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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.
by 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 agoI 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 agoI wasn't arguing against buybacks. I was just giving some reasons buybacks are more popular with some companies than dividends are.