That is to say from the shareholders to themselves.
But if you’re a foreigner owning US stocks, they’re taxed much differently.
Right off the bat, the IRS withholds 15-30% of dividende paid to foreigners. Not so with cap gains.
And, at least in Canada, US stock dividends are taxed at full personal tax rates.
Cap gains are cap gains, foreign or domestic in Canada.
So I’m all for cutting dividends and doing buybacks.
Your basically taking more risk with capital that income to reward you for putting your capital at risk
Dividend and company taxes can really screw certain types of shareholders.
It also depends on what kind of account the holdings are in. In retirement accounts, it’s all the same.
In our « tax-free savings accounts », we still get hit by IRS withholding taxes that we can’t write off against any corresponding taxes (because there aren’t any).
In a cash account, US dividends are taxed as if they were bond interest.
Capital gains also let stockholders pick and choose which year to crystallize their gains.
I don’t plan on selling some funds until I have a low tax year.
on topic https://www.ft.com/content/0f863da4-0b6e-11ea-b2d6-9bf4d1957...
Tax rate on cap gains and dividends is 20%.
Inflation is zero.
Company earns 10% of its market cap yearly in profits.
Company's market cap is static over time.
Scenario A: returns profits as share buy backs.
Scenario B: returns profits as dividends on which the shareholder pays tax and reinvests the rest in company stock.
At the end of the scenario, sell all stock paying capital gains tax due (nothing to pay on scenario B since stock price has not changed.)
Even though dividends and capital gains are taxed at the same rate, scenario A beats scenario B by 10% over 10 years and 45% over 30 years.
There's some confusion in your comment. The company is already property of the shareholder. The shareholder holds shares of the company. Thus, the assertion that stock buybacks transfer wealth from the company to the shareholder is a tautology because the wealth from the company is already the wealth of the shareholder.
Perhaps more accurate would be to say they liquidate part of a company's wealth (the broader value of all assets owned by the company) into stock price (the value at which a share can be sold on the open market).
From this perspective it seems fair to say that they transfer wealth from company control to shareholder control.
Of course, all of these characterizations are the same and describe the same event, but I find this one the least inflammatory. It makes it clear that no transfer of wealth is happening, that buybacks don't meaningfully effect share price, etc.
No. It drives up the share price. That's nice for people who want to sell, but does little for the long term. A company that has dividends might be able to increase them if the number of shares is reduced, but buybacks are often done by companies that dont have dividends. There are companies doing both and I'm not sure what to make of that.
No, because the shareholders already have the wealth that is in the company, since stock is a form of wealth. It makes some part of the wealth shareholders already have liquid, though.
What is peculiar is that this act has nothing to do with running a company well in the long term, yet is the most immediate way executives can improve their "performance based compensation". Execs seem to have found a hack around stock based compensation that biases companies towards divestiture over investment, and the short-term minded shareholders are onboard with this scheme at the expense of long-term minded shareholders.
This looks largely like a bug in the executive compensation system...I'm curious what kinds of fixes are going to come out of the world of MBA academia.
This same calculation can be made for stocks based on their dividends and any terminal value from an eventual acquisition. These calculations fluctuate more because dividends are variable.
The parent's comment is right though, its something buffet often observes: If a company buys back stock far about its intrinsic value, it is transferring wealth from current shareholders to now ex-shareholders. If it buys it back below intrinsic value, then it is transferring it from now ex-shareholders to shareholders.
There is actually a wonderful story that illustrates this. Try searching for "buffet pritzker Rockwood & Co arbitrage".
The short version is that Rockwood & Co was sitting on a massive supply of very valuable chocolate, and its stock price didn't reflect the value of that chocolate. Pritzker controlled the company, and announced it would redeem shares for chocolate (a buy-back in chocolate). Arbitrage traders then bought up shares at the low price, redeemed them for more valuable chocolate, and pocketed the difference.
BUT, what they didn't calculate was that the amount of chocolate that remained inside the company was far larger than the amount that was going out to the departing shareholders. Essentially, the chocolate 'payments' for stocks were far below the intrinsic value of the company. So, every time an arbitrage trader traded in shares for chocolate (at a profit to them) Pritzker was actually getting far richer by retaining his remaining shares. Everyone was winning, but Pritzker was winning far more. In the end, Pritzker retained a much higher ownership percentage of an only slightly smaller stockpile of very valuable chocolate, and made a lot doing it.
I think I saw the full version of this story in the biography of Buffet, but I am not sure. It is super fun. It illustrates why a management team that is buying back shares below intrinsic value is helping the remaining owners increase their wealth, and vice versa.
The fact that arbitration actually exists is because there is a disconnect between price and wealth generated solely by information differential.
And beyond an exchange, that, merely because their parent's opportunity cost differs greatly, raising one infant is in fact vastly more valuable than another essentially identical infant.
I would suggest that price is not identical to value, it's just that the market is usually the best way to determine a value.
In the extreme case of a disclosure that will tank the stock price their current investors would be better if the company sold new shares ahead of that announcement. This would then dilute the loss across more investors. Though the ethical issues should be obvious.
Buybacks are simply the opposite of issuing new stock which happens to have tax advantages.
https://www.marketwatch.com/story/secs-jackson-says-research...