ELi5: Why do people dislike stock buybacks, but not stock dividends?

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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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Anonymous 0 Comments

Because they sound complex and are different than they used to be. They also have the effect of announcing executive compensation and reducing executive taxation. Executives paid in stock are taking on risk and aligning interests with shareholders though.

They do benefit investors through improved tax treatment. A dividend is taking the assets of the company and giving it to owners. That dividend is taxed at ordinary income rates, and doesn’t necessarily benefit the owner/investor. That is especially true if the investor is near their peak earnings. The dividend is a taxable event that comes regardless of the investors individual need. Imagine a US worth a million dollars and has 10,000 shares. Each share is worth $100. There is 10,000 in cash in the company above the companies needs. The company can give those assets to the shareholder ($1 per share). Now the company is worth $990,000 and each share is worth $99 and the investor has 1 share + $1. The investor has to pay taxes on that share of up to 50% in some states. The investor has 99.50 and the government has $0.50.

With a share but back, that same company takes the $10,000 and buys 100 shares. The company is still worth $1,000,000, but now there are only 9,900 share holders. The value of each share went up since each share represents a very slightly larger piece of the company, and the cost is now $101.10. No tax is due to the shareholders, but tax is due by those who sold their shares to the company. A tax will eventually be due at a lesser capital gains rate (0-28% federal plus state tax), but it’s not due until a time the shareholder chooses to sell.

For a retired living on their assets, it doesn’t make much difference, but to somebody actively bringing in income, a dividend payment actually hurts returns.

For those that want others to pay more taxes, shareholder buybacks look bad. Companies have to be careful with growing too fast or expanding outside their core competencies, so the grow the business argument may or may not be applicable. Proctor and Gamble is great at toothpaste but can only sell so much. Once they’ve got product in the whole hygiene aisle, becoming an AI company probably isn’t a great idea, even if another company can do well there. Regarding employee pay, it is generally set by the market and while some companies make huge profits per employee, others are losing money and don’t have the option of reducing employee pay.

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