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
The only differences between the two are:
1. Shareholders can choose whether to participate in a stock buyback. Not so with dividends.
2. Stock buybacks are generally taxed at preferential capital gains rates while dividends are generally taxed at higher ordinary income rates.
3. Dividends are often made at regular intervals, which creates a sort of obligation for the company to continue making that payment in order to avoid signaling financial distress to the shareholders, whereas stock buybacks are generally a one-time thing. Note, however, that companies do also sometimes pay one-time special dividends.
In short (“ELI5”), in most cases people who are against stock buybacks but not dividends just don’t understand what a stock buyback actually is.
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