Hacker News Reader

Comment by abledon | Hacker News Reader

Also GOOGL, MSFT had done a stock buyback to keep their shareprice high to appease investors. I think age of high growth for stock is over.

View on HN

A stock buyback is not much different than a dividend payout. Calling it "appeasement" is kinda ridiculous. Investors invest to get returns.

It is absolutely different because in order to recoup the benefit of a stock buyback you need to sell your holdings. Dividends, by contrast, accrue to those who maintain holdings.

Buybacks work very well for executives paid in stock who diversify out of their company stock with suspiciously convenient timing, and speculators.

Sorry, there's no difference between a $100 stock paying a $10 dividend and doing a buyback which increases the stock price to $110. You can always sell $10 to realize the same cash in your pocket.

> and speculators

Everybody who invests is a "speculator".

Speculation is defined as trying to sell something at higher prices, generally short term. Bitcoin or gold are examples of speculations.

Investors on the other hand are not necessarily interested in price fluctuation but owning their share of the cash flow through growth or dividends.

Investors always try to sell at higher prices.

You know you can hold a stock forever without having to sell it? I have shares that I own from 17 years with absolutely no intention to sell, they pay me in dividends more in one year than I paid for them almost two decades ago.

That doesn't mean you'd be trying to sell for lower prices, does it?

A (sufficiently rational) investor's willingness to sell is mainly a function of current price vs. expected future returns compared to other viable alternatives - which of course includes the dividends paid and any other benefits they might gain from ownership. And yes, there's also changes in personal need for currency, psychological reasons, etc. but I'd consider these special cases.

Even in your case if you had any good indication towards the stock you're owning being severely overpriced, the likely optimal thing to to would be to sell and dump the money into the next best alternative.

I'd also suggest to be careful in the assumption that "holding a stock forever" is a good idea. Very few companies have existed forever so far.

You're speculating every time you decide not to sell it.

So let's just go with this and say we draw a line between short term + higher risk and long term + lower risk investors.

I still haven't seen the actual argument for what would make a difference when it comes to Dividends vs. Buybacks.

> actual argument for what would make a difference when it comes to Dividends vs. Buybacks.

to some people, it's a psychological difference, not a financial difference.

Except when you opt to reinvest dividends. Buybacks were invented as a tax dodge.

Significant difference on tax for shareholders, at least in Australia

Same in North America.

Nope.

My understanding is US also have significant differences between income and capital gains taxes, I though even more so than Australia.

Could you explain why you said "nope"?

"A stock buyback is not much different than a dividend payout."

It's very different. In a dividend payout those holding the shares and staying with the company get the money. In a buyback those selling the shares and leaving the company get the money.

When you crunch the numbers buybacks almost always overpay for stock. From an investor's point of view they'd be better with the cash money.

It's another one of those situations where there is a comfortably theory of equivalence that the finance industry loves, that is unfortunately contradicted by the hard facts on the ground. Economics in a nutshell...

Half of the problems of society are caused by this. Once you can attach a number to something, you can make a false equivalence and justify many ills. People often do this unknowingly or even worse, some intend it.

You can realize just the gain in the stock value due to the buyback if you like. Nobody said you have to sell all the stock.

There isn't any gain in the stock value. That's the point. The theory doesn't work out in practice.

It's a stubborn belief in 'efficient markets'.

All FAANG companies had dedicated money pools for share buybacks. Apple even pays dividends. The common belief is that is a company is doing share buybacks, it doesn't innovate anymore. These buybacks have been taking place for the past 10 years and they are still growing.

They’re one of the most tax advantaged way to return money to shareholders. That’s it. I don’t like this method or the need, but the motivation isn’t rooted in lack of innovation etc. Friedman doctorine has become gospel, so this is the result.

The charge of Lack of innovation is more that they returning money to shareholders instead of funding more r&d (organic/acquisition) not how (dividends/buybacks )

Some level of R&D is often needed to sustain a company's viability long-term. However, as a shareholder I also expect some share of profits to be returned to me.

Returning the money directly to the shareholder as dividend or buyback is an indication that management cannot find better use for the money, or unwilling to take the risk. Berkshire Hathway never declares dividend or does buybacks either. The profits are returned to you by giving you the choice to sell the shares when you want[1]

Google for example could have really invested in Google Fiber or taken a similar capital intensive project instead of returning 100's of billions of dollars.

Alternatively could be growing inorganically through acquisitions. The largest acquisition Google has done is only for $12.5B of Motorola in 2011. Only one of top 5 acquisitions is in this decade ( Mandiant) and top 5 combined they spent only $25B

Compare that to say Microsoft who are spending $70B on Activision, $10B on OpenAI, also bought Github($8B), Nuance($20B) just in the last 5 years.

Google simply doesn't seem to have any ideas on how to spend money.

[1] Buybacks give you the same choice as well, but they are not increasing the total value through investments to do so, just reducing the number of shares in circulation.

More money for research is not always a good use of capital. You can't solve more problems, or faster, just with cash.

Some days it's wisest to wait until you're ready.

Invest in upstream/ downstream businesses or in capital heavy projects, You could acquire also grow inorganically. R&D in the accounting sense is very different from research as we think. Yes there is diminishing returns for spending cash but I don't think these big companies are anywhere close to that being a real problem.

In a sibling post I talked about Google's inability to spend, this is also true for old school Blue chip companies like say Oil& Gas, they have had enormous record profits last couple of years and while they have for good reasons not doing lot of new wells[1] they have not not also done much green energy investments either.

[1] Financially sound not do so, given the long term prospects of oil are not great, and short term price fluctuations are not good decision basis for 30+ year projects new drilling entails.

If you hold stock for more than a year, the dividends become "qualified dividends" and are taxed at long term capital gains rates.

The only practical difference is you pay taxes on the dividends when you receive them, and taxes on the capital gains when you sell.

Investors expecting a return on their investments? How awful!

Presumably, absent tax advantages of buybacks, more companies would pay dividends and bigger dividends. (At the end of the day a, simplistic, way to look at the innate value of a company's stock is the net present value of its future dividend stream.)

There is an additional difference beyond the tax advantage. With dividends, the market has more expectation of maintaining similar level of dividends, whereas there's generally and currently no similar expectation on companies doing the share buyback to buy similar amounts quarterly. This allows a bit more flexibility on the company. This extra flexibility may or may not be a good thing, but regardless, it is an additional meaningful difference.

Fair. And, historically, companies known for being consistent dividend stocks got hammered if they cut back. Which, as you suggest, may or may not have been a good thing in general. Whereas buybacks haven't really acquired the same level of X% per quarter. (And, in fairness, is inevitably caught up with questions of whether the stock is "fairly" priced.)

Good article on the impact of stock buybacks: https://hbr.org/2014/09/profits-without-prosperity

There's a bill in Congress to "add more accountability" to stock buybacks by imposing taxes (https://www.congress.gov/bill/117th-congress/senate-bill/275...), but it's clear congress has no interest in curtailing this practice unfortunately.

What's "wrong" with the practice?

Company makes money, company puts it into stock buybacks instead of company development and expansion.

Sometimes that is the best use of the money.

How is that different from putting it into a dividend?

And why would anyone invest in a company that will never pay dividends/do buy-backs?

It prevents natural price discovery, a key function of a healthy market.

I don't see how it prevents natural price discovery.

On the contrary, stock buybacks depend on price discovery working! They wouldn't move the stock price if it didn't!

It's a way to dodge dividend taxes. It can be also be used to do some light price manipulation to boost executive compensation tied to share price. I don't think it's a huge evil or anything, but that would be the case for it being wrong.

You'll pay the taxes when you sell the stock. There's no dodging going on.

Yes and no.

The result of buybacks is that the number of shares drops. E.g. Berkshire's stake in Apple raised from 5.2 to 5.5 % merely as a result of Apple's buybacks.

Obviously shareholders benefit from having a larger piece of the cake while not requiring to pay any tax on this operations.

They pay the tax when they sell the appreciated stock.

Tax rates on some dividends is higher. It is absolutely a tax dodge.

It depends entirely on whether it is an ordinary or a qualified dividend. This is true in the US, other jurisdictions vary

The tax difference between ordinary or qualified dividends is the same as the tax difference between short and long term gains.

It's simply not a tax dodge.

So there is a tax difference, we both agree.

If I bought a stock yesterday and they issued a dividend today, there is no way for me to avoid the higher tax rate.

If I bought it yesterday and they decide to do a buyback today, I can hold it until the lower capital gains rate kicks in, thereby avoiding the higher tax rate.

See how I can avoid paying the higher tax rate?

Play some more games with tax loss harvesting, and the buyback option gives you a lot more ability to pay lower taxes. With the dividend there is a limit to the amount of loss you can offSet with short term losses.

Simply put, in any given situation capital gains is likely to give you a better option to pay lower taxes.

The practice itself is whatever, but the issue is that dividends are taxed differently than capital gains. At the end of the day the investor makes the same pre-tax income with either strategy, but they can face drastically lower tax burdens.

In other words, buybacks are a way of paying way less tax.

> In other words, buybacks are a way of paying way less tax.

Not way less, just choosing _when_ to pay a tax (say, during retirement years instead of working years of one's life).

I don't see anything wrong with doing this.

It is better for a business to own its own share for the most part, prevent outside decisions from creeping in.

I’ve heard this ever since the Netscape IPO

Reply on news.ycombinator.com