With stock buybacks taking heat and even crazy uncle Bernie getting in on the action, I figured the time was right for me to join the chorus of finance professionals happy to give you their two cents about them.
The theoretical argument goes pretty much as follows: a stock buyback is exactly the same as a dividend, except instead of cash landing in your account (as a taxable event, mind you), there are fewer shares outstanding and therefore the price of your stock goes up (ceteris paribus).
As the saying goes, in theory, there is no difference between theory and practice, in practice, there is.
So let’s talk about the differences.
As a brief refresher, dividends are pretty simple, and most of them are recurring (monthly, quarterly, or annual), and (mostly amateur) investment theses have been built around them. The company periodically takes some cash and distributes it to the shareholders, a certain amount per share that you own. This is taxable to you (usually between 15-24% Federally depending on your tax bracket).
Buybacks differ from dividends in a few key ways:
- They aren’t typically regularly recurring. This makes them feel special and unpredictable.
- They may be equivalent to many years of cash build-up, so you can get a nice headline grabbing number like $100 billion.
- They don’t show up as cash in your portfolio, you have to make the cash available yourself by selling a portion of your shares.
- It is hard to keep track of how much value is being returned to you via share buyback. Your portfolio does not have a section that tells you how much of the appreciation of your shares is due to the fact that you now own a larger portion of the company.
- The value of a buyback is small compared to the daily fluctuations of the market. A stock could easily be down the day of a substantial share buyback for reasons related to the economics of the company.
- Somehow dividends seem to escape scrutiny here (see #5 above), despite stocks losing value when the dividends become payable.
- Dividends have acquired a sheen of being deserved, we work hard at something and it pays dividends this is good.
- Buyback has a negative mood affiliation. I’m not sure if it is the ‘buy’ that sounds greedy, or ‘back’, where it also sounds greedy, or a combination of the two, but somehow share buybacks sound greedy to most people. It manages to bring out the Australian in all of us.
However, even given these concrete reasons, I think the most likely reason people dislike buybacks is simple misunderstanding. Dividends are simple. Own shares, get cash. Buybacks are complicated, and somewhat unseen.
Most people do not have the mental energy to spare on the thought exercise of a share buyback (see example at bottom here). To them, stock ownership is some form of gambling, and therefore buybacks do not confer value to the shareholders while dividends clearly do.