Comment by Tuna-Fish
17 hours ago
4. Those who intend to re-invest all returns in to the stock, who avoid a taxable event when their ownership of the company goes up without having to first pay tax for the dividend.
A stock buyback rewards all stockholders equally. Those who sell, get their reward in cash. Those who do not sell, get their reward in the proportion of their ownership of the company going up.
There is supply and demand to consider. Buybacks create a tendency toward higher share prices, but only while they continue. That demand cuts off when the buybacks stop.
If the buybacks are at a discount to whatever the stock turns out to have been worth at the time, then that benefits all the shareholders. That can be a great use of money for all shareholders.
But buybacks at inflated prices benefit only exiting shareholders. Exiting shareholders tend to include hired management. Of course nobody really knows the valuation that well, so obviously there's a guessing game.
This is pretty hard to argue against for anybody who agrees that valuation is a thing at all.
> Those who intend to re-invest all returns in to the stock
Sell the stock then use the gains to buy the stock? I'm very confused by this.
> without having to first pay tax for the dividend
Long term capital gains and dividends are taxed at the same rate. The only tax-free way to benefit from a higher share price (that I know of) is to borrow against it.
> get their reward in the proportion of their ownership of the company going up.
Which only matters if the company pays dividends, or the shareholders eventually sell.
The company has some money. They choose to return it to shareholders. There are two legal ways to do so: Buy back some stock, or issue a dividend.
Now assume I am a long-term investor, who invested money into a company, and wants to keep all that money in the company, instead of taking money out.
If the company pays a dividend, I can put the money they paid me back into the company, but I have to pay capital income tax on the money in between. If they buy back some stock, I have essentially fully reinvested my money to grow my share of ownership in that company, but I have not paid any tax on this, and will only have to do so at the end. As I get to grow compound interest on my money, I will come out much better in the long term.
The other tax-free way to benefit is to sell while your in the (fairly generous) 0% capital gains bracket
> Those who do not sell, get their reward in the proportion of their ownership of the company going up.
This is incorrect. If the company buys back say $100m worth of its stock, it's true that the individual shares remaining represent a larger fraction of the company, BUT the company itself is worth $100m less after the transaction (because it has spent that $100m on purchase of something that can't be added to the balance sheet - basically incinerated that money from company's point of view, similarly to how paying out dividends is "destroying" money). These two factors cancel out perfectly, and the book value per share remains unchanged.
That's only true if the company pays book value for the shares.
I'm upvoting because you're advancing the discussion for sure.
You're right, I missed that! But, essentially this makes the case for buybacks even worse - paying over book value for shares means that the company is reducing its book value via the buyback. So, it's worth less after the buyback.
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