How are stock buybacks any worse than dividend payouts to investors?
I get how they are logistically different, but to me, whether you give the investors cash that they use to buy more stock, or you internally increase the value of a stock by buying it back with company funds, the result is the same – Investors get richer at the cost of investment.
Not saying buybacks aren’t bad, but I guess I just don’t understand the hate relative to dividend payments.
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I’d imagine that’s because a stock holder cannot really gain any personal benefit from a stock buyback unless they sell their stock, whereas from a dividend they gain the benefit without having to divest from the company.
In theory there’s nothing wrong with stock buybacks. When a business has some extra cash and doesn’t believe that there’s an opportunity for growth through investment, sometimes the best thing to do with that money is to just give it back to shareholders. The problem is that a lot of CEOs of these big companies are compensated through stock or stock options in the company that they manage. A stock buyback is a quick and easy way to artificially inflate a company share price to the benefit of management and shareholders, even when there are better things to do with that money such as raise wages for workers or invest in new growth opportunities.
I’d imagine that’s because a stock holder cannot really gain any personal benefit from a stock buyback unless they sell their stock, whereas from a dividend they gain the benefit without having to divest from the company.
In theory there’s nothing wrong with stock buybacks. When a business has some extra cash and doesn’t believe that there’s an opportunity for growth through investment, sometimes the best thing to do with that money is to just give it back to shareholders. The problem is that a lot of CEOs of these big companies are compensated through stock or stock options in the company that they manage. A stock buyback is a quick and easy way to artificially inflate a company share price to the benefit of management and shareholders, even when there are better things to do with that money such as raise wages for workers or invest in new growth opportunities.
Some companies do stock buybacks the right way that are beneficial for shareholders(Aflac for example).
A good deal of companies do not, by buying back shares while also still expanding outstanding shares, by issuing more via executive compensation for example.
Not sure that qualifies as an ELI5 question.
You said it yourself, they’re litterally the same thing, returning cash to investors, typically when you have no good investment opportunity left.
They only have bad reputation because it’s internet and people love commenting on things they don’t understand.
Some companies do stock buybacks the right way that are beneficial for shareholders(Aflac for example).
A good deal of companies do not, by buying back shares while also still expanding outstanding shares, by issuing more via executive compensation for example.
Not sure that qualifies as an ELI5 question.
You said it yourself, they’re litterally the same thing, returning cash to investors, typically when you have no good investment opportunity left.
They only have bad reputation because it’s internet and people love commenting on things they don’t understand.
Stock buybacks aren’t *inherently* bad, but its applications and effects are fairly bad for the stock owners.
First up, artificial scarcity: By removing stock of [profitable company here] from the market, you make the remaining parts worth more without having changed the value of the company, by making them rarer than they really need to be, so investing in that company becomes a bigger investment for a similar reward. If you could pay $100 to get a $5/month dividend (very fictitious numbers), why would you prefer paying $150 to get that same $5/month?
Second, you essentially signaling that your company has nothing *better* to do with their extra cash, than to buy back its stock. While that in itself in smaller quantities isn’t anything to bat an eye at, when it happens in a big enough quantity, it becomes frankly worrisome, as the company should be able to grow with that cash, and generate more profit the following year. In capitalism, a company that doesn’t grow or have any idea how to grow further, is a bit of a sitting duck in the marketplace.
Third, the timing of buybacks is usually on years where the dividends would be *chef’s kiss* levels of good, and people may be receiving more money than usual. Those buybacks cost money to make, it reduces the amount of profit, and in turn, it reduces the amount on the dividend checks.
***So, all combined, buybacks just make the stocks harder to sell by making their price higher, before the lack of growth makes the company flinch and fail, and then to boot, it reduces the size of the dividends I would get.***
And that’s essentially how it boils down, as far as I know.
Dividends are basically like interest payments when you deposit money a kind of reward for putting your money with a group for a while, regular dividends are an indication of the long term growth and stability of a company. Stock buybacks are generally the company has a surplus of cash and has run out of ideas on where to spend it.
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