[jon_dahl]

I'll go on the record asking a question that might be dense: why would this apply to stock buybacks and not dividends?

Stock buybacks accomplish a similar goal to dividends. You're transferring profits to shareholders. By paying dividends, you distribute profits via cash. With a buyback, you distribute profits by increasing the value of equity. There are tradeoffs between these two approaches (tax treatment and otherwise), but they do the same thing.

And aren't dividends (or future dividends) the ultimate point of equity?

[rumanator]

> By paying dividends, you distribute profits via cash.

Dividends are paid from profits. This particular example of stock buyback would be paid from an emergency loan granted to the company under the assumption that it is to be used to help the company get back on it's feet.

Wasting an emergency loan on buybacks is the equivalent on burning the emergency cash by funneling it straight into the pockets of the company owners at the tax payers' expense, in a way that's a whole lot like fraud.

[tedunangst]

Where does the idea that the company is going to immediately spend its emergency loan on more buybacks come from?

[not2b]

From what happened in 2008.

[rumanator]

> Where does the idea that the company is going to immediately spend its emergency loan on more buybacks come from?

From the topic of the discussion you're commenting on.

[umanwizard]

What would prevent them from doing exactly the same thing with dividends: spending the emergency loan on them?

[toast0]

Dividends are sometimes paid from profits, and sometimes paid from loans.

[lavezza]

Companies used to take their profits and either invest in R&D/Capital if they were trying to grow, or give dividends if they were mature. But once C-level compensation became focused on stock options, top management have an incentive to increase the stock price over other concerns. If a company spends every dollar of profit (or cheap loans) on buybacks, they aren't spending money on things that will sustain the business long term like R&D, having funds to weather a downturn, etc. Not that every buyback is a problem. Apple has done buybacks because they felt there stock was the best place to invest their money. It's not like they blew through their cash account just to boost the price.

[thatthatis]

Also, stock buybacks don’t incur capital gains tax until the appreciated stock is sold. Dividends are taxed when issued.

Maybe there’s an effect of executive compensation, but the standard narrative on buybacks is tax avoidance

[hjrnunes]

Because to earn dividends you must be a owner i.e. actually hold company stock.

To profit from buybacks you only need the option of buying the stock at a lower price than the buyback price.

The CEOs and other CXXs of these firms often have large amounts of options included in their comp packages.

This is why buybacks happen at market highs instead of market lows as sound management principles and common sense would suggest.

Increasing shareholder value by increasing equity value is just a pretext. The real purpose of buybacks is a swindle to funnel company money directly into the pockets of the C-Suite through what in the books appears a routine management operation.

These executives decide on the buybacks and exercise their share options just before, thus pocketing millions in company money and actually hurting shareholders.

Shareholders get the blame despite having little to no power and seeing their investments ruined and looted. Also, in many firms, a lot of shareholders are also employees.

You can find it better told here:

https://www.theatlantic.com/magazine/archive/2019/08/the-sto...

[hedora]

Some companies pay out “retained dividends” on unvested RSUs.

Like buybacks vs regular dividends, the main differences have to do with their taxability.

From what I can tell, the main complaint in the Atlantic article is that CEOs time buyback announcements to coincide with their stock sales. The first example they give is the Home Depot announcing a buy back (apparently in the Feb ‘18 earnings call), and then selling stock after the insider lock up window opened. In all likelihood, that sale was scheduled well ahead of time (execs have to do this to avoid insider trading charges).

So, the controversy seems to reduce to Home Depot having a strong quarter and buying back stock, making money for shareholders, including the CEO.

Note that if they’d issued dividends, and they pay retained dividends on unvested RSUs, the net effect would be exactly the same (except taxes).

[hjrnunes]

The controversy is not insider trading. It is executives exercising their share options during buybacks the price of which they themselves decide.

They decide when to buyback and choose to do it at market highs. This is not sound management and is not in the interest of the shareholders.

I learned about it in a recent edition of "The Intelligent Investor".

Most executives are shareholders only during the brief moment it takes exercising their options. They are not shareholders in the investor or even trader sense.

The claim that this amounts to distributing dividends is also not true. Options which is most of what the executives are holding don't earn dividends.

[tedunangst]

Because somehow it was decided that buybacks are greedy and dividends are good. Probably because your grandparents talked about retiring on dividends. But paying out the money in a different makes it evil.

[hedora]

Buybacks used to be illegal, you know.

(Well put, by the way — I’m agreeing with you.)

[teruakohatu]

The big issue is, as I understand it, companies borrowing money to buyback stock.

[tedunangst]

Companies borrow money to pay dividends too.

[rumanator]

>>Companies borrow money to pay dividends too.

The very definition of "dividends" is precisely distributing profits to it's shareholders.

[formercoder]

No, it’s retained earnings ending balance = retained earnings beginning balance + net income - dividends

Nothing about dividends vs buybacks has to do with where the cash comes from.

[rumanator]

None of the elements of your equation reflects borrowed cash. In fact, you acknowledge that dividends are drawn from earnings. So what's your point?

[umanwizard]

Well, all I can say is get a new dictionary, because companies really can and do borrow money to pay dividends.

Of course, any bailout would have to have terms preventing this, and it should prevent immediately spending it on stock buybacks too.

[rumanator]

> Well, all I can say is get a new dictionary,

Great umanwizard, it's a good thing you're here to tell us that Cambridge university is wrong! After all, what do they know about finance and economics?

https://dictionary.cambridge.org/us/dictionary/english/divid...

[robocat]

This is clearly false: there are plenty of value companies with high volatility of profits and low volatility of dividends. Certainly I have seen loss making companies still pay dividends.

[AnimalMuppet]

No, the definition is a payment from a company to stockholders that's labeled "dividend". I know of companies that were losing money that still paid dividends.

[teruakohatu]

I am out of my depth here but isn't that because of a shortfall verses expected profits, or restrictions on moving money around the world (apple) verses borrowing huge amounts of money at low interest rates to give investors a tax advantage and giving management large bonuses?

[raincom]

buy backs help c-level executives and shareholders; dividends help just shareholders, and may also increase the tax burden on these shareholders.

[mrfusion]

Two words, moral panic.