4 ms·

If they paid dividends, it would have been returned to the shareholders (both long and short) At the end of the day, buybacks benefit those who tender shares i

by niggler 14y ago

If they paid dividends, it would have been returned to the shareholders (both long and short) At the end of the day, buybacks benefit those who tender shares into the buyback at the expense of the other shareholders (the buyback would have to happen at a price above the market price at the time of the buyback, so that net loss is attributed to people who are still holding the stock.) This would be worthwhile if the company can grow earnings and profits enough to compensate for the short-term expense, but that doesn't happen most of the time. Taking the long view, dell was $15/sh back then. If you just held for 16 years you'd be down nearly $2/sh. If they paid a dividend instead of a buyback, you'd have received at least $20 in dividend during that time (and the stock price, all else equal, would be higher)

shrughes 14y ago
How is this outcome bad?
- niggler 14y ago
  Under the buyback, long-term investors who have held on for the 16 years have lost nearly $2/sh. Under the dividend they would have made at least $18/sh. There's a positive feedback cycle: Companies show a disregard for long-term shareholders; large investors, seeing how they are being ignored, focus on short-term investments; Companies see that investors are interested in the short-term and don't play the long game.
  - rgbrenner 14y ago
    with the buyback, those who did not sell any shares owned a larger percentage of the company than before the buy back. with the buyback, those who sold shares reduced their percentage ownership of the company. If they did not want to receive a larger percentage, then they could have sold a portion of their shares equal to the percentage being repurchased. If they had done that, they would have received what would have been equal to the dividend. In other words, there is no difference between a dividend and a buyback -- they both return money to the shareholders.
    - niggler 14y ago
      That would be true if the buyback happened at a price close to market value. Two things happened: 1) the buybacks had to be higher than market value (reducing value for the residual shares) 2) the performance was weak (amplifying the loss since the share count was reduced)
      - rgbrenner 14y ago
        those points do not change anything. 1) those who refused to resell were implicitly saying their shares were worth more than the buyback price. Else they would have sold. It does not change the fact that they could have received what would have been equal to a dividend if they would have sold a portion of their shares equal to the portion dell wanted to buy back. 2) the performance of Dell in the future is a separate issue from share buybacks. Those who refused to sell their shares thought Dell was worth more than the buyback price -- indicating they expected strong growth in the future. That was a bad investment decision on their part.
schumitsch 14y ago
If you want really want dividends instead of a buyback, just sell your shares in proportion to the percent of the company bought back. It's logically the same thing. In both cases you have the same amount of cash and the same ownership of the company (although, you do have to pay a transaction fee to sell shares).
- niggler 14y ago
  The two things seem the same but are different (as far as taxes are concerned)
  - jaggederest 14y ago
    Not since dividends are treated the same as long term capital gains. Unless you've been holding your shares less than a year, you're fine.
    - niggler 14y ago
      Tendering shares for which you have a capital loss triggers a capital loss event, and the amount that you can take a tax loss is limited by other factors (whereas you have to pay full penalty for gains, for losses there is a limit at the individual level). It's not symmetric
  - Tuna-Fish 14y ago
    They don't "seem the same", they are exactly the same thing. From the shareholder point of view, they are completely equivalent. The only thing that changes is that if you are completely passive about your holdings, buybacks reward you with a larger stake of the company, while dividends reward you with straight up cash. Either way, you can trade one for the other at market price. If you think there is something wrong with stock buybacks that is not also wrong about dividends, you are simply confused.
    - niggler 14y ago
      When you tender, you trigger a taxable event. If you are sitting on a position with a capital loss, to participate in the buyback you have to take a loss. With a dividend, while you take a tax hit for the dividend, your cost basis is adjusted accordingly (so you don't take a capital gains event) which is important if you have a losing position (you are only allowed to take a certain amount of loss in your tax return under certain circumstances, making the buyback unpalatable in the context of a larger return with other sources of capital loss) Try to do your own taxes this year. It's a learning experience.

by niggler 14y ago

shrughes 14y ago

How is this outcome bad?

niggler 14y ago
Under the buyback, long-term investors who have held on for the 16 years have lost nearly $2/sh. Under the dividend they would have made at least $18/sh. There's a positive feedback cycle: Companies show a disregard for long-term shareholders; large investors, seeing how they are being ignored, focus on short-term investments; Companies see that investors are interested in the short-term and don't play the long game.
- rgbrenner 14y ago
  with the buyback, those who did not sell any shares owned a larger percentage of the company than before the buy back. with the buyback, those who sold shares reduced their percentage ownership of the company. If they did not want to receive a larger percentage, then they could have sold a portion of their shares equal to the percentage being repurchased. If they had done that, they would have received what would have been equal to the dividend. In other words, there is no difference between a dividend and a buyback -- they both return money to the shareholders.
  - niggler 14y ago
    That would be true if the buyback happened at a price close to market value. Two things happened: 1) the buybacks had to be higher than market value (reducing value for the residual shares) 2) the performance was weak (amplifying the loss since the share count was reduced)
    - rgbrenner 14y ago
      those points do not change anything. 1) those who refused to resell were implicitly saying their shares were worth more than the buyback price. Else they would have sold. It does not change the fact that they could have received what would have been equal to a dividend if they would have sold a portion of their shares equal to the portion dell wanted to buy back. 2) the performance of Dell in the future is a separate issue from share buybacks. Those who refused to sell their shares thought Dell was worth more than the buyback price -- indicating they expected strong growth in the future. That was a bad investment decision on their part.

schumitsch 14y ago

If you want really want dividends instead of a buyback, just sell your shares in proportion to the percent of the company bought back. It's logically the same thing. In both cases you have the same amount of cash and the same ownership of the company (although, you do have to pay a transaction fee to sell shares).

niggler 14y ago
The two things seem the same but are different (as far as taxes are concerned)
- jaggederest 14y ago
  Not since dividends are treated the same as long term capital gains. Unless you've been holding your shares less than a year, you're fine.
  - niggler 14y ago
    Tendering shares for which you have a capital loss triggers a capital loss event, and the amount that you can take a tax loss is limited by other factors (whereas you have to pay full penalty for gains, for losses there is a limit at the individual level). It's not symmetric
- Tuna-Fish 14y ago
  They don't "seem the same", they are exactly the same thing. From the shareholder point of view, they are completely equivalent. The only thing that changes is that if you are completely passive about your holdings, buybacks reward you with a larger stake of the company, while dividends reward you with straight up cash. Either way, you can trade one for the other at market price. If you think there is something wrong with stock buybacks that is not also wrong about dividends, you are simply confused.
  - niggler 14y ago
    When you tender, you trigger a taxable event. If you are sitting on a position with a capital loss, to participate in the buyback you have to take a loss. With a dividend, while you take a tax hit for the dividend, your cost basis is adjusted accordingly (so you don't take a capital gains event) which is important if you have a losing position (you are only allowed to take a certain amount of loss in your tax return under certain circumstances, making the buyback unpalatable in the context of a larger return with other sources of capital loss) Try to do your own taxes this year. It's a learning experience.