Comment by mdemare
10 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).
> 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.
The second sentence relies on the assumption of infinitely liquid shares, which isn't compatible with an ever–dwindling number of shares outstanding.