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In a stock buyback, the investor only is made whole by "exiting" the stock. I.e., if that stock has voting rights, and you're more interested in being able to i

In a stock buyback, the investor only is made whole by "exiting" the stock. I.e., if that stock has voting rights, and you're more interested in being able to influence as a shareholder, you're left out of the "lifting of every risk sinker" when a company does a buyback. In fact, it guarantees that the amount of shareholder influence as a whole decreases, because if someone were to reacquire that share it would be more expensive now. Stock buybacks are basically attempts to shirk leashes, freeing execs/other shareholders from the ongoing influence of exiting shareholders. Dividends on the other hand, are straightforward returns on what was a commitment to sink risk. An ongoing source of income for the shareholder as a result of the company thriving. It's a straight up payment of a coupon off a bond. There is no need to exit/re-enter required. Your # of shares do not move. Therefore your relative investment stays as it was, whereas with the buyback, you're handing back your ongoing leash and influence on the company. Stock buybacks are therefore not equivalent in any way to paying of dividends. I don't know why this is so hard to understand.

s1artibartfast 4y ago
If a company does a buyback, shouldn't you still have a higher percent control if you dont sell any of your holdings, and the same % control if you do sell the dividend equivalent Imagine a company has 100 shares and I own 10. If they company buys back 50, the stock price will double, and my % ownership goes up from 10 to 20%. I can sell down to 10%, the same control I had before to take my profits. What am I missing here?
- deleted 4y ago
  [deleted]
- NickNameNick 4y ago
  Wouldn't that friend on who's voting the stock that company holds in itself? Is it the CEO? The board? The chairman? Or are the stocks cancelled from the total?
  - s1artibartfast 4y ago
    I can't parse all of your question. What friend? To answer what I think you are asking, the buyback shares are usually destroyed. It isn't like the CEO gets to vote with them instead of shareholders. In fact, they company does not destroy the shares, and holds on to them for whatever reason, they do not get to vote with them. those are called "treasury stock". Apple is a classic case. Around 2010, the company had 26 billion shares outstanding. They've spent the last decade buying them back, and now have about 16 billion shares. This contributes significantly to the increase in stock price. The portion of the company 1 share represents is 60% larger today than it was in 2010 because there are fewer of them
  - realityking 4y ago
    Bought back shares are either retired or held in the company’s treasury stock. Either way, there’s no voting right for these shares.
    - salawat 4y ago
      Again, this decreases actionable accountability to the external world. This should make it clear why stock buybacks would be preferred. Fewer people with standing to sue if they don't agree with management's direction.
      - s1artibartfast 4y ago
        so more shares is more accountable? I'm not sure how you get that more shares means more owners. Doesn't really seem like the limiting factor.
- Rury 4y ago
  Nothing, except for well... many investors aren't rational, or at the very least, they operate on other rationale. And because of this, it's entirely possible the stock price doesn't actually double in your scenario. However, if didn't, it at least would work positively towards the value metrics of the stock.
- fredophile 4y ago
  There are a few reasons some companies prefer buybacks over dividends. Probably the smallest reason is that buybacks can save investors money on their taxes. A much bigger reason is that buybacks are viewed as one time events. When a company starts paying a dividend investors often expect that dividend to be paid regularly. If the company chooses to stop paying a dividend or decreases the dividend the share price drops. Finally, there is executive compensation. Let's say my compensation package let's me buy shares at $100 each. If the share price is currently $110 and the company does a $10 dividend then the share price goes to $100 and my options are worthless. If the company does a stock buyback then the share price goes up and my options are worth more. As CEO which do you push for?
  - s1artibartfast 4y ago
    I agree that a smart CEO holding options would favor to dividends but don't see how this is an argument against it. It seems that it benefits stockholders and CEOs alike. Stockholders get the same value as a dividend without the immediate taxable income, and CEOs and other option holders like employees get some of the value when their options mature.
    - fredophile 4y ago
      I wasn't arguing against buybacks. I was just giving some reasons buybacks are more popular with some companies than dividends are.
- recursive 4y ago
  Stock price can't double. The amount of cash the company has must decrease by an amount equal to half its market cap. That should do something roughly equivalent to the value of the company.
  - s1artibartfast 4y ago
    The doubling is relative to if they had paid a dividend of the same value. Stock price can double with the same market cap if you reduce the number of outstanding shares by half.
prasadjoglekar 4y ago
Buybacks and dividends both return capital to shareholders. In each case, the board and management are making the conscious choice to return capital rather than reinvest in the business. Mostly because they don't have a good internal investment to make that will generate returns. Investors can diversify and risk allocate for themselves. Dividends are nothing like bond coupons. Coupons are guaranteed, tax treatment for both payor and payee is quite different.
aeternum 4y ago
So by your line of reasoning, a stock split should leash a company and hold them accountable since the cost to acquire or require shares is now much less than before. We don't need the SEC, we just need to force companies to perform stock splits!
- salawat 4y ago
  Voting shares + people active exercising and riding management like no tomorrow. Point I'm making is that you can't declare a mechanism where you gain money but must exit as equivalent to you gain money, but no effect on your position as equivalent things.
  - aeternum 4y ago
    The company purchases the shares from the market so you don't have to sell. What if a company buys back 50% of the shares and simultaneously performs a 1:2 stock split so that there are exactly the same number of shares available?
yucky 4y ago
If a company believes its own stock to be undervalued, why not invest in themselves by buying it? In that case it's an investment, vs a dividend which is not.
travisjungroth 4y ago
> Stock buybacks are therefore not equivalent in any way to paying of dividends. They are extremely similar. The differences are around timeline and tax advantages, none of which you covered. In a buyback, your percent ownership in the company will go up and the price will go up (barring other factors). You can sell some stock to keep your percentage flat and get some cash, making it like a dividend. Or, you can make a dividend like a buyback by reinvesting the dividend. Your percentage of ownership will go up.
- salawat 4y ago
  If and only if people previously holding stock sell back to the company. Regardless, you realize no gains if you do not exit your interest on that stock. The exit is non-optional, and often not reenterable from.
  - travisjungroth 4y ago
    > If and only if people previously holding stock sell back to the company. This is trivial. They just buy it on the open market. This is public stock, people are always buying and selling. > Regardless, you realize no gains if you do not exit your interest on that stock. This is the big advantage of buybacks for shareholders! It is taxed as capital gains, and you can completely defer taxes by not selling. And "exit your interest" makes it sound like you have to sell all of it. You can just sell a small portion to make it like a dividend. You don't seem to be getting this. > The exit is non-optional, and often not reenterable from. Nonsense. It is optional. You can choose to keep it as stock or turn it into cash. And you can totally re enter. It's public stock. Are you mixing up publicly traded stock buybacks with something in private companies?

s1artibartfast 4y ago

If a company does a buyback, shouldn't you still have a higher percent control if you dont sell any of your holdings, and the same % control if you do sell the dividend equivalent Imagine a company has 100 shares and I own 10. If they company buys back 50, the stock price will double, and my % ownership goes up from 10 to 20%. I can sell down to 10%, the same control I had before to take my profits. What am I missing here?

deleted 4y ago
[deleted]
NickNameNick 4y ago
Wouldn't that friend on who's voting the stock that company holds in itself? Is it the CEO? The board? The chairman? Or are the stocks cancelled from the total?
- s1artibartfast 4y ago
  I can't parse all of your question. What friend? To answer what I think you are asking, the buyback shares are usually destroyed. It isn't like the CEO gets to vote with them instead of shareholders. In fact, they company does not destroy the shares, and holds on to them for whatever reason, they do not get to vote with them. those are called "treasury stock". Apple is a classic case. Around 2010, the company had 26 billion shares outstanding. They've spent the last decade buying them back, and now have about 16 billion shares. This contributes significantly to the increase in stock price. The portion of the company 1 share represents is 60% larger today than it was in 2010 because there are fewer of them
- realityking 4y ago
  Bought back shares are either retired or held in the company’s treasury stock. Either way, there’s no voting right for these shares.
  - salawat 4y ago
    Again, this decreases actionable accountability to the external world. This should make it clear why stock buybacks would be preferred. Fewer people with standing to sue if they don't agree with management's direction.
    - s1artibartfast 4y ago
      so more shares is more accountable? I'm not sure how you get that more shares means more owners. Doesn't really seem like the limiting factor.
Rury 4y ago
Nothing, except for well... many investors aren't rational, or at the very least, they operate on other rationale. And because of this, it's entirely possible the stock price doesn't actually double in your scenario. However, if didn't, it at least would work positively towards the value metrics of the stock.
fredophile 4y ago
There are a few reasons some companies prefer buybacks over dividends. Probably the smallest reason is that buybacks can save investors money on their taxes. A much bigger reason is that buybacks are viewed as one time events. When a company starts paying a dividend investors often expect that dividend to be paid regularly. If the company chooses to stop paying a dividend or decreases the dividend the share price drops. Finally, there is executive compensation. Let's say my compensation package let's me buy shares at $100 each. If the share price is currently $110 and the company does a $10 dividend then the share price goes to $100 and my options are worthless. If the company does a stock buyback then the share price goes up and my options are worth more. As CEO which do you push for?
- s1artibartfast 4y ago
  I agree that a smart CEO holding options would favor to dividends but don't see how this is an argument against it. It seems that it benefits stockholders and CEOs alike. Stockholders get the same value as a dividend without the immediate taxable income, and CEOs and other option holders like employees get some of the value when their options mature.
  - fredophile 4y ago
    I wasn't arguing against buybacks. I was just giving some reasons buybacks are more popular with some companies than dividends are.
recursive 4y ago
Stock price can't double. The amount of cash the company has must decrease by an amount equal to half its market cap. That should do something roughly equivalent to the value of the company.
- s1artibartfast 4y ago
  The doubling is relative to if they had paid a dividend of the same value. Stock price can double with the same market cap if you reduce the number of outstanding shares by half.

prasadjoglekar 4y ago

Buybacks and dividends both return capital to shareholders. In each case, the board and management are making the conscious choice to return capital rather than reinvest in the business. Mostly because they don't have a good internal investment to make that will generate returns. Investors can diversify and risk allocate for themselves. Dividends are nothing like bond coupons. Coupons are guaranteed, tax treatment for both payor and payee is quite different.

aeternum 4y ago

So by your line of reasoning, a stock split should leash a company and hold them accountable since the cost to acquire or require shares is now much less than before. We don't need the SEC, we just need to force companies to perform stock splits!

salawat 4y ago
Voting shares + people active exercising and riding management like no tomorrow. Point I'm making is that you can't declare a mechanism where you gain money but must exit as equivalent to you gain money, but no effect on your position as equivalent things.
- aeternum 4y ago
  The company purchases the shares from the market so you don't have to sell. What if a company buys back 50% of the shares and simultaneously performs a 1:2 stock split so that there are exactly the same number of shares available?

yucky 4y ago

If a company believes its own stock to be undervalued, why not invest in themselves by buying it? In that case it's an investment, vs a dividend which is not.

travisjungroth 4y ago

> Stock buybacks are therefore not equivalent in any way to paying of dividends. They are extremely similar. The differences are around timeline and tax advantages, none of which you covered. In a buyback, your percent ownership in the company will go up and the price will go up (barring other factors). You can sell some stock to keep your percentage flat and get some cash, making it like a dividend. Or, you can make a dividend like a buyback by reinvesting the dividend. Your percentage of ownership will go up.

salawat 4y ago
If and only if people previously holding stock sell back to the company. Regardless, you realize no gains if you do not exit your interest on that stock. The exit is non-optional, and often not reenterable from.
- travisjungroth 4y ago
  > If and only if people previously holding stock sell back to the company. This is trivial. They just buy it on the open market. This is public stock, people are always buying and selling. > Regardless, you realize no gains if you do not exit your interest on that stock. This is the big advantage of buybacks for shareholders! It is taxed as capital gains, and you can completely defer taxes by not selling. And "exit your interest" makes it sound like you have to sell all of it. You can just sell a small portion to make it like a dividend. You don't seem to be getting this. > The exit is non-optional, and often not reenterable from. Nonsense. It is optional. You can choose to keep it as stock or turn it into cash. And you can totally re enter. It's public stock. Are you mixing up publicly traded stock buybacks with something in private companies?