What does a BIDEN Presidency look like?

[Jacob]

The shareholder is not compelled to declare dividend income.  He or she can choose to hold the appreciated shares and pay capital gains later.

So for the shareholder, the value gain from the increase in stock prices (including that driven by buy-backs) provides more flexibility in terms of financial planning, and so is generally superior to dividends?

Makes sense.

In addition to what Yi said, dividends (even if special) build expectation of future dividends which may not be sustainable.

Also, large special dividends create unwelcome volatility in the stock price and can create windfalls for very temporary holders. For example if company has an extra few billion to either pay out as a special dividend or a stock buyback, the stock buyback will almost certainly be over time and not have a huge daily impact on the stock price. But if there is a special dividend, if I'm randomly trading in and out of the stock, I may (or may not) end up holding it on the dividend date and get the full thing as a cash payment.

That makes sense as well. So both from the perspective of company directors and of shareholders, distributing excess revenue via buy-backs is generally superior to dividends (I'm sure there are exceptions, but this is the general case)?

That also makes sense, thank you.

So share buy-backs is the superior way to put excess cash from the company into the pockets of shareholders, compared to dividends.

In that case it seems imminently reasonable that the taxation implications of dividends and stock buy-backs should be aligned, since paying dividends is also about putting excess cash from the company into the pockets of shareholders.

Then there is, of course, the ideological and political question of what degree wealth generated by the stock market should be taxable. Seems to me that if you think it should contribute more (for whatever value of "more") that a stock-buy-back tax is reasonable, and conversely if you think stock market wealth generation should be minimally taxed then it's not a good idea.

[alfred russel]

So share buy-backs is the superior way to put excess cash from the company into the pockets of shareholders, compared to dividends.

In that case it seems imminently reasonable that the taxation implications of dividends and stock buy-backs should be aligned, since dividends is also about putting excess cash from the company into the pockets of shareholders.

Then there is, of course, the ideological and political question of what degree wealth generated by the stock market should be taxable. Seems to me that if you think it should contribute more (for whatever value of "more") that a stock-buy-back tax is reasonable, and conversely if you think stock market wealth generation should be minimally taxed then it's not a good idea.

At the simplest level of analysis, a board of directors should be indifferent between paying dividends and buying back stock--a $1 dividend gives shareholders $1 cash, while a buyback gives them $1 of appreciation. Because the effect is similar, in the US there was a reform about 20 years ago so that dividends are also taxed at the capital gains rate so that the tax treatment was aligned. This isn't perfect, because while the tax rates may be aligned, if I receive a dividend I have to pay the taxes today, but if there is a stock buyback, I don't have to pay taxes on the appreciation until I sell the stock, which could be years in the future. So there is still some incentive for buybacks over dividend payments.

There are a lot of other considerations but in general:

-if a company is turning recurring and regular profits that can't be reinvested effectively, the company will likely pay dividends because shareholders will be able to count on regular dividends vs. the uncertainty of stock buyback programs. Uncertainty will depress the stock price, so paying dividends is preferred.
-if a company has cash it wants to return to shareholders but doesn't believe it can sustain a regular dividend into the future, it will likely have a stock buyback program.

[Jacob]

Thanks Dorsey

Am I correct in reading into your post that prior to this change, dividends and stock-buy-backs were more or less aligned in terms of tax (other than the ability to defer capital gains from share appreciation), and this new taxation scheme will tax stock-buy-backs more than dividends?

[alfred russel]

Thanks Dorsey

Am I correct in reading into your post that prior to this change, dividends and stock-buy-backs were more or less aligned in terms of tax (other than the ability to defer capital gains from share appreciation), and this new taxation scheme will tax stock-buy-backs more than dividends?

Yes but the tax is 1% and payable by corporations rather than the recipient of the dividend. So individual investors won't see the change directly, and the tax isn't at a super radical rate that is going to destroy american capitalism.

[Admiral Yi]

There's also the distortionary effect.  Companies that buy back stock have come to the conclusion that their earnings can not be optimally invested, perhaps because they are operating in a mature market with no room for growth.  Returning money to the shareholders allows them to direct that money to presumably more productive investments.

[Syt]

Dumb question, probably, but can a company buy back all its stock? If that happens, who would be the shareholders? I assume a corporation couldn't "own itself"?

[Tonitrus]

Dumb question, probably, but can a company buy back all its stock? If that happens, who would be the shareholders? I assume a corporation couldn't "own itself"?

Sure...that is just an IPO in reverse, or "going private".

[Admiral Yi]

Sure...that is just an IPO in reverse, or "going private".

Those two are not the same thing.  If Musk buys Twitter the cash will come out of his pocket and the shares will go to him.  When a company buys shares the money comes from them and the shares don't go into an individual.

I guess theoretically a company could zero out the stock and restructure as a partnership, but I've never heard of that being done.

[Gups]

Dumb question, probably, but can a company buy back all its stock? If that happens, who would be the shareholders? I assume a corporation couldn't "own itself"?

Presumably there has to be at least one share left or it ceases to be a company.

[DGuller]

  You probably can't buy back all the stock at literally the same time.  Whoever owns the last stock before it's bought back becomes the sole owner of the company, and then the stock loses its meaning as a split "deed" on the company.

[crazy canuck]

The shareholder is not compelled to declare dividend income.  He or she can choose to hold the appreciated shares and pay capital gains later.

So for the shareholder, the value gain from the increase in stock prices (including that driven by buy-backs) provides more flexibility in terms of financial planning, and so is generally superior to dividends?

Makes sense.

In addition to what Yi said, dividends (even if special) build expectation of future dividends which may not be sustainable.

Also, large special dividends create unwelcome volatility in the stock price and can create windfalls for very temporary holders. For example if company has an extra few billion to either pay out as a special dividend or a stock buyback, the stock buyback will almost certainly be over time and not have a huge daily impact on the stock price. But if there is a special dividend, if I'm randomly trading in and out of the stock, I may (or may not) end up holding it on the dividend date and get the full thing as a cash payment.

That makes sense as well. So both from the perspective of company directors and of shareholders, distributing excess revenue via buy-backs is generally superior to dividends (I'm sure there are exceptions, but this is the general case)?

That also makes sense, thank you.

So share buy-backs is the superior way to put excess cash from the company into the pockets of shareholders, compared to dividends.

In that case it seems imminently reasonable that the taxation implications of dividends and stock buy-backs should be aligned, since paying dividends is also about putting excess cash from the company into the pockets of shareholders.

Then there is, of course, the ideological and political question of what degree wealth generated by the stock market should be taxable. Seems to me that if you think it should contribute more (for whatever value of "more") that a stock-buy-back tax is reasonable, and conversely if you think stock market wealth generation should be minimally taxed then it's not a good idea.

No, share buy backs put no money in the pockets of shareholders.  It is a shell game that puts money into the hands of those who have pay packages based on short term measures of share value and those given stock options - ie the people who dreamed up the scheme in the first place.

For this to put money in the pockets of the shareholders themselves, they would have to sell their stock.  But that becomes a game of speculation.  It has now become so common that people start deluding themselves into thinking it is an efficient use of resources.  But it would actually be better for shareholders if they could benefit by keeping their stock and participate in the success of the company through dividend payments.

The scenario Yi proposed - the shareholders benefit through a temporary increase in sharevalue is by definition very short sighted.  Share value, of course fluctuates.

[DGuller]

What's the difference between a stock buyback, and shareholders receiving dividends and either reinvesting all of them into more shares or disposing of all shares?  Ignoring taxes, the only difference seems to me the nominal value of the share, since in the second scenario you have more shares outstanding dividing the same market cap.  If executive incentive options don't take into account stock dilution or concentration, then it seems like a problem with badly structured compensation packages, not stock buybacks.

[The Minsky Moment]

The Modigliani-Miller hypothesis (MM) posits that a firm's value is invariant to capital structure - i.e. you can't increase firm value by leveraging or deleveraging. If MM holds than share buybacks don't do anything; you reduce share count but lose cash at the same time.  It should be a wash.

MM might not hold if:
1) firm value increases (or decreases) with leverage for some reason.  Then buybacks can affect value but only because it is a kind of leveraging.
2) the firm takes advantage of inside information.  I.e. the firm times buybacks for when its shares are undervalued, based on info not yet public.  For this reason, buybacks are sometimes seen as a buy signal and prices will rise on the news.

Unfortunately, CC is probably right most of time - executives put buyback programs in place because it creates a ready market for the shares they earn as compensation.  I.e. the main purpose of buyback programs is to help insiders efficiently liquidate their non-cash comp.

From DG

If executive incentive options don't take into account stock dilution or concentration, then it seems like a problem with badly structured compensation packages, not stock buybacks.

Q. Who designs comp packages?  A. Comp committees.  Q. Who compromises comp committees?  A Other execs and former execs.

It's back scratching all the way around.

[The Minsky Moment]

Another feature of buybacks is that they reduce float.  Combined with other trends favoring private financing, it contributes to the withering of the public markets as compared to private equity.  Whether this is a good or bad thing is a matter of debate.

Overall, I am skeptical re buybacks as a corporate tool.  Most of the reasons for why they might be useful seem to involve some kind of market dysfunction.

[alfred russel]

No, share buy backs put no money in the pockets of shareholders.  It is a shell game that puts money into the hands of those who have pay packages based on short term measures of share value and those given stock options - ie the people who dreamed up the scheme in the first place.

For this to put money in the pockets of the shareholders themselves, they would have to sell their stock.  But that becomes a game of speculation.  It has now become so common that people start deluding themselves into thinking it is an efficient use of resources.  But it would actually be better for shareholders if they could benefit by keeping their stock and participate in the success of the company through dividend payments.

The scenario Yi proposed - the shareholders benefit through a temporary increase in sharevalue is by definition very short sighted.  Share value, of course fluctuates.

This isn't correct.