That's completely backwards. Dividends are the only distribution to shareholders. Stock buybacks look great for Executives trying to inflate share price and earn bonuses tied to Earnings Per Share (EPS).
> That's completely backwards. Dividends are the only distribution to shareholders. Stock buybacks look great for Executives trying to inflate share price and earn bonuses tied to Earnings Per Share (EPS).
Argh.
Suppose you have a company with a business worth a billion dollars. The company makes $200 million in profits, so now they have a business worth a billion dollars and $200 million in cash, so now the total of the company's shares are worth $1.2 billion.
Suppose they have a million shares. When they make the money the price per share goes from $1000 to $1200. If they pay the dividend the share price goes back to $1000, but each shareholder now has a $1000 share and $200 in cash, so they still have $1200 in value.
If, instead of paying a dividend, they pay $200 million to buy back a sixth of their shares and each shareholder tenders a sixth of their shares in the buyback, then at the end of it for each original share the shareholders now have... wait for it... $1000 in shares and $200 in cash. Or, in particular, for every six shares they had they now have $6000 in shares (5 x $1200) and $1200 in cash. Which is basically the same thing.
But then the taxes are due on the ~17% profit from share price appreciation instead of on 100% of the dividend. And the shareholders who would have reinvested the dividend back in the company simply don't tender any shares and don't realize any taxable gains at all.
And then if the price per share gets too high they can have a stock split.
Of course, you also get almost the same effect by leaving the cash inside the company and letting shareholders who want immediate returns sell that percentage of their shares on the market, and if the cash is inside the company then it can be inside a foreign subsidiary in a jurisdiction with lower corporate income tax rates. Which is how the tax code encourages multinational corporations to hoard huge piles of cash.
Dividends and stock buybacks both distribute value to shareholders. Dividends distribute cash, and stock buybacks distribute value by increasing the price of shares. In a rational market, distributing an $X dividend or buying back $X worth of shares will both have the same result for shareholder value. See the sibling comment for details.
People who are investing with a long-term view in mind might prefer stock buybacks because it defers the taxable event until sale. I prefer stock buybacks when I'm planning to hold my shares. With a dividend, I have to pay taxes on the dividend before I can reinvest that cash by buying more shares; with stock buybacks, the share price just increases by that amount over time instead.
Not really (besides excellent answers from: AnthonyMouse,Pyxl101) share buybacks also shows the company's long term intention to give stockholders more value.
