4 ms·

Buybacks are just a more tax-efficient way to issue dividends to shareholders (dividend issuance is a taxable event and at short-term rates, buybacks raise the

by necubi 1y ago

Buybacks are just a more tax-efficient way to issue dividends to shareholders (dividend issuance is a taxable event and at short-term rates, buybacks raise the stock price and those gains aren't taxable until you sell, at which point it may be long-term cap gains). It's reasonable to be upset about the fact that this is arguably a tax dodge! But all of the other criticism of buybacks apply equally to dividends which no one seems to get upset about. Fundamentally this is the corporation saying it doesn't have a market-beating way to reinvest this capital, and it's giving the money back to its owners to more productively invest.

missedthecue 1y ago
But the buyback involves buying from sellers. Why don't the sellers of the shares owe tax? Don't see how that's a tax-dodge. The fundamental purpose of a buyback is not to raise the stock price. The purpose of a buyback is to reduce the amount of outstanding shares, which makes every existing owner own an increased percentage. If a company buys back 10% of its stock, each long term shareholder now owns 10% more of the company. Over the long term, steady buybacks increase shareholder value this way, but the purpose of it isn't to slam the order book and juice the price. That's counterproductive, because you'll buy fewer shares at higher prices, and within a trading day, the market will push the price back to normal anyway.
- deleted 1y ago
  [deleted]
- NoahZuniga 1y ago
  capital gains tax (selling for a higher price) is lower than income tax (getting dividends)
  - bcrosby95 1y ago
    You're comparing apples to oranges. At least in the US, both capital gains an dividends have lower tax rate carve outs if you own the stock for > 1 year.
  - missedthecue 1y ago
    Unless you're day trading, dividends are generally taxed at capital gains rates for most publicly traded companies in America (REITs and K-1 partnerships get worse tax treatment at the point of distribution). You don't even need to hold it for a year. Could be different in other nations.
- kingstnap 1y ago
  Slight correction. If they buy back x, it strengthens shares by 1/(1-x) So if they buy back 50%, remaining shareholders have 2x ownership.
- ninkendo 1y ago
  > The fundamental purpose of a buyback is not to raise the stock price. Make up whatever nonsense you want about the “fundamental purpose” of something, it doesn’t matter. The purpose of a system is what it does: https://en.m.wikipedia.org/wiki/The_purpose_of_a_system_is_what_it_does https://en.m.wikipedia.org/wiki/The_purpose_of_a_system_is_w... Stock buybacks increase share price. There’s no reason to look any farther than that. The purpose of stock buybacks is what stock buybacks do.
  - missedthecue 1y ago
    They reduce sharecount. Not all buybacks increase share price. I can give you a thousand examples of massive buybacks that happened before the stock dropped considerably. But all reduce sharecount.
    - araes 1y ago
      That's usually long term. Searching on the subject of "buybacks where share price decresed", Google returns Merck as an example (reffing Harvard Business Review), which actually works quite well to illustrate. The HBR article even notes the main strategy "historically, companies that bought back their own shares have posted immediate returns between two and 12 percentage points above the market average" "Merck's stock price dropped after a major buyback announcement when investors focused on expiring patents and a drying drug pipeline" Except: Feb. 23, 2000, NYT, "Merck & Company, the No. 1 United States drugmaker, will buy back as much as $10 billion of its shares, which have fallen 18 percent this month." (Closest share price I can grab is 2/25/2000 at $57.39) Share price then climbs steadily (tiny drop in July) up to a max at 12/29/2000 of $89.27 before finally crashing. The first example Google returns is full of info on the stock behavior that makes it look like the stock buyback did not initially jack the price. Owners had 10 months to pull in a 55% share price increase before it crashed. And they floated through the 2000 March 10 bubble popping until the stock market really started deflating in 2001.
- derf_ 1y ago
  > Why don't the sellers of the shares owe tax? They do, but it is only paid by the people who took the money (instead of being forced to do so), and, more importantly, only on the difference from what they paid. If you pay out $1mln of dividends, then everyone collectively owes (let's say at a qualified rate of 20%) a total of $200k. If you buy 20,000 shares from one guy at $50/share, you returned the same $1mln of cash to shareholders, but if he bought last year for $45, he only owes (let's say at a long-term capital gains rate of 20%) a total of $20k in taxes.
beezle 1y ago
Until the mid-80s they were illegal except in a handful of unique cases. This is not just about div vs buyback taxes. Though there is no immediate mathematical economical benefit to the shareholders who remain, the markets have proven that the stock price will rise (and likely executive compensation) as a result of reduced sharecount vs the same demand (though possibly more demand as other companies engage in the same behavior). Much of the gains in the stock market the past decade or so are simply the result of a greatly reduced number of shares available to purchase - as a result of buybacks, takeovers and going private (there are roughly 1/2 the number of listed companies today as in the 1990s).
echelon 1y ago
> Fundamentally this is the corporation saying it doesn't have a market-beating way to reinvest this capital, and it's giving the money back to its owners to more productively invest. Before tech companies demonstrated the principle of infinite growth, the purpose of a company was to generate revenue (paid as dividends) for its shareholders. So much growth hasn't really been possible before. If a company can keep growing and investing infinitely, one might argue that it's time for the DOJ / FTC to step in and stop them from eating the entire business sector. That's the sign of a monopoly pushing into every market like an invasive species and making the existing businesses in those markets go extinct. Kind of like how tech companies are now movie companies, music companies, game companies, pharmaceuticals, grocery stores...
- drewbug01 1y ago
  > Before tech companies demonstrated the principle of infinite growth Perhaps we have different definitions of “infinite,” but either way I’m pretty sure nobody’s demonstrated that yet.
deleted 1y ago
[deleted]
mullingitover 1y ago
> buybacks raise the stock price and those gains aren't taxable until you sell They temporarily raise the stock price for the people who are the counterparties to the stock purchase, but isn't that also creating a taxable event for them? Once the buyback is done, what's keeping that share price from sliding right back down to earth? The shareholders who support the company and hold watch a group who bet against the company by selling shares reap a profit, in a tax advantaged way, while their own dividends are effectively stolen. The buybacks are actually a crap deal for anyone who is a responsible buy and hold investor.
- missedthecue 1y ago
  The dividends aren't stolen. A company with 1m shares outstanding buys back 100k of them. Now there are 900k shares outstanding. All long term shareholders who support the company own an extra 10% of the firm with nothing out of pocket. Imagine steady buybacks at reasonable prices over a long period of time... this has an incredible effect. Warren Buffett bought a couple percent of American Express, and now owns 22% of the company despite not buying a share in decades. It really becomes apparent over time. American Express just carefully repurchased shares over the years and Buffett's stake became greater and greater.
  - chronia739 1y ago
    > All long term shareholders who support the company own an extra 10% of the firm with nothing out of pocket. They own an extra 11%. Not 10%. 1/100 versus 1/90
    - Waterluvian 1y ago
      I hate how fractions work this way. We need to call up the math people and ask them to change it.
      - __turbobrew__ 1y ago
        Can you tell them to get rid of compounding interest while they are at it?
shortrounddev2 1y ago
Does "tax-efficient" mean "tax-dodging" here
conradev 1y ago
Fundamentally this is the corporation saying it doesn't have a market-beating way to reinvest this capital Isn’t that the crux of it, though? Running a company into the ground by not investing in growth or R&D? We give tax credits to corporations to incentivize R&D spending
- missedthecue 1y ago
  There aren't always infinity positive return ideas to invest in. Sometimes there really aren't any. Garrett Motion is a company that manufactures turbochargers and sells them to the big three automakers. It's a decently steady and profitable business but it's slowly on the way out. EVs don't need turbochargers. They have a small R&D division looking into EV inverters, and they'll continue to make turbochargers for non-auto applications, but for the most point, they are a melting ice cube and their CEO tells you this in plain terms on earnings calls. But their stock is priced like it too, so they are plowing most of their free cash flow into buying back shares, and it more than offsets the melt. The result? Their shares are steady and up about 95% over the past 5 years despite overall revenue decline across this period. Sure, you could have this sleepy turbocharger factory start investing in real estate, or get into uranium mining, or begin trying to write and sell cloud computing software. But their strategy is to keep making a good product and regularly eat up stock to overcome declining earnings per share, and it's working rather nicely.
- ivewonyoung 1y ago
  That was considered a tax loophole by the last administration so the R&D exception was allowed to expire in 2022 and only recently restored by the new admin.
  - conradev 1y ago
    R&D tax credits did not “expire". Immediate expensing expired in 2022, requiring companies to split credits across multiple years. Multiple attempts since then have tried to restore expensing (often in bipartisan tax packages), but Congress hasn’t passed a permanent fix.
justin66 1y ago
> But all of the other criticism of buybacks apply equally to dividends which no one seems to get upset about. I don't know what planet you're living on, where nobody's ever been upset about dividends.
AtlasBarfed 1y ago
What if the stock buyback is done to trigger stock options with artificial stock price inflation? And maybe I don't understand the stock option game and stock BuyBacks don't count towards the strike price for options. But I doubt it

by necubi 1y ago

missedthecue 1y ago

But the buyback involves buying from sellers. Why don't the sellers of the shares owe tax? Don't see how that's a tax-dodge. The fundamental purpose of a buyback is not to raise the stock price. The purpose of a buyback is to reduce the amount of outstanding shares, which makes every existing owner own an increased percentage. If a company buys back 10% of its stock, each long term shareholder now owns 10% more of the company. Over the long term, steady buybacks increase shareholder value this way, but the purpose of it isn't to slam the order book and juice the price. That's counterproductive, because you'll buy fewer shares at higher prices, and within a trading day, the market will push the price back to normal anyway.

deleted 1y ago
[deleted]
NoahZuniga 1y ago
capital gains tax (selling for a higher price) is lower than income tax (getting dividends)
- bcrosby95 1y ago
  You're comparing apples to oranges. At least in the US, both capital gains an dividends have lower tax rate carve outs if you own the stock for > 1 year.
- missedthecue 1y ago
  Unless you're day trading, dividends are generally taxed at capital gains rates for most publicly traded companies in America (REITs and K-1 partnerships get worse tax treatment at the point of distribution). You don't even need to hold it for a year. Could be different in other nations.
kingstnap 1y ago
Slight correction. If they buy back x, it strengthens shares by 1/(1-x) So if they buy back 50%, remaining shareholders have 2x ownership.
ninkendo 1y ago
> The fundamental purpose of a buyback is not to raise the stock price. Make up whatever nonsense you want about the “fundamental purpose” of something, it doesn’t matter. The purpose of a system is what it does: https://en.m.wikipedia.org/wiki/The_purpose_of_a_system_is_what_it_does https://en.m.wikipedia.org/wiki/The_purpose_of_a_system_is_w... Stock buybacks increase share price. There’s no reason to look any farther than that. The purpose of stock buybacks is what stock buybacks do.
- missedthecue 1y ago
  They reduce sharecount. Not all buybacks increase share price. I can give you a thousand examples of massive buybacks that happened before the stock dropped considerably. But all reduce sharecount.
  - araes 1y ago
    That's usually long term. Searching on the subject of "buybacks where share price decresed", Google returns Merck as an example (reffing Harvard Business Review), which actually works quite well to illustrate. The HBR article even notes the main strategy "historically, companies that bought back their own shares have posted immediate returns between two and 12 percentage points above the market average" "Merck's stock price dropped after a major buyback announcement when investors focused on expiring patents and a drying drug pipeline" Except: Feb. 23, 2000, NYT, "Merck & Company, the No. 1 United States drugmaker, will buy back as much as $10 billion of its shares, which have fallen 18 percent this month." (Closest share price I can grab is 2/25/2000 at $57.39) Share price then climbs steadily (tiny drop in July) up to a max at 12/29/2000 of $89.27 before finally crashing. The first example Google returns is full of info on the stock behavior that makes it look like the stock buyback did not initially jack the price. Owners had 10 months to pull in a 55% share price increase before it crashed. And they floated through the 2000 March 10 bubble popping until the stock market really started deflating in 2001.
derf_ 1y ago
> Why don't the sellers of the shares owe tax? They do, but it is only paid by the people who took the money (instead of being forced to do so), and, more importantly, only on the difference from what they paid. If you pay out $1mln of dividends, then everyone collectively owes (let's say at a qualified rate of 20%) a total of $200k. If you buy 20,000 shares from one guy at $50/share, you returned the same $1mln of cash to shareholders, but if he bought last year for $45, he only owes (let's say at a long-term capital gains rate of 20%) a total of $20k in taxes.

beezle 1y ago

Until the mid-80s they were illegal except in a handful of unique cases. This is not just about div vs buyback taxes. Though there is no immediate mathematical economical benefit to the shareholders who remain, the markets have proven that the stock price will rise (and likely executive compensation) as a result of reduced sharecount vs the same demand (though possibly more demand as other companies engage in the same behavior). Much of the gains in the stock market the past decade or so are simply the result of a greatly reduced number of shares available to purchase - as a result of buybacks, takeovers and going private (there are roughly 1/2 the number of listed companies today as in the 1990s).

echelon 1y ago

> Fundamentally this is the corporation saying it doesn't have a market-beating way to reinvest this capital, and it's giving the money back to its owners to more productively invest. Before tech companies demonstrated the principle of infinite growth, the purpose of a company was to generate revenue (paid as dividends) for its shareholders. So much growth hasn't really been possible before. If a company can keep growing and investing infinitely, one might argue that it's time for the DOJ / FTC to step in and stop them from eating the entire business sector. That's the sign of a monopoly pushing into every market like an invasive species and making the existing businesses in those markets go extinct. Kind of like how tech companies are now movie companies, music companies, game companies, pharmaceuticals, grocery stores...

drewbug01 1y ago
> Before tech companies demonstrated the principle of infinite growth Perhaps we have different definitions of “infinite,” but either way I’m pretty sure nobody’s demonstrated that yet.

deleted 1y ago

[deleted]

mullingitover 1y ago

> buybacks raise the stock price and those gains aren't taxable until you sell They temporarily raise the stock price for the people who are the counterparties to the stock purchase, but isn't that also creating a taxable event for them? Once the buyback is done, what's keeping that share price from sliding right back down to earth? The shareholders who support the company and hold watch a group who bet against the company by selling shares reap a profit, in a tax advantaged way, while their own dividends are effectively stolen. The buybacks are actually a crap deal for anyone who is a responsible buy and hold investor.

missedthecue 1y ago
The dividends aren't stolen. A company with 1m shares outstanding buys back 100k of them. Now there are 900k shares outstanding. All long term shareholders who support the company own an extra 10% of the firm with nothing out of pocket. Imagine steady buybacks at reasonable prices over a long period of time... this has an incredible effect. Warren Buffett bought a couple percent of American Express, and now owns 22% of the company despite not buying a share in decades. It really becomes apparent over time. American Express just carefully repurchased shares over the years and Buffett's stake became greater and greater.
- chronia739 1y ago
  > All long term shareholders who support the company own an extra 10% of the firm with nothing out of pocket. They own an extra 11%. Not 10%. 1/100 versus 1/90
  - Waterluvian 1y ago
    I hate how fractions work this way. We need to call up the math people and ask them to change it.
    - __turbobrew__ 1y ago
      Can you tell them to get rid of compounding interest while they are at it?

shortrounddev2 1y ago

Does "tax-efficient" mean "tax-dodging" here

conradev 1y ago

Fundamentally this is the corporation saying it doesn't have a market-beating way to reinvest this capital Isn’t that the crux of it, though? Running a company into the ground by not investing in growth or R&D? We give tax credits to corporations to incentivize R&D spending

missedthecue 1y ago
There aren't always infinity positive return ideas to invest in. Sometimes there really aren't any. Garrett Motion is a company that manufactures turbochargers and sells them to the big three automakers. It's a decently steady and profitable business but it's slowly on the way out. EVs don't need turbochargers. They have a small R&D division looking into EV inverters, and they'll continue to make turbochargers for non-auto applications, but for the most point, they are a melting ice cube and their CEO tells you this in plain terms on earnings calls. But their stock is priced like it too, so they are plowing most of their free cash flow into buying back shares, and it more than offsets the melt. The result? Their shares are steady and up about 95% over the past 5 years despite overall revenue decline across this period. Sure, you could have this sleepy turbocharger factory start investing in real estate, or get into uranium mining, or begin trying to write and sell cloud computing software. But their strategy is to keep making a good product and regularly eat up stock to overcome declining earnings per share, and it's working rather nicely.
ivewonyoung 1y ago
That was considered a tax loophole by the last administration so the R&D exception was allowed to expire in 2022 and only recently restored by the new admin.
- conradev 1y ago
  R&D tax credits did not “expire". Immediate expensing expired in 2022, requiring companies to split credits across multiple years. Multiple attempts since then have tried to restore expensing (often in bipartisan tax packages), but Congress hasn’t passed a permanent fix.

justin66 1y ago

> But all of the other criticism of buybacks apply equally to dividends which no one seems to get upset about. I don't know what planet you're living on, where nobody's ever been upset about dividends.

AtlasBarfed 1y ago

What if the stock buyback is done to trigger stock options with artificial stock price inflation? And maybe I don't understand the stock option game and stock BuyBacks don't count towards the strike price for options. But I doubt it