What does a BIDEN Presidency look like?

[crazy canuck]

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.

One obvious difference is choice.  As an investor, I would much rather have the choice of where to invest my dividend money (or spend it) rather than suffer an artificial pump so that the executive suite can exercise a lucrative and perfectly timed dump.

Remember the thesis in favour is that buy backs put cash in the pockets of shareholders.  That notion does not hold up to scrutiny.

[Admiral Yi]

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.

I think this overlooks one thing: that shareholders can neither spend nor reinvest cash in a company's treasury.

[The Minsky Moment]

I think this overlooks one thing: that shareholders can neither spend nor reinvest cash in a company's treasury.

It assumes shareholders can do their own personal portfolio balancing

[alfred russel]

One obvious difference is choice.  As an investor, I would much rather have the choice of where to invest my dividend money (or spend it) rather than suffer an artificial pump so that the executive suite can exercise a lucrative and perfectly timed dump.

Remember the thesis in favour is that buy backs put cash in the pockets of shareholders.  That notion does not hold up to scrutiny.

I don't know why I'm going to try, but here we go:

assume that a company is worth $100 and has 100 shareholders with one share each. Each share is obviously worth $1 a share.

The company has $20 of excess cash that it can't invest. If it pays that as a dividend, each shareholder gets a $0.20 dividend. The share price is reduced to $0.80 because the company is only worth $80 after the dividend.

If it uses that for a stock buyback, it buys 20 shares with the $20. Now the company is worth $80 as before, but there are only 80 shareholders. So the remaining shareholders didn't get a dividend, but because there are only 80 shareholders at the reduced price the shares are now still worth $1 a share.

So shareholders should be indifferent between a buyback and dividend. At the end of the day, they either have an $0.80 share and $0.20 of cash, or no cash but a $1.00 share.

[DGuller]

But what if you want cash, and not a stock, because you want to decide for yourself?  You can't just exchange stock for cash, can you?

[Berkut]

One obvious difference is choice.  As an investor, I would much rather have the choice of where to invest my dividend money (or spend it) rather than suffer an artificial pump so that the executive suite can exercise a lucrative and perfectly timed dump.

Remember the thesis in favour is that buy backs put cash in the pockets of shareholders.  That notion does not hold up to scrutiny.

I don't know why I'm going to try, but here we go:

assume that a company is worth $100 and has 100 shareholders with one share each. Each share is obviously worth $1 a share.

The company has $20 of excess cash that it can't invest. If it pays that as a dividend, each shareholder gets a $0.20 dividend. The share price is reduced to $0.80 because the company is only worth $80 after the dividend.

If it uses that for a stock buyback, it buys 20 shares with the $20. Now the company is worth $80 as before, but there are only 80 shareholders. So the remaining shareholders didn't get a dividend, but because there are only 80 shareholders at the reduced price the shares are now still worth $1 a share.

So shareholders should be indifferent between a buyback and dividend. At the end of the day, they either have an $0.80 share and $0.20 of cash, or no cash but a $1.00 share.

Hmmm.

In the first case, each shareholder owned 1% of the company.

When the company bought back those shares, they shares didn't disappear - they just became owned by the company - the company owned itself. It could resell those shares.

The 80 shareholders did not suddenly own 1/80th each, they still only own 1/100th of the company.

Right?

[alfred russel]

One obvious difference is choice.  As an investor, I would much rather have the choice of where to invest my dividend money (or spend it) rather than suffer an artificial pump so that the executive suite can exercise a lucrative and perfectly timed dump.

Remember the thesis in favour is that buy backs put cash in the pockets of shareholders.  That notion does not hold up to scrutiny.

I don't know why I'm going to try, but here we go:

assume that a company is worth $100 and has 100 shareholders with one share each. Each share is obviously worth $1 a share.

The company has $20 of excess cash that it can't invest. If it pays that as a dividend, each shareholder gets a $0.20 dividend. The share price is reduced to $0.80 because the company is only worth $80 after the dividend.

If it uses that for a stock buyback, it buys 20 shares with the $20. Now the company is worth $80 as before, but there are only 80 shareholders. So the remaining shareholders didn't get a dividend, but because there are only 80 shareholders at the reduced price the shares are now still worth $1 a share.

So shareholders should be indifferent between a buyback and dividend. At the end of the day, they either have an $0.80 share and $0.20 of cash, or no cash but a $1.00 share.

Hmmm.

In the first case, each shareholder owned 1% of the company.

When the company bought back those shares, they shares didn't disappear - they just became owned by the company - the company owned itself. It could resell those shares.

The 80 shareholders did not suddenly own 1/80th each, they still only own 1/100th of the company.

Right?

Nope. They own 1/80th of the shares outstanding. The 20 shares of treasury stock held by the company are effectively collectively held by the shareowners.

If you disagree...well when you read about earnings per share and things and PE ratios, those are calculated on the basis of shares outstanding and don't include any treasury stock. The same for when the market capitalization of companies is calculated: the calculations are based on shares outstanding and exclude treasury stock as well.

[DGuller]

The 80 shareholders did not suddenly own 1/80th each, they still only own 1/100th of the company.

Right?

They own 1/100th of the company, but the company consists of 20% of the company, so they also own 1/100th of 20% of the company.  However, 20% of the company also consists of 20% of 20% of the company, so they also own 1/100th of 20% of 20% of the company.  However, 20% of 20% of the company also consists of 20% of 20% of 20% of the company, so they also own 1/100th of 20% of 20% of 20%.  If you keep adding it up, 0.01 + 0.002 + 0.0004 + 0.0008 + ... = 0.0125, which incidentally makes up 1/80th of the company.

[Admiral Yi]

The treasury shares are just like authorization to reissue shares.

[OttoVonBismarck]

I'd point out, while it is just one data point--Berkshire and Buffett don't believe in dividends and do believe in share buybacks. Additionally, because essentially all of his wealth is tied exclusively to his vast ownership of BRK.A shares, Buffett isn't really playing compensation games. His compensation, unlike the typical compensation of a board-hired executive, is basically a flat salary with some security and travel benefits (he does not get incentive-based stock grants--his total comp is $100,000 in salary and around $250,000 in fringe benefits, mostly related to corporate travel and security arrangements.)

The way I've seen Buffett make his argument is his "ideal" Berkshire shareholder is someone who buys and holds the shares basically their entire lives, and he thinks the primary use of the vast cash his companies throw off (a lot of it is insurance float) is to invest in something that will provide a nice return, which will ultimately push the share price up. His argument is when he cannot find good investments, or his cash holdings are simply too large, it is more efficient to raise shareholder value with share buybacks vs dividends. I believe Buffett has also said he only favors buybacks when he has reason to know that Berkshire shares are being offered at "less than intrinsic value" on the market.

[The Minsky Moment]

I'd point out, while it is just one data point--Berkshire and Buffett don't believe in dividends and do believe in share buybacks.

Of course they do; buybacks are tax advantaged compared to dividend distributions.  But that is an argument in favor of taxing them.

[Admiral Yi]

https://www.youtube.com/watch?v=4PZ84O42sqo

Heartening signs on Senate races. 

[The Larch]

Fauci to step down by the end of the year.

[Oexmelin]

The death threats must have taken their toll.

[DGuller]

Good God, are we actually going ahead of with the student loan forgiveness?  This is banana republic territory.