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.
In: 98
1. Quite often, companies do stock buybacks when their shares are stupidly overvalued. For example Meta, Nvidia. These buybacks then just push the shares to be even more overvalued so the buybacks do even less good. This is only natural, because companies are generally in a position to do buybacks when profits are surging(hence high prices), but less likely to do buybacks during tougher times. Dividends on the other hand tend to be less cyclical(companies generally try to maintain dividend if it isn’t causing problems)
2. There’s also the 1% tax that applies to stock buybacks now, which makes it worse for investors than dividends. It’s triple taxation- first they get taxed on corporate taxes, then they get taxed when they buy back their shares with the already taxed profits, and then I get taxed when I sell the shares that they buy back(Or when i withdraw from 401k). Vs dividends which are only double taxed(corporate profit is taxed, and then the dividend is taxed)
3. Buybacks lead to situations where companies that do buy-backs are overrepresented on market indexes/index funds, and dividend paying companies are under-represented. If a company pays a dividend, generally their market cap will drop by the amount of the dividend, and the dividend goes into other stocks in the index. But if a company does a buyback, the buy pressure from the buyback pushes up market cap, causing it to make up a larger share of the index.
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