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
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.
Latest Answers