This is kind of funny because the SEC is basically saying Nvidia held their share price artificially high by doing this, but Nvidia also bought back billions of their own shares, by this logic they were overpaying.
I am curious if there is evidence for this. I don’t see how distributing capital that could be used for growth pressures share prices up.
People not selling back the shares are trading the current profits for a bigger share of future profits, which may never exist. So I am not sure on a risk adjusted discounted cash flow model there is any justification for increased price pressure.
I always presumed that the main benefit of buybacks v dividends was being able to time capital gains for tax purposes.
But this is all speculation too, no evidence behind my post.
The other reason is that there are very few stocks that are being valued by the market on any sort of model. That goes for cash flow models as well as other things like PE ratios, etc. We are in the tinkerbell regime, prices went up over the last 10 years because people are clapping louder. Obviously that is a controversial take but I am not predicting a reversal, just saying that the market overall is in a weird place.
But the fact itself adds demand for the shares on the market, affecting the share price.
Off the market, an offer does become public immediately, that is a necessary component of doing it at all. The sales do not. Directly is the wrong word, there's no more direct way to affect price than a bid/ask/sale of a share. The key is that the information about how much of the stock will actually get bought at what price is delayed on its way to becoming a price signal in the market.
Here's an old-ish but good paper about it, showing how this delay can be exploited by those with inside information. Not a loophole but rather another thing to watch out for. https://chicagounbound.uchicago.edu/cgi/viewcontent.cgi?arti...
Say I have a company worth a $1,000,000 dollars that has a 1,000 shares each worth $1,000. Company comes into a giant one off windfall. They use that windfall to buyback half the shares. There are now there are only 500 shares that own a $1,000,000 dollar company so each share is worth $2,000. Or put another way .2% of future profits is worth more than .1% of future profits.
> I always presumed that the main benefit of buybacks v dividends was being able to time capital gains for tax purposes.
It's not about timing, it's simpler. Buybacks are taxed as capital gains, and dividends as income.
Also, with the windfall the $1,000,000 company is no longer worth that much, it is worth $1,000,000 + the windfall, so you will be buying back at a much higher rate.
But you're right about qualified dividends. I had no idea qualified dividends were taxed at the same rate as capital gains. I'd always hear that was why companies do stock buybacks.
Thanks for teaching me something new. You're right it's about allowing investors to time their taxable events.
But look at a simple example, your example. Company Worth $1,000,000. 1,000 shares, each worth $1,000.
Windfall Event: They get $1,000,000 of unexpected income. Now the company was whatever it was before + $1,000,000.
Naturally, that means the company is worth $2,000,000. So the stock price is $2,000.
Well, we buy back half the shares, but it is 500 shares at $2,000 a share. This costs $1,000,000.
Now each share is worth $1,000 because the company has spent half its capital.
Say windfall is 1 mil.
Post windfall market cap is 2 mil. (1 mil for company + 1 mil in cash)
Company buys 500 shares at 2,000. So the company is now worth 1 mil again but there are 500 shares. 1 mil / 500 shares is 2k per share.
It is just a more tax efficient way to distribute earnings.
It's bad for society to have companies spend money on their own shares, and dividends have the appealing property that they allow a holder to both continue to hold, and bank some gains for further investments.
I think we should get rid of the tax advantage for capital gains though, the mechanism through which a company distributes capital shouldn't determine tax rate. Also I think dividends make it psychologically easier for people to live off the interest.
If you have 10000 in stock, and there's 20% inflation and the price of your stock goes up to 12000, you haven't made any real gains (no added purchasing power) but you have accrued 2000 in taxable gains.
Instead of adjusting returns for inflation, we just reduced the marginal tax rate for capital gains.
Unless the insiders act illegally. If an insider wants to act illegally they can do so in any number of ways other than knowing that a buy back is coming.