Comment by ygouzerh

10 hours ago

From the company perspective, performing buyback when market is high is just throwing cash by the windows to over-priced shares. If they wanted to distribute cash, they could just use dividends

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ygouzerh

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articulatepang  9 hours ago

Three things:

1. From the perspective of shareholders, and for the moment ignoring taxes, buybacks and dividends are exactly economically equivalent. If a dividend happens, you get some cash. If a buyback happens, the value of your shares goes up. Crucially, the amount by which each share's price goes up is equal to what the per-share dividend would have been. It's a useful exercise to work this out and convince yourself that it's true.

2. Now let's stop ignoring taxes. If a dividend happens, you get taxed that year. If the value of your shares goes up, you don't get taxed that year. Instead, you get taxed whenever you sell, which might be later when you retire and are in a lower tax bracket, or after a period of some years when you get a lower capital gains tax rate.

3. Now let's think about the effect of dividends vs buybacks on the allocation of your portfolio as a shareholder. Neither changes the total value of your portfolio -- that was point number 1, plus just plain old conservation of dollars, modulo taxes -- but a dividend increases the proportion of your investment that's in cash, while a buyback keeps it constant. Let's say you auto-invest all dividends in the S&P 500 or equivalent index fund. Then dividends reduce your ownership stake in the company, while buybacks keep it constant.

For these reasons, most investors prefer (or ought to prefer) buybacks: they have the same economic effect as dividends but allow you to defer taxes to whenever is optimal for you. Also, and this is a smaller point, if a company does a dividend then you have to actively do something (that is, buy stock) in order to maintain the same proportion of your portfolio in that company. In other words, if you want 10% of your savings to be in X, and they do a dividend, then you have to take the cash and buy shares of X. The reason this is a smaller point is that at least in theory you can get your brokerage to do this for you automatically.

There are some nuances where point number 1 fails to hold: signaling, bad execution of the buybacks, and principal-agent conflicts. The big example of that final point is executive compensation tied to specific share prices. I'm not an expert in this area so I don't know, off the top of my head, if there's real evidence either way that this effect is very large, but it's one that people will bring up so everyone who thinks about this ought to know about it.

  • bruce343434  5 hours ago

    > If the value of your shares goes up, you don't get taxed that year. Instead, you get taxed whenever you sell, which might be later when you retire and are in a lower tax bracket, or after a period of some years when you get a lower capital gains tax rate.

    This is actually not true in the Netherlands, which taxes unrealized gains on wealth. Quite unique. But NL also features a dividend tax, which politicians tried to get rid off but didn't succeed because it was such an unpopular plan.

  • mdemare  8 hours ago

    This is not quite correct. If a dividend happens, the market capitalisation drops by the amount of the dividend, the number of shares remains constant, so the share price dips by the amount of the dividend per share. All investors get the dividend.

    If a buyback happens, the market capitalisation drops by the amount of the buyback, and the number of shares drops by the same ratio, keeping the share price initially constant. The money goes to the investors who sell.

    Buybacks are nevertheless good for investors who hold. They now have shares in a company whose market cap is 100% growing enterprise, instead of 90% enterprise and 10% bag of money. That means that if the company keeps doing well, the share price will increase faster than it would have done otherwise (it will also drop faster - it's no longer anchored to an inert pile of cash).

    • articulatepang  7 hours ago

      > The money goes to the investors who sell.

      The investors who sell are wealthier by amount $X because now they have fewer shares and more dollars.

      The investors who don't sell are wealthier by the same amount $X because the shares they kept are worth more, because prices go up.

      > keeping the share price initially constant. This statement is definitely incorrect, unless you're being very technicaly and pedantic about "initially". You can think about it theoretically or you can look at empirical evidence. It is well-supported empirically that share prices go up after buybacks, and in fact they do so quantitatively by exactly the amount necessary for the equation implied above to hold.

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  • tripledry  9 hours ago

    > In other words, if you want 10% of your savings to be in X, and they do a dividend, then you have to take the cash and buy shares of X.

    Wouldn't the inverse of this be true in buybacks though? If it's economically equivalent then buyback should increase the price and similarly increase the proportion of X in your portfolio - which would force you to rebalance (might have tax implications).

    Generally agree with the main point.

rapidaneurism  9 hours ago

Dividends and capital gains have different treatment in a number of tax codes. In the UK for example when you have high income the dividend marginal tax is 39.35% but CGT only 24% with a higher tax free allowance (500 for dividends 3000 for cgt)

xmprt  10 hours ago

> to be executed by 31 December 2028

So I don't think it's going to be executed at the absolute peak. But it does imply that the finance people in ASML believe that the stock is undervalued even if the market as a whole is at all time highs.