same thing - though for a value company, share price generally is based off the dividend payment history over a period of time, and expected likelihood of that trend continuing. So missing a dividend would definitely have an impact. It isn’t quite like a bond, but many people try to use value companies that pay dividends for similar purposes - cash flow. If a dividend isn’t paid, theoretically you’d expect the money not spent to be an asset on the books and increase the overall share price proportionally, modulo the markets valuation of such a thing. But it still isn’t cash in anyone else’s bank account, and the companies management could just spend it on something else at any time.

by kgwgk 4y ago

lazide 4y ago

I think several things are getting confused here. I’m mentioning two factors: 1) tax efficiency 2) actual risk of losing money/extracting value from their holdings. If an investor wants reliable, regular income, stock buybacks aren’t helpful. Dividends are. Enough to be worth using less tax efficient structures. However if an investor wants a maximally large portfolio at a indefinite future point, they generally don’t care about dividends. In fact if they want maximum tax efficiency above cash flow (which such investor generally wants), and are comfortable with risk, they want to avoid dividends. Stock buybacks ARE more tax efficient than dividends, but also higher risk. In theory (and usually in practice even more so), buying back the $1bln increases the value of ongoing remaining stock holdings by $1bln. However, unlike a dividend, that doesn’t get converted into cash. It turns cash into increased scarcity for equity ownership in the company. Depending on expected future earnings multiples (cough inflated P/E) this can swing widely, but also provide ‘leverage’ for a company doing this. Which increases ongoing dependence on management of the company, market perception of the companies worth, etc. which increases actual risk to the investor going forward. It is far more tax efficient though. Which if ‘everything always goes up’ is not a big deal, and often desirable. If someone is making sure they have cash in a bank account every month so they don’t need to be eating cat food, less so. Does what I’m saying make more sense in that context? I suspect that the ‘market goes up’ + automation of trades has also made dividends look less necessary. It’s been awhile since we’ve had a good stock market crash.

kgwgk 4y ago
> In theory (and usually in practice even more so), buying back the $1bln increases the value of ongoing remaining stock holdings by $1bln. That's absolutely wrong. (If that's - in some sense - correct, it will also be true that distributing $1bn in dividends the company increases the value of ongoing remaining stock holdings by $1bln.) Anyway, the question was if the tax treatment of dividends relative to capital gains gives investors a strong incentive to prefer 'growth' companies that do not ever return capital to the owners rather than 'not-so-much-growth' companies that pass a substantial part of their cashflows ot the owners. And the answer is 'not as much as you implied' because there are also companies that distribute money using a mechanism that is not affected by the tax treatment of dividends so investors can avoid dividends without being restricted to 'growth only' companies.
- lazide 4y ago
  Mind providing some references as to how removing $1bln of shares from the market doesn’t increase every remaining shareholders value by $1bln, assuming market cap stays the same (which it generally does, independent of another variable)? Even if the shares are not destroyed, the assets of the company now include those $1bln shares and are non-voting. Every other shareholder now has their actual voting power/control/share increase proportionally. Take the hypothetical case where all but 1 share was bought back by the company. The owner of the one remaining non-bought back share is now the controlling shareholder and that share should be valued at the prior market value of all public shares, modulo what everyone things about it’s new future in such a scenario. Dividends do not work the same way, and would not do the same thing - though for a value company, share price generally is based off the dividend payment history over a period of time, and expected likelihood of that trend continuing. So missing a dividend would definitely have an impact. It isn’t quite like a bond, but many people try to use value companies that pay dividends for similar purposes - cash flow. If a dividend isn’t paid, theoretically you’d expect the money not spent to be an asset on the books and increase the overall share price proportionally, modulo the markets valuation of such a thing. But it still isn’t cash in anyone else’s bank account, and the companies management could just spend it on something else at any time.