Sometimes it's easiest to illustrate the flaw in a theory by using extreme examples, so please forgive me for the hyperbole. Let's say you have a company with

Sometimes it's easiest to illustrate the flaw in a theory by using extreme examples, so please forgive me for the hyperbole. Let's say you have a company with only $100M in discounted future earnings (and no significant balance sheet assets), but it is trading on the market for $1B. This 10x intrinsic value scenario isn't common in real life but we definitely see examples like it during market bubbles. The company wants to distribute $1M back to shareholders. If it pays a dividend, shareholders receive the full million less taxes - so perhaps $600-750k in their pockets. If on the other hand the company buys back $1M in stock, they are buying 0.1% of $100M in future earnings, or $100k. If my post doesn't make sense, google "Buffett on buybacks." He's written about the subject in a number of his annual letters.