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Comment by pjc50 | Hacker News Reader

"Stock buybacks are a form of stock manipulation" - not really, they're a means of returning money to the shareholders while bypassing taxes on dividends.

(Not an expert on the US tax system as I'm a Brit, but it seems that the tax treatment of dividends depends on how long the stock is held, and can be taxed at income tax rates, while stock buybacks result in inflating the stock value which is always CGT. Not sure what the tax treatment is for institutional investors?)

NB that "returning money to the shareholders" is ultimately what companies are for, and we should completely expect them to do this because without it investors wouldn't invest in the first place. It's infinite zero-dividend growth that's weird (Amazon).

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They're a means of "returning money", but they also pump up the stock price, to which managers' TCs are linked. Hence they are a form of manipulation.

Unlike dividends, they don't return money to all shareholders, but to those who sell shares, which are the wealthiest, unnecessarily increasing inequality.

Excessive buybacks and underinvestment are a big reason why Intel failed. Gelsinger (CEO) talked about this publicly. It's not just "returning money to shareholders", because it leads to perverse incentives and underinvestment. Under Otellini, Intel returned 109% of its profits to shareholders.

> They're a means of "returning money", but they also pump up the stock price, to which managers' TCs are linked. Hence they are a form of manipulation.

Why would you say they're pumping up the stock price, rather than just raising the price? Is it a temporary pumping effect, like an Elon Musk tweet from 2017, or is it actually increasing the value of the remaining shares?

Probably only the latter. My point was that executives (share sellers) benefit and it creates potentially toxic incentives.

Executives are always incentivized to increase share value; that’s their job. Note: it’s the board of directors that issues new shares not executives. Executives can sit on the board, but the two are not the same. Executives are actually appointed by the board.

The reason stock buybacks are viewed somewhat negatively is because it’s a lazy way to increase share value. Preferably executives would use the money to come up with new products/services to increase revenues. But if we’re talking about huge mega corporations, who already spend a lot of money on R&D, capex and/or acquisitions, then using some additional cash flow on buybacks makes sense.

In Intel’s case, the buyback merits some discussion because it is implied that government subsidies are being used to buyback shares which is not the intention of the subsidy.

Edit: IMO, I don’t think Intel underinvested, I believe they invested in many failed ventures and under their past and current leadership they are not able to grow the company in any meaningful way.

> My point was that executives (share sellers) benefit and it creates potentially toxic incentives.

This seems like a good incentive. Executives of course don't have to have any shares, although they probably will, but that's not "toxic".

I know that toxic is now the blandest word in the language due to overuse, but even given that this seems distortional.

Let's say corp XYZ has 100 shares out, and they're owned by 50 people.

At any point, there are people trading, buying and selling those 100 shares. Buyer 51 comes along and wants to buy a share. He can only buy a share if one of the 50 owners are selling. So, he has to offer a price that'll convince one of the 50 to sell.

XYZ Corp decides to do a buyback. They buy 20 of those shares. In that moment, they will certainly create a spike in demand for the 20 shares.

But later on, now there are only 80 shares out. When buyer 52 comes along to buy a share, there are fewer shares, and fewer sellers. He might have to offer more than Buyer 51 to actually get a share for that reason.

That's not pumping stock, though, right? Pumping stock is artificially increasing the number of buyers, for a short period. You're describing reducing the number of sellers. Which may increase the price, or may not.

You could argue that the buyback itself, like the moment where the company actually buys the shares back, is a pump moment. they could have the demand far outstrip the typical demand in the moment. But long-term, the price should be higher as they have decreased supply.

> But later on, now there are only 80 shares out. When buyer 52 comes along to buy a share, there are fewer shares, and fewer sellers. He might have to offer more than Buyer 51 to actually get a share for that reason.

By buying that one share buyer 52 gets ownership of 1.25% of the company. Buyer 51 only got 1.00% of the company when they bought their share. You need to take that into account when comparing share prices.

>Under Otellini, Intel returned 109% of its profits to shareholders.

Seems like everything is working as intended. What do you think that companies are supposed to do with their profits? Why do you think shareholders buy stocks in the first place?

> What do you think that companies are supposed to do with their profits?

With hindsight it's clear that it would have been better for shareholders if Otellini had reinvested more profit into R&D rather than returning it to shareholders. Intel has now lost their process node advantage to TSMC. Their CPUs are not competitive on power efficiency with AMD and Apple. This is leading to smaller profits and ultimately a worse outcome for shareholders.

Right, more R&D and more CAPEX. The question is not whether shareholders deserve any return on their investment (yes), the question is short term vs. long term focus. Same with Boeing (161% of Boeing profits given to shareholders 2013-2019, underinvestment in talent and safety).

> Hence they are a form of manipulation.

They are a form of manipulation we don’t normally care about. Definitely not illegal.

By this definition, productivity is manipulation. Or tax optimization is manipulation. Or IPOs are manipulation.

Typically this word is used to indicate unethical and illegal behavior. Not just typical organizational behavior.

>Unlike dividends, they don't return money to all shareholders,

That's false reasoning in so many level. Take every of your arguments and do counterfactual and you see.

> leads to perverse incentives and underinvestment

Investing is not alternative to paying dividends in any well managed company. Companies invest if they see better ROI for the investment than elsewhere. They give money back to shareholders (either dividends or buybacks) when they can't do better than markets.

The positive ROI may accrue primarily to the top executives who are in a position to directly make that decision. Especially in a field like semiconductor processing where risks are high on new investment, it is almost always a lower risk decision to buyback the stock. I don't know the specifics of Otellini's pay package, but I would assume that his tenure resulted in massive wealth for himself, so this is certainly rational economic behavior but severely damaged the company.

>it is almost always a lower risk decision to buyback the stock.

This is all about buyback versus dividend. How it is that people are thinking wrong counterfactual?

Well the other part is that a big part of share buybacks are simply "sanitizing" the dilution from stock based comps(which are increasingly the way that most people get paid).

Intel SBC was 3.2 billion in 2023, and there haven't been any buybacks I think the last 2-3 years? Quite a bit of dilution which doesn't really make long term investors happy.

> They're a means of "returning money", but they also pump up the stock price […]

Stock prices are also effected by dividends:

> Dividends can affect the price of their underlying stock in a variety of ways. While the dividend history of a given stock plays a general role in its popularity, the declaration and payment of dividends also have a specific and predictable effect on market prices. After the ex-dividend date, the share price of a stock usually drops by the amount of the dividend.

* https://www.investopedia.com/articles/investing/091015/how-d...

This has been know since (at least) 1955:

* https://www.jstor.org/stable/2976771

Buybacks "pumping the stock price" is a common misconception, but not actually true (unless the buyback is executed at prices lower than fair value).

There are less shares outstanding afterwards, but there is also less cash, so if executed at fair prices there is no reason for the stock price to move.

Just think through an example of a simple company which is a pot of $1000, and can get 10% returns on it. There are 100 shares, so if investors want 10% returns, shares should trade at 10$ (P/B = 1). If the company repurchases half the shares, there will be only 50 shares but the company only has 500$ now, making each share still worth 10$ for 10% hurdle rates.

But companies are not pots of assets. What you are buying is assets - liabilities + predicted future cashflow * discount rate.

So a more realistic example would be a company with 100 shares, $1000 of cash, and $1000/yr stable income.

So before a buyback, 1 share grants you the benefits if whatever the company does with $10/yr of income. Whether it be dividends, reinvestment, etc.

If the share price is $25 and they spend half their cash on hand to buy 20 shares back, now one share gets you $12.50/year of income. Thus the share is worth more than it was before.

Disclaimer: Armchair finance / economics knowledge. Hope the above is correct.

Prior to the Bush era tax cuts, all dividends were taxed at the income rate, which I think explains the biggest motivation in the shift from dividends to buybacks in that era.

Nowadays, as you say, there is no difference in tax rates for qualified dividends. However, one big remaining benefit of buybacks is that a dividend forces one to incur a taxable event when the dividend is issued, even if one chooses to immediately re-invest the dividend in the company (as many people still in the accumulation phase of investing do). On the other hand, a buyback does not force those people to sell.

On the other hand, a buyback should lower the market cap of a stock, so cap-weighted index funds ought to sell and re-balance when a buyback is issued, so most index investors would seemingly end up selling. However, they end up being able to avoid most of the capital gains taxes by re-balancing through redemptions and heartbeat trades.

> On the other hand, a buyback should lower the market cap of a stock

You got it backwards. If a stock is priced fairly, a buyback is value-neutral. Reduction of the cash on hand is offset by the increase of future cash flow per share. It's dividends that reduce the market cap.

No, because the future cash flow per share is not reflected in the current market cap.

Perhaps you are thinking of share price instead: there it is true that dividends reduce share price, while buybacks are share-price neutral at least theoretically, though it is commonly believed by many people that they do affect price.

(Hence, under that same theoretical model, market cap must decrease if share price remains the same because market cap is total number of outstanding shares * share price. So if the former decreases while the latter stays the same, market cap must have decreased.)

You're right, I need a coffee.

> On the other hand, a buyback should lower the market cap of a stock [...]

Uhh...what?

Buybacks are a return of value. Share prices adjust accordingly to the updated proportion of outstanding stock.

Might want to select a new username, friend.

The price of the share stays the same but there are fewer shares, so the market cap would go down.

But EPS rises so equilibrium would suggest the price of the share would almost certainly rise to match the old EPS.

The earnings per share certainly increases. But this is (at least theoretically) offset by the fact that the firm's assets have decreased. For example, if the buyback was paid for with cash, then prior to the buyback, the shares represented a claim of ownership not just on future earnings, but also on that cash reserve.

That said, this is all under a theoretical model (as in Miller-Modigliani theorem). In practice/empirically, there is reason to plausibly believe that e.g. the decision to announce a buyback has a signalling effect and so can increase share prices.

Well it certainly makes a market for the lucky duckies who are the counterparties for the buyback. They benefit.

Is there a heuristic for how much of the value of a share is assigned to asset value vs forward looking earnings? Many of the ‘hot’ stocks like Nvidia seem almost all forward looking.

For public companies you don't need a heuristic, as the balance sheet is included in quarterly earnings reports.

This isn’t even necessarily true for dividend yield let alone for EPS.

By buying stocks, the company transfers money out of the company and to shareholders. Of course the market cap should go down: the fundamental value of the company has gone down (they have less cash).

> NB that "returning money to the shareholders" is ultimately what companies are for

You have absorbed modern market brokenthink.

Companies are for creating goods or services to sell to other parties. They existed long before the idea of shareholders. Following your logic, companies pre-VOC had no existing purpose.

> Companies are for creating goods or services to sell to other parties

Out of autruism? If not, it's to make money for owners. Shareholders are sort of owners thus to make money for shareholders.

Yes, actually.

>> For the first companies, the privilege of incorporation, often via royal charter, was granted selectively to facilitate activities that contributed to the population’s welfare, such as the construction of roads, canals, hospitals and schools. Allowing shareholders to profit was seen as a means to that end. Companies were deeply interwoven within the country’s or town’s social fabric, and were meant to contribute to its collective prosperity. <<

https://qz.com/work/1188731/the-idea-that-companies-should-b...

That sounds like the economic system was created for the benefit of society and it did so by incentivizing people to create companies in exchange for profit. If someone taxes carbon and that causes me to reduce emissions, is my action altruistic or is the tax?

Who cares?

Pardon? It is the answer to the question of why companies exist. Companies exist to make profit; capitalism exists to enable for-profit companies to exist because they benefit society. If a company's goal wasn't to make profit, people wouldn't invest in it, and it wouldn't be a company.

If you don't care, why participate in a conversation about it and ask a sibling reply for a counterpoint?

Who cases if it’s altruistic or selfish if the outcomes are the same.

The argument is that the company exists to benefit society.

Profit exists as a side effect of having investors.

Someone asked whether companies act out of altruism and you replied to say that they do (or did). A bit of a rug pull to then say 'who cares, the outcome is the same'.

But the outcomes are not the same. Tracing the conversation back, the top level comment pointed out that we should expect companies to give their profits to investors because they operate for profit. A company that exists to benefit society would be expected to put its profits towards bettering society, or at least towards its own ability to do so.

I argue that benefits to society are a side effect of profit-seeking, which capitalism takes advantage of to great effect. A company with no interest in improving the world will nevertheless wind up doing so, because they'll make money in exchange for providing utility, because the system is designed that way. Expecting a company to behave to benefit society instead of for profit will give you bad predictions when the two are at odds.

That's an aspiration, not reality.

The author of that quote literally founded a company (Granito Group) to sell this message to sympathetic (obviously left leaning) organizations so that he could personally profit from it. Case closed.

Do you have counter evidence beside ad hominem attacks?

What part of what I wrote was an attack?

Businesses have always been for putting food on the table of their proprietors. We've got a few more levels of abstraction now, but the fundamental is the same.

Why does anyone work? Because they need or desire certain goods and services. They entire idea of a business falls flat if it does not produce stuff people want. It is of course true that from the perspective of the business owner running the business is how they work, how they get the stuff they want by making money to buy things, but putting the emphasize on that seems wrong to me, after all you can run a business without trying to make as much profit as possible but you can not run a business that produces nothing.

>you can run a business without trying to make as much profit as possible but you can not run a business that produces nothing

This is not an even comparison. A business that produces the minimum amount (0) of product/service should be compared against a business that produces the minimum amount (-$assets) of profit, which corresponds to 0 revenue. Neither business can be run, but the former can at least sit on its assets or pivot into actually making something.

A business can also produce too much and collapse (see Atari and DeLorean), but it can't collapse from too much profit.

It makes more sense to put the emphasis on profit, I think.

You can run a business with negative profit (say, to capture market share or using a loss leader), but you can’t run a business with negative production.

Production is essential to a business and profit is not, strange as that may seem.

What does negative production mean to you here? I can run an incineration business or a demolition derby, as long as I get paid to do so. If that doesn't count as negative production (because I'm producing space or entertainment value; potentially at a loss to acquire market share), what does? If negative production is a physical impossibility, the claim that you can't run a business with it doesn't tell us anything about business.

This is not an even comparison.

This was not intended to be one or at best in the following sense. Making products and making profits are two features of businesses, the first one is essential, the second one is dispensable. No products, no business. No profits, no problem. Even more, no profits is where every business would ideally be, in a functioning market competition should drive the margins towards zero, the price should be equal to the costs of production.

> Companies are for creating goods or services to sell to other parties. They existed long before the idea of shareholders. Following your logic, companies pre-VOC had no existing purpose.

Sure, but the owners (sole proprietors, shareholders, partners, etc.) of most companies want to make profit selling those services and goods. The more money you make the more you can grow the company or reward yourself (as owner).

Companies never existed without shareholders. It's in the name: "company", ie a group of people. You're thinking about "ventures" or "businesses". Which would exist by decree of the sovereign, for example.

Companies don't exist for returning money to shareholders, but issuing stock exists to return money to shareholders.

1. Company issues stock in order raise capital

2. Company uses capital to grow business

3. Company returns money to stock purchases as risk-reward for purchasing stock

Buy-backs are what a company _should_ do once the capital it raised has had a positive ROI

> NB that "returning money to the shareholders" is ultimately what companies are for

And here I thought Intel was for producing computer chips. Silly me. I forget the entirety of human history was just an elaborate pyramid scheme.

Computer chips that they sell for a profit that they return to shareholders

From a basic economics perspective, companies conduct buybacks when they have no other use for the money. Since re-investment supports shareholders on a longer timescale, Intel has essentially let the market know they don't have any other use for the money they have. The point of investing in a company is the funds to be used to generate wealth. If I invest in your company and you just give me back my money, what's the point of the company (especially if its money requiring extra leverage to produce). Buybacks are inefficient use of invested capital (see NVidia's stock price if you need a comparison for a more efficient use of cash and its effect on shareholder value).

Whether they are efficient or not entirely depends on the company. For every NVidia you can find another company (or ten) that reinvests inefficiently because managers tend to like building empires at the expense of their shareholders.

Of course. Intel, specifically, does not make a compelling case that they spent their cash efficiently.

It is a silly notion there is anything wrong per se about stock buybacks. Just as you can sell stock when you need cash (and lose some control) it is simply buying stock back when you saved some cash (and regain control).

The only reason stock buybacks are thought of in negative light is that they seem to be a way for companies to not pay taxes... but the tax law is not companies' fault! It is our fault for the tax law to be this way!

Don't the companies, their industry organizations, and the people who own them lobby congress to make that tax law?

It seems to me that in that case, tax law is their fault.

I have no idea why journalists have such a hate boner for stock buybacks. Dividends can get favorable tax treatment too.

Just allows owners to time the tax hit.

It's like I mentioned when this came up yesterday, it's just a favorite boogieman.

It gets clicks from people who aren't old enough yet to have any assets.

Most people don't own individual stocks. So their audience just pictures top hat wearing capitalists when they hear stock buybacks. It's the same reason why tenants garner sympathy while landlords are quickly called slumlords.

Couple of comments:

Usually when people buy shares they are going to try and get the most shares for the least amount of money, but the incentives are a bit different for stock buybacks. I don't know if buybacks are large enough to "move the market" but I'd be curious to see details on how exactly orders are placed.

I'm a big believer that we need more non-profits that simple exist to employ people and provide goods and services. I realize this is just a charity and depends on the good will of people with capital.

You're probably thinking of co-ops, it is much harder to be a non-profit for most types of companies.

It can be both at the same time. By buying out your stock, you alter the company's assets, but the price of the stock remains the same since you still have the same number of stocks issued. You just replaced your money assets with stock assets.

Once you cancel the stocks you bought back, the rest of the shares will hold a more significant percentage of the company and increase in value.

But this is one part of the equation. The other part is that your stock is inside a market, and buyers and sellers combined determine its price. If you keep buying your stock, you create buying pressure, helping keep the price from falling.

Stock buy backs functionally work no different them dividends at the end of the day. Your returns instead of getting issued as cash from a dividend are in the form of higher share value. Taxed as short term or long term capital gains vs dividend.

Its a form of stock manipulation if you mean that buying stock increases the value of the stock. It doesn't mean its a form of manipulation in some kind of illegal unethical way that i think this comment thread is trying to make it sound.

It's stock manipulation, we just chose not to see it as such. Just like alcohol is objectively a hard drug but we just chose not to categorize it as such.

Why is company X buying its own stock on the open market "manipulation" rather than any other purchaser?

Because you have inside knowledge and you are altering the stock price.

The company is in charge of itself. Everything it does alters the price.

Bought back shares strictly increase the price for existing shareholders as it takes them off the market. The entire concept is mainly due to stupidity in tax law that ends up double taxing direct dividends.

Stock buybacks are heavily regulated. They need to be tracked and publicly reported and the plans for buybacks need to be announced by the company ahead of time.

Note that buybacks must be announced beforehand by the company, so everyone selling their shares has the same knowledge.

Why is me buying my own book to bring it to the best seller list any different than any other purchaser?

Stocks are supposed to be a share of ownership in a company, and the price goes up and down because being an owner of a company goes up and down in desirability, based on how well the company is doing.

Just like with buying your own book, buying your own stock artificially increases the desirability.

This is a misunderstanding of what stock buybacks are. Companies do not buy their stock from themselves. They buy the stock from participants in the market.

Following your example, it'd be like the author of a book buying the book they wrote from someone else. If the author chooses to pay someone else 1000$ for their book, they can, but they will be wasting money.

A company doing a stock buyback is trading off their own capital (they have to spend it, it's not an infinite money glitch where they buy it from themselves) to get back shares of the company itself at the then-market-price. The market chooses whether that's a good trade. It may not

that's an argument for why best seller lists are stupid.

companies can create new stock anytime out of thin air, and that decreases the price. why can't they do the opposite?

some owners of the company decide to buy stocks from the others, thus consolidating ownership. that's what stock buyback is.

note, the argument for taxing buybacks is completely different, and valid. (and it might make sense, it might not, it depends on the circumstances. externalities tax (pollution, tax on induced traffic, etc), LVT (land value tax) and wealth tax would be much better, than taxing transactions.)

> companies can create new stock anytime out of thin air, and that decreases the price. why can't they do the opposite?

So at any point, a company can devalue existing shares that people have already purchased? That also sounds like a problem.

sure it can be securities fraud, but usually it's done to attract more investors.

companies on stock exchanges usually do stock splits, etc. (and based on bylaws majority or 2/3rs or more of existing owners need to approve.)

If companies couldn't issue stock there wouldn't be a stock market at all.

> Why is me buying my own book to bring it to the best seller list any different than any other purchaser?

What's the best-seller list in this case?

Because it’s independent of other price signaling mechanisms. The company doesn’t buy the stock because it thinks that stock is a good investment, it does so because of how it influences future prices.

Ignoring inflation if a company issues the same inflation adjusted dividend forever say 1% at current prices. In theory the stock should stay roughly the same over the next hundred or thousand years. However, with a buyback the stock would increase constantly forever with endless stock splits.

The second option is great for long term owners in terms of taxes, but it’s also manipulation of the stock price.

No, it buys it /because it has money to spare/. Having the money to spare makes it a good investment.

Companies can have net profits and be terrible investments.

The exact same company can be a great investment at 10$, and a terrible investment at 10,000$. You can’t separate stock price from if something is a good investment or not.

The example I gave was low risk 1% dividend, that’s not a stock I would want to own. Net result the company, which has inside information, should expect the price to correct ie fall at some point and thus be a poor investment until that point. That doesn’t prevent them from buying it because the goal isn’t a positive ROI.

Is a company issuing its own stock (i.e. selling) also market manipulation? It brings the price down. Buyback is the reverse operation.

The difference from actual price manipulation, is that the price change in issues and buybacks is a permanent effect of the material change of the number of outstanding shares, not a fledging effect of the change in trade volume, i.e. the intrinsic value of the stock goes up or down.

edit: of course buybacks, like dividends, decrease the value of a company, and issuing stock increase it, so it is not clear cut.

If you're going to stretch the difference that much the why not go all out?

CEOs are constantly attempting to manipulate the stock price by trying their best to do a good job.

> NB that "returning money to the shareholders" is ultimately what companies are for

And here I thought companies are there to provide me, the consumer, and the customer, with useful products and services.

If the purpose is return of money to shareholders, then the best strategy is to over leverage the company, spend every penny on stock buybacks, then default on all obligations to suppliers, pension funds and customers.

Because you can fund stock buybacks with debt, but you could not do that with dividends.

We have made economic destruction profitable and it’s happening across our economy - water companies in UK are going bankrupt because they have huge debt that they took out just for stock buybacks, and not for anything else, and now interest rates are up. Same thing happened with airlines, and many other firms.

It's always been "both"? (specifically for the PLC-type company). People invest in the expectation of a return, to be achieved by doing business. It's usually phrased as "maximize shareholder value", which is ambiguous about the timeframe, but for most cases the value is understood to be over the indefinite future. Not that that stops people from taking short term decisions which can be bad in the long term.

> Because you can fund stock buybacks with debt, but you could not do that with dividends.

There are plenty of companies with large debs that pay dividends on the US market, such as Ford.

The overleveraged self-destruction is bad, but that tends to be a feature of private equity deals where there is a single majority owner doing it on purpose (e.g. Maplin, Jaguar Land Rover). Harder to do with a publicly owned company where the investors can see what you are doing and may sue you.

The UK water companies should never have been privatized in the first place. They're dysfunctional because water isn't a normal market and arguably can't be, so they're ripe for this kind of looting of the state by capital depletion.

Just want to mention since many commentors on this seem to miss this, three important points about stock buybacks missed by the back and forth partisan talking points on this comment:

1. They only make sense when the stock is undervalued and aren’t purely driven by taxes. If the stock is undervalued, then investors benefit by owning more of the company for less. If the stock is overvalued, then investors don’t benefit. The overall value of the price compared to its long term real value is important. There is a basic problem with this, because company executives probably never want to admit that their stock is overvalued.

2. Companies with strong incomes relative to their price can afford to do buybacks or with strong cash positions are the ones that make sense to do buybacks. Companies like this might be overvalued. When you see companies internet companies with zero income doing buybacks it makes very little sense and only established companies. Companies with strong financial positions relative to their stock price are more likely to be undervalued.

3. Because of the discounted cash value of income model for dividends where the value of a stock is based on future income and cash flow, dividends generally have to be stable and regular to ascribe significant value to a stock, which is why companies that have built up large cash balances but don’t expect to regularly pay dividends opt for buybacks, because they don’t want to create the constant pressure to regularly pay dividends.

1. Stock buybacks are always anti-dilutive regardless of the value of the stock, and so investors always benefit as future earnings are concentrated amongst fewer shares (all other things being equal). It's true that a lower price/value increases the magnitude of this effect, but the effect is always present.

2. Zero income stocks can still do buybacks when they're returning capital raised from shareholders to shareholders (this is essentially just partially reversing a funding round, which again undoes some of the dilution).

3. Companies can be deemed to be significantly valuable without paying any dividends. Companies that have a long history of paying dividends but then suddenly stop tend to be in distress, which is then reflected in their share price.

These statements might be logically true, but I feel the logic ignores the overall strategic factors involved in buying back stock and that management needs to consider whether the stock is over or under valued, whether earnings are strong enough for this to make logical sense and the supply and demand among investors for dividend stocks and the ultimate value of a single lump sum distributed to investors vs the value of increased future earnings to the investor from the anti-dilutive impact of buying back stock.

Discussing only the tax strategy as is happening in this thread is really stepping over some really important strategic operational factors.

> NB that "returning money to the shareholders" is ultimately what companies are for […]

That is one theory of corporate governance:

* https://en.wikipedia.org/wiki/Shareholder_value

* https://en.wikipedia.org/wiki/Friedman_doctrine

There are others:

* https://en.wikipedia.org/wiki/Stakeholder_theory

* https://corpgov.law.harvard.edu/2012/06/26/the-shareholder-v...

* https://sloanreview.mit.edu/article/the-shareholders-vs-stak...

Tax just depends on how long it's held and if it is part of a major index. If you held long enough and it's part of a major index it is taxed the same as a stock buyback would (assuming you sold).

Otherwise it's taxed as income.

Trading stock isn't investing. There's no reason for companies to give money to shareholders that simply bought their shares on the stock market. The company doesn't profit from that.

Stock buybacks only pass money to those shareholders whose stock the company buys back. The buyback may raise the overall market price of the stock, but it also might not.

Agreed. It is a huge problem though that share buybacks are a way actual production (wages) is taxed at a higher rate than passive income.

NB that "returning money to the shareholders" is ultimately what companies are for [...]

This could not be further from the truth. Companies - and actually the entire economy - only exists for one purpose, to satisfy the needs of the people, to efficiently produce good and service that people need or desire. Profits are just means to the end, a control signal to steer the economy. Not that they are not important, but they are not why we have companies.

> "returning money to the shareholders" is ultimately what companies are for

That's what shareholders want you to think. But societally and economically companies are mostly for everything else. If no company ever paid a single dividend or never bought back any of its stock nothing bad would happen. There are a lot of companies doing exactly that.

But if companies stopped doing everything else they do that they are supposedly not for, the economy would end.

Except that even then, an investor can sell their shares. If they couldn’t, no company would ever be able to raise money in a public offering.

Who would invest in or create a company that would never pay a dividend and never bought back its stock? How would shareholders ever yield gains from their investment?

Short of some entity buying all stock and taking the company private (to then withdraw profits), there would be no way to return profits to shareholders.

The companies currently not doing those things are in a growth phase, with the expectation that in the future they probably will be issuing dividends/buybacks.

Those who benefit from the company exist would invest in it: state, employees, clients.

> The companies currently not doing those things are in a growth phase, with the expectation that in the future they probably will be issuing dividends/buybacks.

Berkshire-Hathaway has only paid dividends once since Buffet took over, and is the highest priced stock listed on the NYSE.

But Berkshire Hathaway does do stock buybacks.

Periodic stock buybacks and resales are a slow version of pump and dump.

When company goes public its shares become tokens in the casino. Shreholders can sell their shares to people who want to gamble with them. And just one reason is sufficient for people to want to take a gamble and purchase them. It's enough that they believe that they'll be able to sell it for more later.

And they are not wrong. As long as the name on the token takes a prominent place in public consciousness people will flock to it and early investors will be able to sell it for more. If you want to see what's sufficient for people to invest in something look at shiba inu crypto token or WIF.

Who would create a company for 100k if it can sell it to gamblers for millions when it goes public? Plenty of people. There's whole industry of angel investors fuelled by thay dynamic.

For them to be effective at returning money to shareholders, the action of buying stock is intended to take stock out of supply thus increasing share price value. Exactly as you say.

Yet, this is clearly a form of stock manipulation, as it's an action to manipulate the share price.

Whilst it is stock manipulation, it's debatable if it should be legal.

I believe it should be legal, it's an efficient way to increase share value without adding to someone's income, thus often carries no immediate taxable obligation.

However one could argue that these methods of moving wealth around without taxable events triggering adds to the fuel for calls to tax unrealised gains on all stock.

So in the long run we are all worse off.

Those laws will likely come regardless, as a way to fight the billionaire class, so stopping stock buybacks at this stage is unlikely to do anything.

It does effectively legalize a form of insider trading though, a company would never do a massive stock buyback right before dropping bad news because the stocks they are now holding goes down in the price.

> form of insider trading

Rule 10b-18 is designed to prevent companies from using buybacks to manipulate the market, stating that share buy backs must meet 4 conditions:

1. all shares must be purchased during a single day and from a single broker or via a single deal

2. larger companies cannot authorize buybacks within the last 10mins of the day and smaller companies can't authorize them within the last 30 mins

3. companies have to buy back their stocks at a price lower than or equal to the highest independent bid

4. companies can't buy back more than 25% of the average daily volume

Dividends also change the share price, should those be illegal? What about announcing new products?

> not really, they're a means of returning money to the shareholders while bypassing taxes on dividends.

This is actually a new idea. Prior to a change by the Reagan administration in 1982, they were considered to be an illegal form of market manipulation. Dividends served the purpose of dumping excess funds to shareholders.

Stock buybacks return money to the investors.

>NB that "returning money to the shareholders" is ultimately what companies are for

That's debatable in many instances of the modern economic system. Of course, some instances of capitalism focus on that particular goal you've mentioned, but that wasn't always the case and it still isn't, depending on the socio-economic circumstances.

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