Hacker News Reader

Comment by s1artibartfast | Hacker News Reader

If a company does a buyback, shouldn't you still have a higher percent control if you dont sell any of your holdings, and the same % control if you do sell the dividend equivalent

Imagine a company has 100 shares and I own 10. If they company buys back 50, the stock price will double, and my % ownership goes up from 10 to 20%. I can sell down to 10%, the same control I had before to take my profits.

What am I missing here?

View on HN

There are a few reasons some companies prefer buybacks over dividends.

Probably the smallest reason is that buybacks can save investors money on their taxes.

A much bigger reason is that buybacks are viewed as one time events. When a company starts paying a dividend investors often expect that dividend to be paid regularly. If the company chooses to stop paying a dividend or decreases the dividend the share price drops.

Finally, there is executive compensation. Let's say my compensation package let's me buy shares at $100 each. If the share price is currently $110 and the company does a $10 dividend then the share price goes to $100 and my options are worthless. If the company does a stock buyback then the share price goes up and my options are worth more. As CEO which do you push for?

I agree that a smart CEO holding options would favor to dividends but don't see how this is an argument against it.

It seems that it benefits stockholders and CEOs alike. Stockholders get the same value as a dividend without the immediate taxable income, and CEOs and other option holders like employees get some of the value when their options mature.

I wasn't arguing against buybacks. I was just giving some reasons buybacks are more popular with some companies than dividends are.

Nothing, except for well... many investors aren't rational, or at the very least, they operate on other rationale. And because of this, it's entirely possible the stock price doesn't actually double in your scenario. However, if didn't, it at least would work positively towards the value metrics of the stock.

Stock price can't double. The amount of cash the company has must decrease by an amount equal to half its market cap. That should do something roughly equivalent to the value of the company.

The doubling is relative to if they had paid a dividend of the same value.

Stock price can double with the same market cap if you reduce the number of outstanding shares by half.

Wouldn't that friend on who's voting the stock that company holds in itself?

Is it the CEO? The board? The chairman? Or are the stocks cancelled from the total?

I can't parse all of your question. What friend? To answer what I think you are asking, the buyback shares are usually destroyed. It isn't like the CEO gets to vote with them instead of shareholders. In fact, they company does not destroy the shares, and holds on to them for whatever reason, they do not get to vote with them. those are called "treasury stock".

Apple is a classic case. Around 2010, the company had 26 billion shares outstanding. They've spent the last decade buying them back, and now have about 16 billion shares. This contributes significantly to the increase in stock price. The portion of the company 1 share represents is 60% larger today than it was in 2010 because there are fewer of them

Bought back shares are either retired or held in the company’s treasury stock. Either way, there’s no voting right for these shares.

Again, this decreases actionable accountability to the external world.

This should make it clear why stock buybacks would be preferred. Fewer people with standing to sue if they don't agree with management's direction.

so more shares is more accountable?

I'm not sure how you get that more shares means more owners. Doesn't really seem like the limiting factor.

Reply on news.ycombinator.com