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Can someone explain to me the theory of stock buybacks? How is this not just financial engineering? How are you meant to differentiate companies who’s stock goe

by cced 2y ago

Can someone explain to me the theory of stock buybacks? How is this not just financial engineering? How are you meant to differentiate companies who’s stock goes up because they’ve been productive and made great products from those that increase their stock prices using buybacks? Are there rules against taking out loans and using them to perform stock buybacks?

bombcar 2y ago
Stock buybacks are mathematically identical to dividends if you work it out. And yes, people track that, and yes taking loans to pay dividends is a favorite trick of dying companies.
- darkfloo 2y ago
  Do you have to pay taxes on dividend under American law ? If so I guess that makes stock buyback better from a point of view of shareholders
  - bluGill 2y ago
    You pay taxes in Dividends, which is one reason shareholders generally don't like them. A lot of shareholders are also in the savings phase of their life - they are working some other job and don't need the income from Dividends yet and so getting a dividend is a bad thing as it is more money they have to invest (particularly if you have to pay for each trade which is common). Shareholders who are retired like dividends because it is a simple paycheck without needing to sell their shares and they would be paying those taxes anyway.
- MereInterest 2y ago
  Aren’t they taxed differently, though? To my knowledge, dividends are taxed as ordinary income, whereas sales following a stock buyback may be taxed as capital gains (if they were held long enough before that point).
  - refurb 2y ago
    If you're talking about the US, then no, dividends are given special tax treatment at a reduced rate if they are "qualified dividends". If they aren't, then yes, they are taxed as regular income.
  - teraflop 2y ago
    "Qualified" dividends from long-term-held stocks are taxed in the same way as long-term capital gains.
    - triceratops 2y ago
      You only have to hold a stock for 60 days to get qualified dividends. For long term gains it's a year.
  - triceratops 2y ago
    Rich people borrow against appreciated assets. They don't sell and incur capital gains tax. That's why company leadership loves buybacks. Ordinary people have to sell assets to take advantage of appreciation. So unless they can time sales to optimize taxes - really only an option for retirees - they might as well get regular dividends.
    - lordfrito 2y ago
      > Ordinary people have to sell assets to take advantage of appreciation Not entirely true.. Ordinary people can take advantage of appreciation of their home value via a standard home equity loan.
      - triceratops 2y ago
        No one's talking about houses here. I thought that was obvious. Also rich people get way, way lower interest rates borrowing against their assets than us poors do on HELOCs.
        2y ago
- FireBeyond 2y ago
  This makes no sense. A dividend is more akin to an annuity, paying out periodically. Stock buybacks are cashing in your chips, a one-off payment.
thrance 2y ago
Stock buybacks used to be illegal in the States up until 1982. You can thank Raegan for that too.
- refurb 2y ago
  > Stock buybacks used to be illegal in the States up until 1982. You can thank Raegan for that too This is not true, but seems to come up a lot. I guess it makes for one of those fun "internet facts" that people like to repeat without any investigation. Bonus points for blaming Reagan. Stock buybacks were not illegal before 1982. If you sit down even think through it, it doesn't even make sense they were illegal. Just like issuing new shares (or doing a stock split), companies have legitimate business needs to buy back stock (reduce the quantity of outstanding shares). What happened in 1982 was that the government made Rule 10b-18, which outlined the "safe harbor" requirements for stock buybacks, where if followed, the company could not be found liable for stock manipulation. https://www.skadden.com/-/media/files/publications/2020/03/trading-issues-arising-out-of-market-disruptions/rule_10b_18_safe_harbors.pdf https://www.skadden.com/-/media/files/publications/2020/03/t... So stock buy backs were legal before 1982, but companies faced a risk of stock manipulation if they were reckless in how they did it.
  - naasking 2y ago
    > So stock buy backs were legal before 1982, but companies faced a risk of stock manipulation if they were reckless in how they did it. Sounds like a much better state of affairs.
    - refurb 2y ago
      Really? You think it's bad that the government is explicit in its rules? I think that's a good thing. I'd rather have it be clear to all parties what is acceptable and what isn't, rather that a murky legal framework where you never know if you're breaking the law.
      - naasking 2y ago

by cced 2y ago

bombcar 2y ago

Stock buybacks are mathematically identical to dividends if you work it out. And yes, people track that, and yes taking loans to pay dividends is a favorite trick of dying companies.

darkfloo 2y ago
Do you have to pay taxes on dividend under American law ? If so I guess that makes stock buyback better from a point of view of shareholders
- bluGill 2y ago
  You pay taxes in Dividends, which is one reason shareholders generally don't like them. A lot of shareholders are also in the savings phase of their life - they are working some other job and don't need the income from Dividends yet and so getting a dividend is a bad thing as it is more money they have to invest (particularly if you have to pay for each trade which is common). Shareholders who are retired like dividends because it is a simple paycheck without needing to sell their shares and they would be paying those taxes anyway.
MereInterest 2y ago
Aren’t they taxed differently, though? To my knowledge, dividends are taxed as ordinary income, whereas sales following a stock buyback may be taxed as capital gains (if they were held long enough before that point).
- refurb 2y ago
  If you're talking about the US, then no, dividends are given special tax treatment at a reduced rate if they are "qualified dividends". If they aren't, then yes, they are taxed as regular income.
- teraflop 2y ago
  "Qualified" dividends from long-term-held stocks are taxed in the same way as long-term capital gains.
  - triceratops 2y ago
    You only have to hold a stock for 60 days to get qualified dividends. For long term gains it's a year.
- triceratops 2y ago
  Rich people borrow against appreciated assets. They don't sell and incur capital gains tax. That's why company leadership loves buybacks. Ordinary people have to sell assets to take advantage of appreciation. So unless they can time sales to optimize taxes - really only an option for retirees - they might as well get regular dividends.
  - lordfrito 2y ago
    > Ordinary people have to sell assets to take advantage of appreciation Not entirely true.. Ordinary people can take advantage of appreciation of their home value via a standard home equity loan.
    - triceratops 2y ago
      No one's talking about houses here. I thought that was obvious. Also rich people get way, way lower interest rates borrowing against their assets than us poors do on HELOCs.
      - 2y ago
FireBeyond 2y ago
This makes no sense. A dividend is more akin to an annuity, paying out periodically. Stock buybacks are cashing in your chips, a one-off payment.

thrance 2y ago

Stock buybacks used to be illegal in the States up until 1982. You can thank Raegan for that too.

refurb 2y ago
> Stock buybacks used to be illegal in the States up until 1982. You can thank Raegan for that too This is not true, but seems to come up a lot. I guess it makes for one of those fun "internet facts" that people like to repeat without any investigation. Bonus points for blaming Reagan. Stock buybacks were not illegal before 1982. If you sit down even think through it, it doesn't even make sense they were illegal. Just like issuing new shares (or doing a stock split), companies have legitimate business needs to buy back stock (reduce the quantity of outstanding shares). What happened in 1982 was that the government made Rule 10b-18, which outlined the "safe harbor" requirements for stock buybacks, where if followed, the company could not be found liable for stock manipulation. https://www.skadden.com/-/media/files/publications/2020/03/trading-issues-arising-out-of-market-disruptions/rule_10b_18_safe_harbors.pdf https://www.skadden.com/-/media/files/publications/2020/03/t... So stock buy backs were legal before 1982, but companies faced a risk of stock manipulation if they were reckless in how they did it.
- naasking 2y ago
  > So stock buy backs were legal before 1982, but companies faced a risk of stock manipulation if they were reckless in how they did it. Sounds like a much better state of affairs.
  - refurb 2y ago
    Really? You think it's bad that the government is explicit in its rules? I think that's a good thing. I'd rather have it be clear to all parties what is acceptable and what isn't, rather that a murky legal framework where you never know if you're breaking the law.
    - naasking 2y ago