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by sah88
4233 days ago
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In both cases the money transferred to shareholders is the same. There is only a distinction when management has options. Think of it this way. Consider a company has NPV of 10 dollars with 10 outstanding shares priced at $1 and 5 dollars in the bank. If it pays out 5 dollars in dividends the NPV is now $5 and there are still 10 outstanding shares worth 50 cents each. If the same company buys stock back with that 5 dollars the NPV also falls to $5. However there are only 5 outstanding shares now so each share is still worth 1 dollar. Now if management doesn't have options, story over no one is any better or worse off assuming market efficiency. However if management has options to buy 5 shares at say, 25 cents, they gain significantly more because the total number of shares has been diluted but the NPV is still the same. In the first scenario total shares increase to 15 and their value decreases to ~33 cents. Transferring 1.6 dollars to management. In the second scenario total shares increases to 10 and their value decreases to 50 cents. Transferring 2.5 dollars to management. |
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Yeah, that has been discussed in a few other comments. There's nothing stopping you from doing the same deal with dividends by giving out the dividend as well as adjusting the outstanding options, or adding clauses to the options to fix this case by changing the strike price or number of options in case of share buybacks.
The article doesn't argue that though, it's saying that since not all shares are retired and some are used as compensation that the value of the buyback isn't all given to shareholders. In reality those two transactions (buyback and issuing shares as compensation) are completely separate transactions that don't depend on each other.