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Huh? Buybacks give money to shareholders who sell. Dividends give money to shareholders who don't sell. That's a big difference. Furthermore, the primary re

Huh? Buybacks give money to shareholders who sell. Dividends give money to shareholders who don't sell. That's a big difference. Furthermore, the primary reason stock is worth what it is, originates from actual or potential dividends (if they stopped reinvesting or hoarding) companies (could) pay. That money has to go somewhere. Either it's hoarded or reinvested in infrastructure or spent frivolously on sweetheart contracts to friends of corporate management. But, crucially, without dividends, none of that can be recaptured by current shareholders. In theory, if shareholders of a company wanted an actual, not virtual, dividend, a stable material return on their investment, currently they could force a change in management that would pay out a dividend. In what you propose, that's not an option. The value of a stock without dividends is almost purely speculative: who's going to be holding the stock when the company's assets are liquidated and returned (minus liabilities) to the stockholders, and what those net assets will amount to when the company is voluntarily or involuntarily shut down—neither of which is a particularly good sign for the state of the company when that happens. Doing away with dividends seems like it would lead to more instability: all the craziness of VC-style investing, but for public companies that are no longer early-stage growth. How could you have stable businesses or an economy when stockholders are driven, not by the promise of a share of profits this quarter or even an easily countable number of years from now, but by a share of the company's assets when the company is no longer a viable entity? How are those kinds of shareholders going to make good decisions about corporate governance? I'm mostly on board with the essay, and the need to change things. However, getting rid of dividends (along with buybacks) without radically restructuring everything else... how does that work? How could it? What am I missing?

nostrademons 3y ago
"Buybacks give money to shareholders who sell. Dividends give money to shareholders who don't sell." Interesting to model the effects of that. Buybacks tend to concentrate ownership among the shareholders that are most optimistic about the company's future. Since the only way to take your cash out is to sell, the most marginally-attached shareholders will sell, leaving only the shareholders who believe the company is worth much more in the future. This could have much more dramatic effects on stock price than is financially rational, because it decreases the liquidity of the stock and decreases the pool of people who might sell in response to rational analysis (because they already sold, and their stock is now retained by the corporation itself, which is not a disinterested party). It also increases the ease of corporate governance but decreases the efficiency of it. Buybacks flush out the most marginally-attached shareholders, those most pessimistic about the company, and so they give company management a shareholder population that is largely on-board with company strategy and not inclined to exit, because they've already had plenty of chances to exit. But the whole point of markets is to aggregate the opinions of many independent parties and avoid groupthink. If the shareholder base is self-selecting, it's particularly vulnerable to groupthink, and by definition has a higher opinion of the company's prospects than the market as a whole. Multiplied across thousands of stocks, that probably makes the market less efficient than without buybacks, also congruent with the declining liquidity. We don't observe declining liquidity, but much of that is because of market makers and passive investors that don't have an opinion or vested interest in the future of the stock itself.
kortilla 3y ago
> Buybacks give money to shareholders who sell. Dividends give money to shareholders who don't sell. That's a big difference. This is incorrect. Buybacks appreciate the equity for everyone. The gains are real either way, just one (dividends) is immediately realized and is used to frequently invest in more of the stock. The net effect is exactly the same. One delivers company capital to shareholders in direct cash, the other delivers it to them in increased ownership stakes. The rest of your post is based on your misunderstanding that buybacks only help sellers, so I won’t dig into the details unless you’re still convinced of that.
- harshreality 3y ago
  I wasn't too concerned about secondary effects. Maybe I should have been, but I believe the way you consider it is incomplete as well, failing to account for the reduction in the company's liquid assets (and thus shareholder equity or ability to reinvest assets to grow) due to the buyback. Suppose a company has 1T market cap, 10 billion shares at $100/share, and wants to buy back 1% or 100 million shares for $10 billion. They have a cash hoard of 100 billion, and another 100 billion in other assets. What happens, ignoring stock market changes from the buy back or reaction (i.e. hypothetically, this couldn't happen, but to isolate the effects assume OTC buyback at current market price, and no public announcement)? Before: shareholders get a share of future potential profits. To avoid adding more hypothetical numbers for dividends, I'll simply index this notional dividend stream to 1, or 100%. In parallel they have a claim on the company's assets: $20/share worth. After: shareholders get an increased share of future potential profits: 100/99, or roughly 1% more than without the buyback. In parallel they have a claim on the company's assets, but those assets have dropped the $20/share equity by 5% to $19/share, evaporating $1/share in equity (conveniently in this example, outstanding shares and buyback dollar amount are equal). Furthermore, the company has lost 5% of its assets, and even more than that percentage of its liquid assets, that it could've used to grow the company. What effects dominate? That depends on how investors see future investment by the company as a driver of future profits, doesn't it?

nostrademons 3y ago

"Buybacks give money to shareholders who sell. Dividends give money to shareholders who don't sell." Interesting to model the effects of that. Buybacks tend to concentrate ownership among the shareholders that are most optimistic about the company's future. Since the only way to take your cash out is to sell, the most marginally-attached shareholders will sell, leaving only the shareholders who believe the company is worth much more in the future. This could have much more dramatic effects on stock price than is financially rational, because it decreases the liquidity of the stock and decreases the pool of people who might sell in response to rational analysis (because they already sold, and their stock is now retained by the corporation itself, which is not a disinterested party). It also increases the ease of corporate governance but decreases the efficiency of it. Buybacks flush out the most marginally-attached shareholders, those most pessimistic about the company, and so they give company management a shareholder population that is largely on-board with company strategy and not inclined to exit, because they've already had plenty of chances to exit. But the whole point of markets is to aggregate the opinions of many independent parties and avoid groupthink. If the shareholder base is self-selecting, it's particularly vulnerable to groupthink, and by definition has a higher opinion of the company's prospects than the market as a whole. Multiplied across thousands of stocks, that probably makes the market less efficient than without buybacks, also congruent with the declining liquidity. We don't observe declining liquidity, but much of that is because of market makers and passive investors that don't have an opinion or vested interest in the future of the stock itself.

kortilla 3y ago

> Buybacks give money to shareholders who sell. Dividends give money to shareholders who don't sell. That's a big difference. This is incorrect. Buybacks appreciate the equity for everyone. The gains are real either way, just one (dividends) is immediately realized and is used to frequently invest in more of the stock. The net effect is exactly the same. One delivers company capital to shareholders in direct cash, the other delivers it to them in increased ownership stakes. The rest of your post is based on your misunderstanding that buybacks only help sellers, so I won’t dig into the details unless you’re still convinced of that.

harshreality 3y ago
I wasn't too concerned about secondary effects. Maybe I should have been, but I believe the way you consider it is incomplete as well, failing to account for the reduction in the company's liquid assets (and thus shareholder equity or ability to reinvest assets to grow) due to the buyback. Suppose a company has 1T market cap, 10 billion shares at $100/share, and wants to buy back 1% or 100 million shares for $10 billion. They have a cash hoard of 100 billion, and another 100 billion in other assets. What happens, ignoring stock market changes from the buy back or reaction (i.e. hypothetically, this couldn't happen, but to isolate the effects assume OTC buyback at current market price, and no public announcement)? Before: shareholders get a share of future potential profits. To avoid adding more hypothetical numbers for dividends, I'll simply index this notional dividend stream to 1, or 100%. In parallel they have a claim on the company's assets: $20/share worth. After: shareholders get an increased share of future potential profits: 100/99, or roughly 1% more than without the buyback. In parallel they have a claim on the company's assets, but those assets have dropped the $20/share equity by 5% to $19/share, evaporating $1/share in equity (conveniently in this example, outstanding shares and buyback dollar amount are equal). Furthermore, the company has lost 5% of its assets, and even more than that percentage of its liquid assets, that it could've used to grow the company. What effects dominate? That depends on how investors see future investment by the company as a driver of future profits, doesn't it?