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This doesn't really make sense unless you're making weird assumptions around liquidity/investment that probably don't add up in reality. Most people who invest

This doesn't really make sense unless you're making weird assumptions around liquidity/investment that probably don't add up in reality. Most people who invest in a stock will reinvest dividends, and so a 2% dividend ends up with you holding 2% more of the stock at the same value. A buyback that results in a 2% price increase results in you holding the same # of shares at 2% more value, with the overall market cap the same. As long as you assume the market is fairly efficient and liquid, you can sell your shares, or not, in either case. If instead you choose not to reinvest your dividends, you can also sell off excess value after a buyback (e.g., say "I will hold no more than $1000 and when the value increases beyond that I will sell excess shares to reduce my value to that number", or sell buyback/market cap% of your holdings, or whatever). Ultimately the difference is taxation, where buybacks win out (cap gains, not income). > BBBY bought back 50% of shares over the last 10y and what did that amount to for shareholders in the end? Well, for the shareholders of the 50% that was bought back, probably pretty well I'd assume.

adam_arthur 4y ago
Why would you reinvest dividends blindly rather than investing in whatever is the best opportunity at the time? Highly doubtful that most are reinvesting, as most money is run through managers who will target a balanced portfolio. I certainly don’t blindly DRIP. Your understanding of buybacks is wrong. You can’t “sell off” after the buyback as a buyback is mechanically neutral to share price. Cash holdings of the company go down such that NAV per share is the same after the buyback. It may go up due to sentiment or technical reasons, but not for fundamental reasons. A company buying back their own shares must be judged the same as an investor buying the shares, if a company has a 1% earnings yield and no earnings growth, then a buyback is effectively the same as locking in a 1% annual return on that cash. If the company shrinks, as it did with BBBY, then the buybacks were dilutive. Shareholders would have more per share today if BBBY had sat on that cash rather than buying back. The math is simple, straightforward, and not really subject to debate… I’m describing the mechanics behind it. The realized value of a buyback can only be known with hindsight… you get nothing today. It’s a bet on the future of the company/earnings just as it is when an investor purchases shares. Final note. You will pay capital gains tax on any future stock sales or dividends, so accretive buybacks can only be said to be tax deferred. In the end when you realize the investment you pay tax on that amount, which may or may not be higher tomorrow than it is today.
- joshuamorton 4y ago
  > You can’t “sell off” after the buyback as a buyback is mechanically neutral to share price. Cash holdings of the company go down such that NAV per share is the same after the buyback. It may go up due to sentiment or technical reasons, but not for fundamental reasons. You're right, but you're also wrong, you can't sell off after a buyback because the buyback is the action. You can, however, sell off after a buyback is announced, and in that case the value more or less does go up for fundamental reasons, not in the company, but in the market for the company's shares, since you know there's an increased demand. The idea I was getting at was that you'd target owning the same percent of the company before and after the buyback, which you can calculate at least as of the announcement. Obviously since share prices fluxuate over time, you can't know it in general though. > If the company shrinks, as it did with BBBY, then the buybacks were dilutive. This is equally true with dividends though. If a company bankrupts itself by paying too many dividends, that's also equally bad for shareholders in the long term. Like fundamentally, there is zero difference between the following two situations: 1. A company announces and implements a 1% dividend 2. A company announces a 1% buyback, and every shareholder sells 1% of their holdings to the company. In both cases, the exact same transaction has taken place. Everyone owns the same percentage of the company before and after, and everyone has the same increase or decrease in cash holdings.

adam_arthur 4y ago

Why would you reinvest dividends blindly rather than investing in whatever is the best opportunity at the time? Highly doubtful that most are reinvesting, as most money is run through managers who will target a balanced portfolio. I certainly don’t blindly DRIP. Your understanding of buybacks is wrong. You can’t “sell off” after the buyback as a buyback is mechanically neutral to share price. Cash holdings of the company go down such that NAV per share is the same after the buyback. It may go up due to sentiment or technical reasons, but not for fundamental reasons. A company buying back their own shares must be judged the same as an investor buying the shares, if a company has a 1% earnings yield and no earnings growth, then a buyback is effectively the same as locking in a 1% annual return on that cash. If the company shrinks, as it did with BBBY, then the buybacks were dilutive. Shareholders would have more per share today if BBBY had sat on that cash rather than buying back. The math is simple, straightforward, and not really subject to debate… I’m describing the mechanics behind it. The realized value of a buyback can only be known with hindsight… you get nothing today. It’s a bet on the future of the company/earnings just as it is when an investor purchases shares. Final note. You will pay capital gains tax on any future stock sales or dividends, so accretive buybacks can only be said to be tax deferred. In the end when you realize the investment you pay tax on that amount, which may or may not be higher tomorrow than it is today.

joshuamorton 4y ago
> You can’t “sell off” after the buyback as a buyback is mechanically neutral to share price. Cash holdings of the company go down such that NAV per share is the same after the buyback. It may go up due to sentiment or technical reasons, but not for fundamental reasons. You're right, but you're also wrong, you can't sell off after a buyback because the buyback is the action. You can, however, sell off after a buyback is announced, and in that case the value more or less does go up for fundamental reasons, not in the company, but in the market for the company's shares, since you know there's an increased demand. The idea I was getting at was that you'd target owning the same percent of the company before and after the buyback, which you can calculate at least as of the announcement. Obviously since share prices fluxuate over time, you can't know it in general though. > If the company shrinks, as it did with BBBY, then the buybacks were dilutive. This is equally true with dividends though. If a company bankrupts itself by paying too many dividends, that's also equally bad for shareholders in the long term. Like fundamentally, there is zero difference between the following two situations: 1. A company announces and implements a 1% dividend 2. A company announces a 1% buyback, and every shareholder sells 1% of their holdings to the company. In both cases, the exact same transaction has taken place. Everyone owns the same percentage of the company before and after, and everyone has the same increase or decrease in cash holdings.