7 ms·

But dividends also result in a concrete financial reward for all shareholders, yes?

triceratops 11mo ago
> all shareholders That's the key phrase, they benefit all shareholders. Buybacks on the other hand only benefit the following shareholders: 1. those with regularly vesting stock options and stock grants - basically employees. For non-tech companies especially, this only means high-ranking employees 2. those who intend to sell - that is, soon-to-be-ex shareholders 3. those who borrow against their stock - typically high-net-worth individuals who own a lot of the stock Stock buybacks are thus a non-egalitarian way to return profits. To reward all shareholders equally, pay dividends.
- saulpw 11mo ago
  Can't group #2 sell 4% of their holdings, thereby remaining shareholders, and delivering to themselves the tax-advantaged equivalent of a 4% dividend?
  - nyeah 11mo ago
    If I'm reading it right, group #2 plan to sell 100% of their holdings during times of heavy buybacks. I think they intend to benefit as much as possible from whatever price increase might be driven by the buyback demand.
  - terminalshort 11mo ago
    Yes. This is correct. Share buybacks are financially equivalent to a dividend from the company's perspective, and slightly better from the shareholder's perspective because they can choose when to take the dividend and pay capital gains tax instead of income tax on it.
    - triceratops 11mo ago
      Qualified dividends (stock held more than 60 days) and long term capital gains are taxed at the same rate.
      - terminalshort 11mo ago
        Good point, but that only applies to individual, not corporate shareholders.
      - barchar 11mo ago
        At any given point in time for an individual yes, but your cap gains rate can vary substantially over time. Also trusts are taxed fairly punitively. So it's still better for everyone since only those who need or want the income have to take it.
        triceratops 11mo ago
        > Also trusts are taxed fairly punitively That only reinforces my viewpoint that buybacks advantage rich shareholders. > your cap gains rate can vary substantially over time It is 0% (up to like $100k for a couple filing jointly), 15% (up to about $580k), and 20% above that. Income tax has many more brackets than that and they kick in at way lower incomes. It's true that your income can vary substantially over time. It might be nice to do earn all your capital gains and dividends in retirement. You will likely need less income then to live on and can incur $100k/year in gains and dividends tax-free. On the other hand, remaining invested in a stock that does buybacks during your working years also concentrates your risk in that stock. So people will likely sell anyway and take some capital gains to diversify. And finally, if we want companies to improve productivity (read: fewer employees) then we can't solely tax labor to fund everything. We have to tax the part of the pie that's actually growing: this is represented by stock prices and dividends.
        labcomputer 11mo ago
        > On the other hand, remaining invested in a stock that does buybacks during your working years also concentrates your risk in that stock. So people will likely sell anyway and take some capital gains to diversify. This really undercuts your previous argument that only certain classes of shareholders benefit from buybacks. Now you are assuming that everyone falls into one of the classes anyway. So we're back where we started: Buybacks benefit all shareholders equally.
  - triceratops 11mo ago
    > delivering to themselves the tax-advantaged equivalent of a 4% dividend? Long-term gains and qualified dividends (shares held longer than 60 days) are taxed at the same rate. What's the tax advantage here?
    - nradov 11mo ago
      The tax advantage of stock buybacks is that investors aren't forced to immediately realize gains. They have the freedom to time sales to minimize overall income tax liability, for example by harvesting losses in other investments in a future year.
      - triceratops 11mo ago
        This is true. I'd still file tax-loss harvesting under "advanced maneuvers employed by high net worth people". At a societal level, and I understand this is a completely different point, I also question whether it's prudent to allow tax dodging this way. We already tax labor heavily and at the same time we incentivize companies to improve productivity (read: use less labor). How do we pay for society without taxing some of the productivity (read: profits) or taxing labor even more? You can only cut so many services.
        barchar 11mo ago
        Even folks who are just saving for retirement benefit, since they need not take any income on top of their normal employment income. They may be in a lower bracket when they sell. Also the reality is that its somewhat rare for retirees to spend down their entire portfolios.
    - slavik81 11mo ago
      That is US-specific tax policy, but many international companies are listed on US exchanges and purchased by international investors. As a Canadian, my retirement savings in my TFSA are subject to 15% taxes on dividends and 0% taxes on capital gains (for US-listed stocks).
- fn-mote 11mo ago
  Can you make this argument more rigorous? I’m just not following the connections here. It seems like your assumption is that a stock buyback is a short term gain. One of your arguments is that the strike price for options is set based on a certain amount of stock in circulation, and decreasing that amount will “artificially” raise the stock price, making the options more valuable. I agree that higher stock price benefits those with options, and I would even agree that it is possible that when those strike prices were valued, the valuation did not take into account the possible global change in the amount of stock (although a market would have included this valuation). I suppose the other part of the argument could be that R&D is good for the stock in the long term in a way that stock buybacks are not… the buybacks pumping up the price of the stock before it is driven into the dirt by competitors who do invest in R&D. There, I’ve done my best for your argument but I still don’t really believe that increased stock prices for everyone is not benefiting everyone more or less equally.
  - nyeah 11mo ago
    [flagged]
    - terminalshort 11mo ago
      [flagged]
      - nyeah 11mo ago
        Hard to say for sure. I don't know either of them. But I'm not casting aspersions on the commenter. I'm responding directly to his implication that if he doesn't understand X then X is false. That's not a thing.
        terminalshort 11mo ago
        [flagged]
  - triceratops 11mo ago
    > It seems like your assumption is that a stock buyback is a short term gain. My argument is a stock buyback isn't a gain for a long-term, buy-and-hold investor. Unless a) they sell some of the stock or b) it pays dividends they don't see the benefit of a higher stock price or reduced share count. Qualified dividends and long term capital gains are taxed at the same rate. So anyone who says "buybacks are more tax-advantaged" is leaving out the second part: "because you can borrow against a higher stock price without paying taxes". Since most (non-rich) people don't do that stock buybacks have the same tax (dis)advantage as dividends. If you know of a way to get tax-free money out of a higher stock price other than borrowing on margin, please tell me. I'd love to learn. > decreasing that amount will “artificially” raise the stock price It isn't "artificial". There are fewer shares in circulation/more demand for the shares. That legitimately translates into a higher price. But stock options and grants are generally given to employees and especially executives. So a reduced share count and higher share price is particularly good for them. > One of your arguments is that the strike price for options is set based on a certain amount of stock in circulation My argument was more that when employees are paid a significant portion of their compensation in stock they tend to sell much of it upon vest (sensibly) in order to diversify or even just to pay their bills. Ergo, being frequent sellers, they benefit from the higher stock price more than they would from regular dividend payments. A higher stock price directly translates into higher compensation. Wouldn't this be a powerful incentive for company management to prefer buybacks over dividends? > I suppose the other part of the argument could be that R&D is good for the stock in the long term I didn't say anything about R&D spending. A company should return as much profit to shareholders as it sees fit. I was rebutting the common, I believe simple-minded, argument that buybacks and dividends are completely equivalent. Even though the company spends the same amount of money, I think they are different in some very significant ways.
- RandomLensman 11mo ago
  What is your definition of "benefit"? Assuming a buyback increases share prices, why would shareholders in general be indifferent?
  - triceratops 11mo ago
    Because if I don't intend to sell right now, and the company is otherwise a healthy, going concern that can pay sustainable dividends, the actual share price is irrelevant to me. If anything, given my belief in the company, a lower share price is better. I can buy more shares!
    - RandomLensman 11mo ago
      If you ever want to sell, getting in the limit nothing for the shares might matter, no? There are other things: for example, share based M&A or compensation or other investors with different preferences - no relevance or interaction?
      - triceratops 11mo ago
        > If you ever want to sell I already said that buybacks benefit sellers. > share based M&A or compensation All fair points. Share-based M&A can be good for investors. But if the stock price is going up because the company spent money on buybacks, then the company could also just pay cash for M&A and skip the buybacks. Higher compensation is good for employees who get paid stock and for upper management, who are nearly always paid largely in stock. There's an argument that's good for shareholders because of better retention. But if that were the case, why not just pay employees more cash?
        RandomLensman 11mo ago
        Are there many investors that are never sellers (that is different from selling soon-ish)? Paying cash could be quite different than paying in shares for M&A. If owning/using shares makes no difference to cash (whether to employees or in M&A situations), why not do buybacks then if there is no difference between cash and shares anyway?
- overrun11 11mo ago
  This is just nonsense. Anyone can sell the stock if they wish, there is no privilege for the high-net worth. Additionally, shareholders benefit from reduced share count because it increases their claim on future profits thereby increasing compounding.
  - triceratops 11mo ago
    You're mixing up points 2 and 3. Anyone can sell, but buybacks benefit mostly sellers. Borrowing against stock is mostly something for HNW people. > shareeholders benefit from reduced share count because it increases their claim on future profits So...dividends? Or when they eventually sell? What if I never want to sell?
    - overrun11 11mo ago
      Buybacks are still better if you want to hold forever and don't care about share price. With a dividend distribution you must pay taxes and reinvest the diminished proceeds. You end up with a smaller share of the company than in the buyback scenario. Example: A: Hold $10 of stock. Buyback of 1$ per share. You're left with $10 of stock. B: Hold $10 of stock. Dividend of 1$ per share. You're left with 9$ of stock and $1 cash - taxes payed. Once reinvested you have $9 + (1 * tax rate) in stock. You're making two mistakes: One is thinking that dividends are magic money that do not cause share prices to fall in exact accordance with the distribution and the other is that buybacks lift the share price somehow (they do not, see Modigliani-Miller).
    - barchar 11mo ago
      Actually, normal people can do the borrowing thing. It's not really as necessary since you have normal employment income but you can do it and it can work. If you continually add more principle to your pile-o-stock than your monthly spending the growth will outpace your interest and you won't accumulate an unbounded amount of leverage. At least if your broker offers decent margin rates or you sell boxes. Well, also, your 401k and IRAs are probably superior to this strategy and can't be used as collateral as they're protected in bankruptcy. So it's not worth it until you fill those up.
- Tuna-Fish 11mo 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.
  - nyeah 11mo ago
    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.
    - jstanley 11mo ago
      > Buybacks create a tendency toward higher share prices, but only while they continue. Buybacks increase the share price because you have a company that is worth (for sake of argument) the same as it was worth before, except now there are fewer shares available. A fixed market cap divided by fewer shares equals a higher share price. In the limit case imagine buying back all but 1 share. Now that 1 share represents the entire value of the company, so the share price would equal the market cap.
      - mitthrowaway2 11mo ago
        The company is worth a bit less after the buyback, because it's given away some of its money, which was part of its valuation. But the effect should still be positive on the share price.
        11mo ago
- barchar 11mo ago
  Actually no, they have the same benefits as a dividend except they don't create a forced tax liability. Stock grants can actually include dividends. Even if you don't sell or borrow against it you benefit because you don't have that tax liability, and the money you woulda paid in taxes can continue to be invested.
- seanhunter 11mo ago
  This is simply untrue in every detail. All common stock is pari passu. A buyback of common benefits all common stock holders pro rata with their holdings. Similarly, vesting grants without buybacks harms the common holders by dilution. A buyback of the amount of vested is the least that is required to keep the common holders whole.
  - overrun11 11mo ago
    The person you're responding to's argument is incoherent and not worth engaging in. The crux of it is that long term shareholders aren't benefited by buybacks because share price doesn't matter to them because they will never sell. Somehow however, dividends are good for them because they will not reinvest them for some reason? It doesn't make any sense.
insane_dreamer 11mo ago
dividends and capital gains are taxed differently
- triceratops 11mo ago
  Not in the US.
LunaSea 11mo ago
> But dividends also result in a concrete financial reward for all shareholders, yes? Yes, but less because in many countries dividends are taxed more than selling shares after a share price increase.

> all shareholders That's the key phrase, they benefit all shareholders. Buybacks on the other hand only benefit the following shareholders: 1. those with regularly vesting stock options and stock grants - basically employees. For non-tech companies especially, this only means high-ranking employees 2. those who intend to sell - that is, soon-to-be-ex shareholders 3. those who borrow against their stock - typically high-net-worth individuals who own a lot of the stock Stock buybacks are thus a non-egalitarian way to return profits. To reward all shareholders equally, pay dividends.

saulpw 11mo ago
Can't group #2 sell 4% of their holdings, thereby remaining shareholders, and delivering to themselves the tax-advantaged equivalent of a 4% dividend?
- nyeah 11mo ago
  If I'm reading it right, group #2 plan to sell 100% of their holdings during times of heavy buybacks. I think they intend to benefit as much as possible from whatever price increase might be driven by the buyback demand.
- terminalshort 11mo ago
  Yes. This is correct. Share buybacks are financially equivalent to a dividend from the company's perspective, and slightly better from the shareholder's perspective because they can choose when to take the dividend and pay capital gains tax instead of income tax on it.
  - triceratops 11mo ago
    Qualified dividends (stock held more than 60 days) and long term capital gains are taxed at the same rate.
    - terminalshort 11mo ago
      Good point, but that only applies to individual, not corporate shareholders.
    - barchar 11mo ago
      At any given point in time for an individual yes, but your cap gains rate can vary substantially over time. Also trusts are taxed fairly punitively. So it's still better for everyone since only those who need or want the income have to take it.
      - triceratops 11mo ago
        > Also trusts are taxed fairly punitively That only reinforces my viewpoint that buybacks advantage rich shareholders. > your cap gains rate can vary substantially over time It is 0% (up to like $100k for a couple filing jointly), 15% (up to about $580k), and 20% above that. Income tax has many more brackets than that and they kick in at way lower incomes. It's true that your income can vary substantially over time. It might be nice to do earn all your capital gains and dividends in retirement. You will likely need less income then to live on and can incur $100k/year in gains and dividends tax-free. On the other hand, remaining invested in a stock that does buybacks during your working years also concentrates your risk in that stock. So people will likely sell anyway and take some capital gains to diversify. And finally, if we want companies to improve productivity (read: fewer employees) then we can't solely tax labor to fund everything. We have to tax the part of the pie that's actually growing: this is represented by stock prices and dividends.
        labcomputer 11mo ago
        > On the other hand, remaining invested in a stock that does buybacks during your working years also concentrates your risk in that stock. So people will likely sell anyway and take some capital gains to diversify. This really undercuts your previous argument that only certain classes of shareholders benefit from buybacks. Now you are assuming that everyone falls into one of the classes anyway. So we're back where we started: Buybacks benefit all shareholders equally.
- triceratops 11mo ago
  > delivering to themselves the tax-advantaged equivalent of a 4% dividend? Long-term gains and qualified dividends (shares held longer than 60 days) are taxed at the same rate. What's the tax advantage here?
  - nradov 11mo ago
    The tax advantage of stock buybacks is that investors aren't forced to immediately realize gains. They have the freedom to time sales to minimize overall income tax liability, for example by harvesting losses in other investments in a future year.
    - triceratops 11mo ago
      This is true. I'd still file tax-loss harvesting under "advanced maneuvers employed by high net worth people". At a societal level, and I understand this is a completely different point, I also question whether it's prudent to allow tax dodging this way. We already tax labor heavily and at the same time we incentivize companies to improve productivity (read: use less labor). How do we pay for society without taxing some of the productivity (read: profits) or taxing labor even more? You can only cut so many services.
      - barchar 11mo ago
        Even folks who are just saving for retirement benefit, since they need not take any income on top of their normal employment income. They may be in a lower bracket when they sell. Also the reality is that its somewhat rare for retirees to spend down their entire portfolios.
  - slavik81 11mo ago
    That is US-specific tax policy, but many international companies are listed on US exchanges and purchased by international investors. As a Canadian, my retirement savings in my TFSA are subject to 15% taxes on dividends and 0% taxes on capital gains (for US-listed stocks).
fn-mote 11mo ago
Can you make this argument more rigorous? I’m just not following the connections here. It seems like your assumption is that a stock buyback is a short term gain. One of your arguments is that the strike price for options is set based on a certain amount of stock in circulation, and decreasing that amount will “artificially” raise the stock price, making the options more valuable. I agree that higher stock price benefits those with options, and I would even agree that it is possible that when those strike prices were valued, the valuation did not take into account the possible global change in the amount of stock (although a market would have included this valuation). I suppose the other part of the argument could be that R&D is good for the stock in the long term in a way that stock buybacks are not… the buybacks pumping up the price of the stock before it is driven into the dirt by competitors who do invest in R&D. There, I’ve done my best for your argument but I still don’t really believe that increased stock prices for everyone is not benefiting everyone more or less equally.
- nyeah 11mo ago
  [flagged]
  - terminalshort 11mo ago
    [flagged]
    - nyeah 11mo ago
      Hard to say for sure. I don't know either of them. But I'm not casting aspersions on the commenter. I'm responding directly to his implication that if he doesn't understand X then X is false. That's not a thing.
      - terminalshort 11mo ago
        [flagged]
- triceratops 11mo ago
  > It seems like your assumption is that a stock buyback is a short term gain. My argument is a stock buyback isn't a gain for a long-term, buy-and-hold investor. Unless a) they sell some of the stock or b) it pays dividends they don't see the benefit of a higher stock price or reduced share count. Qualified dividends and long term capital gains are taxed at the same rate. So anyone who says "buybacks are more tax-advantaged" is leaving out the second part: "because you can borrow against a higher stock price without paying taxes". Since most (non-rich) people don't do that stock buybacks have the same tax (dis)advantage as dividends. If you know of a way to get tax-free money out of a higher stock price other than borrowing on margin, please tell me. I'd love to learn. > decreasing that amount will “artificially” raise the stock price It isn't "artificial". There are fewer shares in circulation/more demand for the shares. That legitimately translates into a higher price. But stock options and grants are generally given to employees and especially executives. So a reduced share count and higher share price is particularly good for them. > One of your arguments is that the strike price for options is set based on a certain amount of stock in circulation My argument was more that when employees are paid a significant portion of their compensation in stock they tend to sell much of it upon vest (sensibly) in order to diversify or even just to pay their bills. Ergo, being frequent sellers, they benefit from the higher stock price more than they would from regular dividend payments. A higher stock price directly translates into higher compensation. Wouldn't this be a powerful incentive for company management to prefer buybacks over dividends? > I suppose the other part of the argument could be that R&D is good for the stock in the long term I didn't say anything about R&D spending. A company should return as much profit to shareholders as it sees fit. I was rebutting the common, I believe simple-minded, argument that buybacks and dividends are completely equivalent. Even though the company spends the same amount of money, I think they are different in some very significant ways.
RandomLensman 11mo ago
What is your definition of "benefit"? Assuming a buyback increases share prices, why would shareholders in general be indifferent?
- triceratops 11mo ago
  Because if I don't intend to sell right now, and the company is otherwise a healthy, going concern that can pay sustainable dividends, the actual share price is irrelevant to me. If anything, given my belief in the company, a lower share price is better. I can buy more shares!
  - RandomLensman 11mo ago
    If you ever want to sell, getting in the limit nothing for the shares might matter, no? There are other things: for example, share based M&A or compensation or other investors with different preferences - no relevance or interaction?
    - triceratops 11mo ago
      > If you ever want to sell I already said that buybacks benefit sellers. > share based M&A or compensation All fair points. Share-based M&A can be good for investors. But if the stock price is going up because the company spent money on buybacks, then the company could also just pay cash for M&A and skip the buybacks. Higher compensation is good for employees who get paid stock and for upper management, who are nearly always paid largely in stock. There's an argument that's good for shareholders because of better retention. But if that were the case, why not just pay employees more cash?
      - RandomLensman 11mo ago
        Are there many investors that are never sellers (that is different from selling soon-ish)? Paying cash could be quite different than paying in shares for M&A. If owning/using shares makes no difference to cash (whether to employees or in M&A situations), why not do buybacks then if there is no difference between cash and shares anyway?
overrun11 11mo ago
This is just nonsense. Anyone can sell the stock if they wish, there is no privilege for the high-net worth. Additionally, shareholders benefit from reduced share count because it increases their claim on future profits thereby increasing compounding.
- triceratops 11mo ago
  You're mixing up points 2 and 3. Anyone can sell, but buybacks benefit mostly sellers. Borrowing against stock is mostly something for HNW people. > shareeholders benefit from reduced share count because it increases their claim on future profits So...dividends? Or when they eventually sell? What if I never want to sell?
  - overrun11 11mo ago
    Buybacks are still better if you want to hold forever and don't care about share price. With a dividend distribution you must pay taxes and reinvest the diminished proceeds. You end up with a smaller share of the company than in the buyback scenario. Example: A: Hold $10 of stock. Buyback of 1$ per share. You're left with $10 of stock. B: Hold $10 of stock. Dividend of 1$ per share. You're left with 9$ of stock and $1 cash - taxes payed. Once reinvested you have $9 + (1 * tax rate) in stock. You're making two mistakes: One is thinking that dividends are magic money that do not cause share prices to fall in exact accordance with the distribution and the other is that buybacks lift the share price somehow (they do not, see Modigliani-Miller).
  - barchar 11mo ago
    Actually, normal people can do the borrowing thing. It's not really as necessary since you have normal employment income but you can do it and it can work. If you continually add more principle to your pile-o-stock than your monthly spending the growth will outpace your interest and you won't accumulate an unbounded amount of leverage. At least if your broker offers decent margin rates or you sell boxes. Well, also, your 401k and IRAs are probably superior to this strategy and can't be used as collateral as they're protected in bankruptcy. So it's not worth it until you fill those up.
Tuna-Fish 11mo 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.
- nyeah 11mo ago
  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.
  - jstanley 11mo ago
    > Buybacks create a tendency toward higher share prices, but only while they continue. Buybacks increase the share price because you have a company that is worth (for sake of argument) the same as it was worth before, except now there are fewer shares available. A fixed market cap divided by fewer shares equals a higher share price. In the limit case imagine buying back all but 1 share. Now that 1 share represents the entire value of the company, so the share price would equal the market cap.
    - mitthrowaway2 11mo ago
      The company is worth a bit less after the buyback, because it's given away some of its money, which was part of its valuation. But the effect should still be positive on the share price.
      - 11mo ago
barchar 11mo ago
Actually no, they have the same benefits as a dividend except they don't create a forced tax liability. Stock grants can actually include dividends. Even if you don't sell or borrow against it you benefit because you don't have that tax liability, and the money you woulda paid in taxes can continue to be invested.
seanhunter 11mo ago
This is simply untrue in every detail. All common stock is pari passu. A buyback of common benefits all common stock holders pro rata with their holdings. Similarly, vesting grants without buybacks harms the common holders by dilution. A buyback of the amount of vested is the least that is required to keep the common holders whole.
- overrun11 11mo ago
  The person you're responding to's argument is incoherent and not worth engaging in. The crux of it is that long term shareholders aren't benefited by buybacks because share price doesn't matter to them because they will never sell. Somehow however, dividends are good for them because they will not reinvest them for some reason? It doesn't make any sense.

insane_dreamer 11mo ago

dividends and capital gains are taxed differently

triceratops 11mo ago
Not in the US.

LunaSea 11mo ago

> But dividends also result in a concrete financial reward for all shareholders, yes? Yes, but less because in many countries dividends are taxed more than selling shares after a share price increase.