Comment by helsinkiandrew
16 hours ago
> Share buybacks allow companies to reward executives directly as their compensation is tied to stock price.
To be fair share owners also like the stock price to go higher, they also like dividends (and higher dividends would tend to drive the stock price higher too), but an X% increase in share price caused by buybacks is favoured over an X% dividend because it isn’t immediately taxed.
My understanding is that executives prefer buybacks because they mostly are compensated with stock options, which don't pay dividends (until exercised) but which appreciate disproportionately from buybacks.
Dividends actually directly lower the stock price. Keep an eye on your portfolio when your holdings go ex-div -- the price falls because it no longer includes that cashflow.
Also, I believe in the US ordinary dividends are taxed at the income tax rate which is much higher than the capital gains rate.
No, most dividends are "qualified" and taxed at the long term capital gains rate, assuming you've held the underlying for a decent amount of time.
Still, they're taxed, whereas buybacks allow the shareholders to control exactly when they take income.
Also buybacks will tend to select for frequently traded shares with high cost basis, further reducing total taxes and selecting for longer term shareholders. They really are just better than dividends in every way.
It doesn’t make sense to compare ordinary dividends to capital gains - either compare ordinary to short term gains or qualified to long term gains.
with everything at record highs we'll see if we continue to prefer inflated share price over reinvestment in the business or increased dividends.