If I own 100 shares, a buyback at $30 is $3000.
If the CEO owns a thousand shares, a buyback at $30 is $3 million
Same math for the dividend.
Nothing unequal about it.
You math skills are equal to your ability to ignore what others write. Quite the achievement.
Yes, my math was wrong.
The point stands. The distributions, whether through dividends or buybacks, are on a PER SHARE basis. Nothing unequal about that.
I’ll put this simply: dividends lower share prices, buybacks raise share prices. And dividend payouts come with tax consequences that aren’t as easily dodged as capital gains.
And the real issue isn’t either act - it’s reducing the company’s cash reserves below prudent levels that’s the problem. Every CEO knows better, and should face repercussions for allowing it to happen. IMO, any bailouts should come with the requirement that the leadership that mismanaged the company will be replaced, and policies implemented that set guidelines for cash reserves going forward. Is that government interference? Yes, so’s giving private companies billions of dollars. You want hands-off, you take the good with the bad, just like Alan Thicke wrote about.
As for shareholder pressure to use the cash, anyone that doesn’t understand the need for cash reserves should be ignored as a short-sighted idiot looking to make a quick buck. If you’re sitting on billions like Buffet, that warrants a conversation. If you’re keeping enough to cover operating expenses for a bit like Apple, that’s just smart leadership - and I’m not a fan of AAPL.
Not really.
I think you’d best review the very basics of stocks. When a stock goes ex-dividend, the stock price falls by the amount of the dividend. This is basically just a matter of simple arithmetic.
Sure, investors will bid up the prices of successful companies — or companies they want to think are successful — so regular dividends may make shares attractive. But this doesn’t counter the message of the preceding paragraph. And note that any price boost solely due to dividends is not directly based on fundamentals. (In fact, very high dividends are a danger signal! Wp Glimcher, on top of the linked list, is now selling for 63 cents a share!)
You also appear to be confused about how stock buybacks work. If you own 100 shares in a company that buys back 1% of its stock, you don’t automatically get 1 share bought back. Instead the company buys shares from willing sellers on the ordinary market. And as I mentioned, those sellers may be the very directors that approved the buy-back!
As pointed out, yeah, really. In my opinion it’s silly that it happens, but it happens.
If you’re a CEO trying to pump up your bonus, doing share buybacks will help you; raising dividends won’t.
NO, you need to review the link that I gave you.
Of course, the price goes down on the ex-dividend date. But it tends to go back up afterward.
Companies are managed to achieve the goals of the corporate board. If the board is interested in the growth of the company in its ability to provide more of the products or services the company has been successful with, it may well make sense not to pay large, or even any dividend. When capital is costly, operating out of current income may be much better for the company as a whole than increasing the price per share to make the company “more valuable.” If capital is plentiful, and cheap, using current income to pay dividends, and buy back shares might be more beneficial. Board members, and managers who receive considerations based on only one of those factors will favor the one which puts money in their own pockets. Benefit to managers, and benefit to shareholders, and benefit to the viability of the corporation are not the simple matter proposed by some.
Keep in mind the actual processes of issuing, buying, and selling shares is an expense, and it does not actually provide a benefit for the company. Issuing new shares to raise capital is a risk, but in some economic climates it is less of a risk than taking out loans, or selling existing shares.
Buying shares of other companies may be more beneficial in some particular situations.
It’s not rocket science. Rocket science is pretty straightforward.
It’s certainly true that if companies buy back stock, that increases Earnings Per Share (which is what septimus was presumably going for originally) by lowering the denominator and if they don’t need the cash, it doesn’t change the numerator. If they have to borrow in order to finance the stock buybacks, that decreases earnings by increasing interest expense, but they presumably only do this when the reduction in the share base more than makes up for it. The extra buying pressure on the stock may itself cause prices to go higher in the short-term, but the market will presumably work out the correct effect of the company losing the cash and perhaps even taking on additional debt to finance it.
In terms of borrowing to issue dividends or buy back stock, it’s more along the lines of “we’re borrowing money because we have the ability to pay interest on it at a lower rate than our return on assets, so we’re going to leverage ourselves more” followed by “we now have all this extra cash we don’t need, and will use it to buy back our stock”. There’s absolutely nothing wrong with this as long as you actually don’t need the cash. The problem with this is when they do end up needing the cash and don’t have the ability to borrow any more. It’s the massive piles of debt that companies acquire because it’s so cheap that causes recessions in the first place most of the time as they are unable to weather a small sag in demand, and why interest rates need to be raised once the economy gets back on track in order to curb over-speculation.
Companies stuck in this situation of needing cash after having bought back their own stock should accept their poor investment in their own stock and sell it back on the market. Unfortunately, no executive that gets paid mostly in stock is going to like that, and that’s part of the problem with stock-based compensation - a concern more about the current stock price than the stock price 10 years from now. There has in general been a trend of making stock grants not sellable for longer periods time, but when you’re competing for top talent, it’s not necessarily possible to get the best people if you can’t gratify them relatively quickly.
Google keeps presenting me with new results from old searches. :smack:
Harvard Business Review in “Why Stock Buybacks Are Dangerous for the Economy” claims that in 2018 S&P 500 companies returned a whopping 109% of net income in the form of buybacks and dividends. Wow! Think of it. That’s not a few outlying companies: that’s the S&P 500 universe in the aggregate returning more than they took in. Obviously bond sales were huge. And this despite that 2018 was a year with after-tax profits suddenly inflated by GOP generosity.
Google also presented me with numerous examples of CEOs and Directors cheerfully selling shares (implying they thought the price was high) while approving buybacks (pretending the price was low).
(Note that the HBR article speaks of “Dangerous for the Economy.” “Evil” is an altogether different type of word and signals that its speaker views economics as just a backdrop for politics or as a morality play.)
They can spend the money to reduce the profit, ie: bonuses to staff, support of staff. Some companies in the UK have paid back some/all of their staff’s furlough money to the government.
Shares and share prices are an artificial artefact of the stock market being invented pre-computers. If we were to create a stock market from scratch today, we would probably allow people to buy stock in arbitrary quantities and probably quote something as $100 being able to purchase 0.0002315% of the company or something and have the % ownership fluctuate instead of the share price.
Viewed in this lens, a company giving you a $3 dividend per $100 of share ownership and a company buying back 3% of all of its shares, $103 in the former case should buy you the exact same proportion of the company as $100 in the latter case should. It’s just that using the accounting of shares and share prices, this reality gets somewhat obscured.
It’s a common theory that executives prefer buybacks because it increases the share price but, as far as I’m aware, no executive compensation packages are actually denominated in pure share prices, they’re all denominated in derived share prices based on market cap so the buyback “trick” would not work. The reason companies have increasingly shifted towards buybacks over dividends, as mentioned above in the thread, is because it’s more tax advantaged.
The column only briefly touched on the most intriguing part of the question, IMO, and the thing that blows my mind the most about the stock market: The price of a stock is not directly related to the performance of the company. It’s all about how many people want to buy or sell the stock.
I liken it to a parimutuel betting system, like at the race track. Except instead of betting on a horse, you’re betting on how many other people are betting on the same horse as you, and the results of the race don’t matter.
But just like at the track, win or lose, the house will take its cut.
Wheelz, that makes total sense.
Except at certain liquidity events where stock ownership directly converts to cash, most notably, bankruptcies, acquisitions, dividends, buybacks and stock offerings.
Stockholders are the most junior debt holders so you can have an entire market believing whatever they want about the stock (as in the case of Hertz) but when a more senior debt holder does a capital call and the company can’t meet the obligation, then the value of the stock is set by a bankruptcy judge at precisely zero.
On of the most common forms of executive compensation is options. These allow you to buy stock at a fixed price. An executive holding options would much prefer buybacks to keep the share price up rather than dividends which lower them.