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
Very simple.
Let’s say I own 1% of a company worth $10,000,000. My investment is worth $100,000, but only if I sell.
The company does great and profits $1,000,000 for the year. As I’m part owner to that company, I should realistically be part owner of the profits. My share of the profit is $10,000, which is a significant chunk of change.
But they don’t do a dividend distribution.
Okay, so maybe they’ll take the cash on hand and use it to invest in growth so they do better the next year, or they pay the employees more to maintain better retention?
Well, no. They decide to do a stock buyback. So the $10MM on the open market becomes $9MM.
Well, that’s good, because my share is now larger on the open market, right?
Nope.
Because the company is gifting those shares to employees, more specifically board members. So there’s still $10,000,000 in shares, I still own 1%, but the entire amount of profit just went into the pockets of the board of directors.
Worse yet, it went into their pockets without being taxed. *They won’t owe taxes until they sell.*
Now keep track of this bit.
The board has now amassed 10% voting control. 55% of the rest of the shareholders (most of which don’t actively vote) would have to unify to change the board. And the board gets to vote on their own pay, and direct the company to buy more stock to give to the board.
So I still own only 1% of the company. And all of the profit goes to a handful of people. So why do I own 1% of the company?
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