It's a mechanism to distribute profits to shareholders. Do you invest in companies that don't distribute profits - does this get you some kind of higher return?
With different consequences and historical outcomes to more commonly used mechanisms.
> Do you invest in companies that don't distribute profits
Does every company that distributes profits do so with buybacks?
> does this get you some kind of higher return?
Do all companies payout the same ratio of market cap as dividend?
I think there's zero point to having a monopoly if you don't distribute the profits.
If you have some argument that dividends are better than buybacks I don't care.
All ASML is doing is raising the share price. The investors that don't want a better deal somewhere else don't have to do a thing - they just have to not sell their shares. ASML is not deciding anything or signaling anything about future returns.
The market is the one sending the signal that there are better deals elsewhere. You can go from $5B to $500B. You can't go from $500B to $50T. There is no amount of R&D that will do that. If you picked a $5-6 billion company in 2008, and it was ASML, congratulations you now have >100x returns.
The inflection point isn't a point where buybacks increase, it's the slow/fast ride up to $500 billion.
The investors chasing 100x returns have already left. Whether the company buys its own shares or sits on its own cash, the net equity value is the same. The only signal it gives to investors is that they have more cash than they want to spend.
Are you? Sorry, "tax efficiency" or what the euphemism is that tries to hide whats actually going on. :)
It's definitely a change in behaviour induced by taxation.
Another example in Germany both capital gains and dividends are taxed. Capital gains are (mostly) only taxed when you sell, dividends are taxed straight away. But each year you can get a small amount of dividends tax free. So it's tax efficient to structure your capital returns to first max out that tax free allowance, and take the rest as capital gains.
That's annoying and complicated.
Singapore is simpler and has lower taxes, so I don't bother optimising anything, and just let my decision be guided by whatever makes financial sense, without worrying about taxes. (In my case, I'm investing in accumulating funds that just never pay any dividends, but instead re-invest them straight away. That way I don't have to worry about re-investing dividends manually.)
Another example: when you have a carbon tax one of the intended consequences is for companies and people to change their affairs such that they emit less CO2, thus optimising their tax bill. The system only works when people 'avoid paying their share'.
So I don't think it's going to be executed at the absolute peak. But it does imply that the finance people in ASML believe that the stock is undervalued even if the market as a whole is at all time highs.
1. From the perspective of shareholders, and for the moment ignoring taxes, buybacks and dividends are exactly economically equivalent. If a dividend happens, you get some cash. If a buyback happens, the value of your shares goes up. Crucially, the amount by which each share's price goes up is equal to what the per-share dividend would have been. It's a useful exercise to work this out and convince yourself that it's true.
2. Now let's stop ignoring taxes. If a dividend happens, you get taxed that year. If the value of your shares goes up, you don't get taxed that year. Instead, you get taxed whenever you sell, which might be later when you retire and are in a lower tax bracket, or after a period of some years when you get a lower capital gains tax rate.
3. Now let's think about the effect of dividends vs buybacks on the allocation of your portfolio as a shareholder. Neither changes the total value of your portfolio -- that was point number 1, plus just plain old conservation of dollars, modulo taxes -- but a dividend increases the proportion of your investment that's in cash, while a buyback keeps it constant. Let's say you auto-invest all dividends in the S&P 500 or equivalent index fund. Then dividends reduce your ownership stake in the company, while buybacks keep it constant.
For these reasons, most investors prefer (or ought to prefer) buybacks: they have the same economic effect as dividends but allow you to defer taxes to whenever is optimal for you. Also, and this is a smaller point, if a company does a dividend then you have to actively do something (that is, buy stock) in order to maintain the same proportion of your portfolio in that company. In other words, if you want 10% of your savings to be in X, and they do a dividend, then you have to take the cash and buy shares of X. The reason this is a smaller point is that at least in theory you can get your brokerage to do this for you automatically.
There are some nuances where point number 1 fails to hold: signaling, bad execution of the buybacks, and principal-agent conflicts. The big example of that final point is executive compensation tied to specific share prices. I'm not an expert in this area so I don't know, off the top of my head, if there's real evidence either way that this effect is very large, but it's one that people will bring up so everyone who thinks about this ought to know about it.
Wouldn't the inverse of this be true in buybacks though? If it's economically equivalent then buyback should increase the price and similarly increase the proportion of X in your portfolio - which would force you to rebalance (might have tax implications).
Generally agree with the main point.
If a buyback happens, the market capitalisation drops by the amount of the buyback, and the number of shares drops by the same ratio, keeping the share price initially constant. The money goes to the investors who sell.
Buybacks are nevertheless good for investors who hold. They now have shares in a company whose market cap is 100% growing enterprise, instead of 90% enterprise and 10% bag of money. That means that if the company keeps doing well, the share price will increase faster than it would have done otherwise (it will also drop faster - it's no longer anchored to an inert pile of cash).
The investors who sell are wealthier by amount $X because now they have fewer shares and more dollars.
The investors who don't sell are wealthier by the same amount $X because the shares they kept are worth more, because prices go up.
> keeping the share price initially constant. This statement is definitely incorrect, unless you're being very technicaly and pedantic about "initially". You can think about it theoretically or you can look at empirical evidence. It is well-supported empirically that share prices go up after buybacks, and in fact they do so quantitatively by exactly the amount necessary for the equation implied above to hold.
The equations are: nr_shares * share_price = cash_of_company + value_of_company_excluding_cash.
In a buyback, cash_of_company decreases by the buyback, and nr_shares decreases by buyback / share_price.
Consider the extreme case, a lemonade stand with a bank account with $1M. 1000 shares outstanding, share price $1000. After a buyback of $900K is announced, 900 shares are sold for $1000. $100K remains in the company's bank account, 100 shares remain outstanding, at ... $1000 per share.
This is actually not true in the Netherlands, which taxes unrealized gains on wealth. Quite unique. But NL also features a dividend tax, which politicians tried to get rid off but didn't succeed because it was such an unpopular plan.