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The answer is far simpler and less cynical. The business has cash saved up. It has 3 options. Give the cash to the business’ owners, spend the cash on improv

The answer is far simpler and less cynical. The business has cash saved up. It has 3 options. Give the cash to the business’ owners, spend the cash on improving the business (such as R&D), or keep the cash sitting around. And businesses often times do all 3 in varying amounts. However, for a publicly listed business, giving cash to the business’s shareholders is taxable income. An equivalent way to reward shareholders without requiring shareholders to pay tax now is to buy outstanding shares and hence causing the price to go up because the supply of shares relative to demand goes down. Also, if a publicly listed business awards equity to employees, such as RSUs which tech companies famously do, then buying back shares simply negates the effect of that since giving the employee equity increased the supply of shares relative to demand.

SamReidHughes 3y ago
Long term, buybacks aren't about supply/demand -- they increase a share's percentage ownership of the business.
- tw8345 3y ago
  Primarily they are used to reward executives who have options and therefore get a disproportionate gain on the buyback.
  - lotsofpulp 3y ago
    Please explain the math that concludes someone that holds [stock] options disproportionately gains from a business buying back shares (presumably relative to other shareholders).
    - 10u152 3y ago
      There isn’t any. The poster above you is incorrect.
    - blackeyeblitzar 3y ago
      It happens when they have a pay package that is dependent on moving the share price. So it’s not about stock market math but the explicit agreement between the company and the executive.
      - lotsofpulp 3y ago
        Pay packages are incorporated into income statements. Reducing cash spend now in lieu of equity is priced in. An executive is also just an employee. So I am not sure what you are implying there. If it’s malfeasance between the shareholders, board of directors, and c suite, you will have to be more explicit.
    - tgma 3y ago
      The question has a flawed premise. An option/RSU holder is not a shareholder before they exercise their options or vest their RSUs, thus should not be getting a dividend allocation (i.e. a non-zero allocation to an option holder is a disproportionate allocation). In a buyback scenario, you are essentially issuing a dividend not to the current shareholders, but splitting that cash among all authorized and not-yet-issued shares (incl. RSUs and options).
      - jldugger 3y ago
        I don't know about you, but I get dividend equivalents when RSUs vest to cover precisely this scenario.
        tgma 3y ago
        When RSU vests, it is no longer an RSU. Not sure why you would call it “dividend-equivalent” as they are regular dividends at that point (unless your broker lends them out in which case you might get substitute payments in lieu.)
        jldugger 3y ago
        I'm just using the terms that show up on my etrade plan confirmations. In lieu of actual dividends, the terms of the grant say the company will issue RSU dividend equivalents, commensurate with what the dividend would have been had it been purchased on the grant date (or something similar, I don't have that paperwork at hand).
        tgma 3y ago
        I suppose that might be some special amendment in your specific RSU plan electing to pay some cash on top, not inherent to the nature of an RSU, which is certainly not a stock (i.e. on the corporate financial reports that payment would not be showing up as a dividend).
      - lotsofpulp 3y ago
        > thus should not be getting a dividend allocation (i.e. a non-zero allocation to an option holder is a disproportionate allocation) This is ignoring the fact that existing shareholders benefited by not having to pay the employees more cash in lieu of the options/RSU. For example, existing shareholders could have benefited from higher dividends due to higher cash flow, or greater appreciation in stock price due to bigger stock buybacks due to higher cash flow. The two effects should cancel each other out.
  - astrange 3y ago
    They have RSUs.

SamReidHughes 3y ago

Long term, buybacks aren't about supply/demand -- they increase a share's percentage ownership of the business.

tw8345 3y ago
Primarily they are used to reward executives who have options and therefore get a disproportionate gain on the buyback.
- lotsofpulp 3y ago
  Please explain the math that concludes someone that holds [stock] options disproportionately gains from a business buying back shares (presumably relative to other shareholders).
  - 10u152 3y ago
    There isn’t any. The poster above you is incorrect.
  - blackeyeblitzar 3y ago
    It happens when they have a pay package that is dependent on moving the share price. So it’s not about stock market math but the explicit agreement between the company and the executive.
    - lotsofpulp 3y ago
      Pay packages are incorporated into income statements. Reducing cash spend now in lieu of equity is priced in. An executive is also just an employee. So I am not sure what you are implying there. If it’s malfeasance between the shareholders, board of directors, and c suite, you will have to be more explicit.
  - tgma 3y ago
    The question has a flawed premise. An option/RSU holder is not a shareholder before they exercise their options or vest their RSUs, thus should not be getting a dividend allocation (i.e. a non-zero allocation to an option holder is a disproportionate allocation). In a buyback scenario, you are essentially issuing a dividend not to the current shareholders, but splitting that cash among all authorized and not-yet-issued shares (incl. RSUs and options).
    - jldugger 3y ago
      I don't know about you, but I get dividend equivalents when RSUs vest to cover precisely this scenario.
      - tgma 3y ago
        When RSU vests, it is no longer an RSU. Not sure why you would call it “dividend-equivalent” as they are regular dividends at that point (unless your broker lends them out in which case you might get substitute payments in lieu.)
        jldugger 3y ago
        I'm just using the terms that show up on my etrade plan confirmations. In lieu of actual dividends, the terms of the grant say the company will issue RSU dividend equivalents, commensurate with what the dividend would have been had it been purchased on the grant date (or something similar, I don't have that paperwork at hand).
        tgma 3y ago
        I suppose that might be some special amendment in your specific RSU plan electing to pay some cash on top, not inherent to the nature of an RSU, which is certainly not a stock (i.e. on the corporate financial reports that payment would not be showing up as a dividend).
    - lotsofpulp 3y ago
      > thus should not be getting a dividend allocation (i.e. a non-zero allocation to an option holder is a disproportionate allocation) This is ignoring the fact that existing shareholders benefited by not having to pay the employees more cash in lieu of the options/RSU. For example, existing shareholders could have benefited from higher dividends due to higher cash flow, or greater appreciation in stock price due to bigger stock buybacks due to higher cash flow. The two effects should cancel each other out.
- astrange 3y ago
  They have RSUs.