8 ms·

It's a mechanism to distribute profits to shareholders. Do you invest in companies that don't distribute profits - does this get you some kind of higher return?

ygouzerh 8mo 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
- MattGaiser 8mo ago
  Dividends are taxed. No company is going to argue they are overvalued either.
- kachnuv_ocasek 8mo ago
  One could argue share buybacks are more tax-efficient.
- eru 8mo ago
  Buybacks and dividends are economically equivalent. They mostly differ in tax treatment.
  - izacus 8mo ago
    Funny how "company does tax evasion to avoid paying their share" is praised :P
    - eru 8mo ago
      Are you sure you know what 'tax evasion' means?
      - izacus 8mo ago
        Yes, I am. Are you? Sorry, "tax efficiency" or what the euphemism is that tries to hide whats actually going on. :)
        eru 8mo ago
        'Tax evasion' is when you are breaking the law. There are various other names, like 'tax optimisation' or 'tax avoidance' is when you do it legal. And the boundaries of what you can call 'tax avoidance' are fuzzy: when in Singapore, I eat out a lot more and pay someone else to clean my home. When in Germany, taxes on labour are too high, so I cook and clean myself. Is that 'tax avoidance' and refusing to 'pay my share'? It's definitely a change in behaviour induced by taxation. Another example in Germany both capital gains and dividends are taxed. Capital gains are (mostly) only taxed when you sell, dividends are taxed straight away. But each year you can get a small amount of dividends tax free. So it's tax efficient to structure your capital returns to first max out that tax free allowance, and take the rest as capital gains. That's annoying and complicated. Singapore is simpler and has lower taxes, so I don't bother optimising anything, and just let my decision be guided by whatever makes financial sense, without worrying about taxes. (In my case, I'm investing in accumulating funds that just never pay any dividends, but instead re-invest them straight away. That way I don't have to worry about re-investing dividends manually.) Another example: when you have a carbon tax one of the intended consequences is for companies and people to change their affairs such that they emit less CO2, thus optimising their tax bill. The system only works when people 'avoid paying their share'.
- xmprt 8mo 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.
- rapidaneurism 8mo 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)
- articulatepang 8mo 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.
  - tripledry 8mo 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.
themafia 8mo ago
> It's a mechanism to distribute profits to shareholders With different consequences and historical outcomes to more commonly used mechanisms. > Do you invest in companies that don't distribute profits Does every company that distributes profits do so with buybacks? > does this get you some kind of higher return? Do all companies payout the same ratio of market cap as dividend?
- abigail95 8mo ago
  You've missed the point of my questions. The GP here thinks they're giving away their monopoly status by doing buybacks. I think there's zero point to having a monopoly if you don't distribute the profits. If you have some argument that dividends are better than buybacks I don't care.
zmb_ 8mo ago
It’s effectively the company saying that they believe the shareholders can get a better return by investing that money elsewhere. So when a company starts doing major buybacks it’s a signal that they have reached an inflection point.
- abigail95 8mo ago
  If you want 100x returns - do you find a $500B company or a $5B one? All ASML is doing is raising the share price. The investors that don't want a better deal somewhere else don't have to do a thing - they just have to not sell their shares. ASML is not deciding anything or signaling anything about future returns. The market is the one sending the signal that there are better deals elsewhere. You can go from $5B to $500B. You can't go from $500B to $50T. There is no amount of R&D that will do that. If you picked a $5-6 billion company in 2008, and it was ASML, congratulations you now have >100x returns. The inflection point isn't a point where buybacks increase, it's the slow/fast ride up to $500 billion. The investors chasing 100x returns have already left. Whether the company buys its own shares or sits on its own cash, the net equity value is the same. The only signal it gives to investors is that they have more cash than they want to spend.

ygouzerh 8mo 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

MattGaiser 8mo ago
Dividends are taxed. No company is going to argue they are overvalued either.
kachnuv_ocasek 8mo ago
One could argue share buybacks are more tax-efficient.
eru 8mo ago
Buybacks and dividends are economically equivalent. They mostly differ in tax treatment.
- izacus 8mo ago
  Funny how "company does tax evasion to avoid paying their share" is praised :P
  - eru 8mo ago
    Are you sure you know what 'tax evasion' means?
    - izacus 8mo ago
      Yes, I am. Are you? Sorry, "tax efficiency" or what the euphemism is that tries to hide whats actually going on. :)
      - eru 8mo ago
        'Tax evasion' is when you are breaking the law. There are various other names, like 'tax optimisation' or 'tax avoidance' is when you do it legal. And the boundaries of what you can call 'tax avoidance' are fuzzy: when in Singapore, I eat out a lot more and pay someone else to clean my home. When in Germany, taxes on labour are too high, so I cook and clean myself. Is that 'tax avoidance' and refusing to 'pay my share'? It's definitely a change in behaviour induced by taxation. Another example in Germany both capital gains and dividends are taxed. Capital gains are (mostly) only taxed when you sell, dividends are taxed straight away. But each year you can get a small amount of dividends tax free. So it's tax efficient to structure your capital returns to first max out that tax free allowance, and take the rest as capital gains. That's annoying and complicated. Singapore is simpler and has lower taxes, so I don't bother optimising anything, and just let my decision be guided by whatever makes financial sense, without worrying about taxes. (In my case, I'm investing in accumulating funds that just never pay any dividends, but instead re-invest them straight away. That way I don't have to worry about re-investing dividends manually.) Another example: when you have a carbon tax one of the intended consequences is for companies and people to change their affairs such that they emit less CO2, thus optimising their tax bill. The system only works when people 'avoid paying their share'.
xmprt 8mo 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.
rapidaneurism 8mo 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)
articulatepang 8mo 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.
- tripledry 8mo 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.

themafia 8mo ago

> It's a mechanism to distribute profits to shareholders With different consequences and historical outcomes to more commonly used mechanisms. > Do you invest in companies that don't distribute profits Does every company that distributes profits do so with buybacks? > does this get you some kind of higher return? Do all companies payout the same ratio of market cap as dividend?

abigail95 8mo ago
You've missed the point of my questions. The GP here thinks they're giving away their monopoly status by doing buybacks. I think there's zero point to having a monopoly if you don't distribute the profits. If you have some argument that dividends are better than buybacks I don't care.

zmb_ 8mo ago

It’s effectively the company saying that they believe the shareholders can get a better return by investing that money elsewhere. So when a company starts doing major buybacks it’s a signal that they have reached an inflection point.

abigail95 8mo ago
If you want 100x returns - do you find a $500B company or a $5B one? All ASML is doing is raising the share price. The investors that don't want a better deal somewhere else don't have to do a thing - they just have to not sell their shares. ASML is not deciding anything or signaling anything about future returns. The market is the one sending the signal that there are better deals elsewhere. You can go from $5B to $500B. You can't go from $500B to $50T. There is no amount of R&D that will do that. If you picked a $5-6 billion company in 2008, and it was ASML, congratulations you now have >100x returns. The inflection point isn't a point where buybacks increase, it's the slow/fast ride up to $500 billion. The investors chasing 100x returns have already left. Whether the company buys its own shares or sits on its own cash, the net equity value is the same. The only signal it gives to investors is that they have more cash than they want to spend.