Comment by triceratops

> It seems like your assumption is that a stock buyback is a short term gain.

My argument is a stock buyback isn't a gain for a long-term, buy-and-hold investor. Unless

a) they sell some of the stock or

b) it pays dividends

they don't see the benefit of a higher stock price or reduced share count.

Qualified dividends and long term capital gains are taxed at the same rate. So anyone who says "buybacks are more tax-advantaged" is leaving out the second part: "because you can borrow against a higher stock price without paying taxes". Since most (non-rich) people don't do that stock buybacks have the same tax (dis)advantage as dividends. If you know of a way to get tax-free money out of a higher stock price other than borrowing on margin, please tell me. I'd love to learn.

> decreasing that amount will “artificially” raise the stock price

It isn't "artificial". There are fewer shares in circulation/more demand for the shares. That legitimately translates into a higher price. But stock options and grants are generally given to employees and especially executives. So a reduced share count and higher share price is particularly good for them.

> One of your arguments is that the strike price for options is set based on a certain amount of stock in circulation

My argument was more that when employees are paid a significant portion of their compensation in stock they tend to sell much of it upon vest (sensibly) in order to diversify or even just to pay their bills. Ergo, being frequent sellers, they benefit from the higher stock price more than they would from regular dividend payments. A higher stock price directly translates into higher compensation. Wouldn't this be a powerful incentive for company management to prefer buybacks over dividends?

> I suppose the other part of the argument could be that R&D is good for the stock in the long term

I didn't say anything about R&D spending. A company should return as much profit to shareholders as it sees fit.

I was rebutting the common, I believe simple-minded, argument that buybacks and dividends are completely equivalent. Even though the company spends the same amount of money, I think they are different in some very significant ways.

It's perfectly ok not to understand corporate finance. It's a boring (and nightmarishly complicated) subject.

NOTE: The commenter is explicitly basing his/her argument on his/her lack of understanding. That's what brought the subject into discussion.

There is supply and demand to consider. Buybacks create a tendency toward higher share prices, but only while they continue. That demand cuts off when the buybacks stop.

If the buybacks are at a discount to whatever the stock turns out to have been worth at the time, then that benefits all the shareholders. That can be a great use of money for all shareholders.

But buybacks at inflated prices benefit only exiting shareholders. Exiting shareholders tend to include hired management. Of course nobody really knows the valuation that well, so obviously there's a guessing game.

This is pretty hard to argue against for anybody who agrees that valuation is a thing at all.

> Those who intend to re-invest all returns in to the stock

Sell the stock then use the gains to buy the stock? I'm very confused by this.

> without having to first pay tax for the dividend

Long term capital gains and dividends are taxed at the same rate. The only tax-free way to benefit from a higher share price (that I know of) is to borrow against it.

> get their reward in the proportion of their ownership of the company going up.

Which only matters if the company pays dividends, or the shareholders eventually sell.

> Those who do not sell, get their reward in the proportion of their ownership of the company going up.

This is incorrect. If the company buys back say $100m worth of its stock, it's true that the individual shares remaining represent a larger fraction of the company, BUT the company itself is worth $100m less after the transaction (because it has spent that $100m on purchase of something that can't be added to the balance sheet - basically incinerated that money from company's point of view, similarly to how paying out dividends is "destroying" money). These two factors cancel out perfectly, and the book value per share remains unchanged.

Yes. This is correct. Share buybacks are financially equivalent to a dividend from the company's perspective, and slightly better from the shareholder's perspective because they can choose when to take the dividend and pay capital gains tax instead of income tax on it.

> delivering to themselves the tax-advantaged equivalent of a 4% dividend?

Long-term gains and qualified dividends (shares held longer than 60 days) are taxed at the same rate. What's the tax advantage here?

If I'm reading it right, group #2 plan to sell 100% of their holdings during times of heavy buybacks. I think they intend to benefit as much as possible from whatever price increase might be driven by the buyback demand.

Because if I don't intend to sell right now, and the company is otherwise a healthy, going concern that can pay sustainable dividends, the actual share price is irrelevant to me. If anything, given my belief in the company, a lower share price is better. I can buy more shares!

You're mixing up points 2 and 3. Anyone can sell, but buybacks benefit mostly sellers.

Borrowing against stock is mostly something for HNW people.

> shareeholders benefit from reduced share count because it increases their claim on future profits

So...dividends? Or when they eventually sell? What if I never want to sell?