No, they aren’t. Buybacks push stock price higher, which also makes a difference for option values in a way that dividend don’t.
Also, they are efficient in that they defer the taxation to the point of share sale, but they are inefficient in that holding a stock for less than a year in the US taxes them at the much higher short-term capital gains rate.
Furthermore, the dividend is cash, it cannot go to zero without giving you a chance to realize it - whereas a stock can go to zero at any time (and many will likely do shortly). I was a small investor in a company that did a respectable 5X exit for shares of the purchaser. I was thus locked up for 6m, during which they did a stock buyback but later promptly went down by 80 percent for reasons unrelated to the purchase of the company I was an investor in.
What was supposed to be a nice 5X exit, turned to a meager 1.5X, and I was extremely lucky that the lockup ended September (that is, same year) because otherwise, for tax reasons, I would have been approx -0.5X (that’s all my investment and then half again) on a 5X exit — as I didn’t have any taxes profits in the following years to net again. (You can carry losses forward for tax reasons, not backwards).
Dividends and buybacks are similar when everything is hunky-dory but never equivalent.
I am not a financial expert but how are buybacks reflected in a company’s balance sheet?
My theory is that buybacks give companies a false sense of complacency. If they do $1 billion worth of buybacks, it doesn’t feel they are really “giving out” $1 billion back to investors. Rather, $1 billion in cash just got converted to a long term asset(their shares). Thus this is how airlines get into a cash crunch. They are lulled to believe they can go crazy with buybacks with no consequences.
If instead they did a special dividend for $1 billion, they would immediately feel the consequences. It is money taken straight out of their bank. Thus they would of course consider more carefully how much to give as a dividend.
Just my theory and why I am against buybacks and for dividends only.
Stocks bought back disappear (making each remaining share reflect a larger percentage of the company). It is in general the reverse of a public offering in which money comes in and new shares come into existence (making each previously existing share represent a smaller part of the company).
This is not technically exact, but probably a good mental model.
Because buying back shares is typically better for non US investors.
I don't live in the US and I am not a US citizen, but if I owned those American Airlines shares, I'd need to pay 30% withholding tax to the US government on that dividend (strictly speaking it's withheld vs. actively paid).
That's in addition to taxes that need to paid in one's own country (assuming no dual taxation treaty).
With a share buyback, the share price rises (ideally) instead and when it is sold, there's no US tax on the capital gain for non resident non citizens.
Also, they are efficient in that they defer the taxation to the point of share sale, but they are inefficient in that holding a stock for less than a year in the US taxes them at the much higher short-term capital gains rate.
Furthermore, the dividend is cash, it cannot go to zero without giving you a chance to realize it - whereas a stock can go to zero at any time (and many will likely do shortly). I was a small investor in a company that did a respectable 5X exit for shares of the purchaser. I was thus locked up for 6m, during which they did a stock buyback but later promptly went down by 80 percent for reasons unrelated to the purchase of the company I was an investor in.
What was supposed to be a nice 5X exit, turned to a meager 1.5X, and I was extremely lucky that the lockup ended September (that is, same year) because otherwise, for tax reasons, I would have been approx -0.5X (that’s all my investment and then half again) on a 5X exit — as I didn’t have any taxes profits in the following years to net again. (You can carry losses forward for tax reasons, not backwards).
Dividends and buybacks are similar when everything is hunky-dory but never equivalent.