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Started By
Message
Company flush with cashflow -- decision to return value to shareholders
Posted on 7/29/22 at 10:27 am
Posted on 7/29/22 at 10:27 am
Why choose Stock Buyback vs. $Bonus (or Dividend)?
(From the employee who is a shareholder perspective)
While I understand the key differences to shareholder in a $Bonus (or Dividend) vs. Buyback (eg, taxes) and stated reasons for a buyback, I have always felt that a buy-back's value to me as a shareholder is more theoretical than real -- ie, would prefer to face a tax consequence of a Dividend or $Bonus as those value-to-shareholder transactions are traceable.
My definition of "real":
Directly, visibly and immediately shows up in my (ie, shareholder) net worth
Given Buy-back mechanics:
LINK
...and while I understand the positive impact on share dilution, EPS, etc. in a buy-back (of which this can be washed away by the next day's financial news...), how exactly does it show up in my net worth?
For example,
BUY-BACK:
In a $6bln buy-back on a $200bln market cap company, I expect that I should see a direct, visible, and immediate 3% ($6bln/$200bln) lift in value of my shares at buy-back, correct? If no buy-back, no 3% lift, correct?
Versus
$BONUS
If an apportioned part of $6bln (employees as mix of total shareholders) were allocated to employees, that should be ~3% less taxes, correct?
Or
DIVIDEND
Dividends as a similar example for all shareholders, ~3% yield uplift, correct?
Look, I get the BoD/C-Suite bonus structures role in said decision making. Not core to my inquiry.
Rather, the psychology of money is in play here in terms of what is "felt" by net worth and what is "understood" but not necessarily felt in net worth for the employees who are shareholders.
Learn me, please.
(From the employee who is a shareholder perspective)
While I understand the key differences to shareholder in a $Bonus (or Dividend) vs. Buyback (eg, taxes) and stated reasons for a buyback, I have always felt that a buy-back's value to me as a shareholder is more theoretical than real -- ie, would prefer to face a tax consequence of a Dividend or $Bonus as those value-to-shareholder transactions are traceable.
My definition of "real":
Directly, visibly and immediately shows up in my (ie, shareholder) net worth
Given Buy-back mechanics:
LINK
quote:
A company can ask shareholders to return a percentage of their shares voluntarily to the company. Investors decide how much of their shares, if any, they want to sell back and at what price, based on a range determined by the company.
quote:
The other way a stock buyback can be executed is open market trading. In this scenario, the company buys its own shares on the market, the same as any other investor would, paying the market price for each share. It may sound complicated, but essentially, the company is investing in itself.
...and while I understand the positive impact on share dilution, EPS, etc. in a buy-back (of which this can be washed away by the next day's financial news...), how exactly does it show up in my net worth?
For example,
BUY-BACK:
In a $6bln buy-back on a $200bln market cap company, I expect that I should see a direct, visible, and immediate 3% ($6bln/$200bln) lift in value of my shares at buy-back, correct? If no buy-back, no 3% lift, correct?
Versus
$BONUS
If an apportioned part of $6bln (employees as mix of total shareholders) were allocated to employees, that should be ~3% less taxes, correct?
Or
DIVIDEND
Dividends as a similar example for all shareholders, ~3% yield uplift, correct?
Look, I get the BoD/C-Suite bonus structures role in said decision making. Not core to my inquiry.
Rather, the psychology of money is in play here in terms of what is "felt" by net worth and what is "understood" but not necessarily felt in net worth for the employees who are shareholders.
Learn me, please.
3
Posted on 7/29/22 at 10:35 am to Turf Taint
Earnings per share will go up, making each share more valuable. A dividend is a more direct route to return cash to shareholders in my opinion.
I guess the main advantage of a buyback is it is a one time purchase, where dividends are ongoing and if you cut it will impacts share prices.
Just my thoughts, certainly not an expert.
I guess the main advantage of a buyback is it is a one time purchase, where dividends are ongoing and if you cut it will impacts share prices.
Just my thoughts, certainly not an expert.
This post was edited on 7/29/22 at 10:39 am
Posted on 7/29/22 at 10:50 am to Turf Taint
You'd have to get in the weeds of the research on value created by buybacks and compare that with dividends to get an answer and it wouldn't be conclusive and would only be a probability for a range of companies with different individual circumstances. Either way, that's money not re-invested in the company, which may impede future growth and shareholder value.
Psychology when it comes to dividends is interesting. My grandmother had Coca Cola stock she bought in the early 1960s, always took cash dividends and thought of cash dividends like interest paid on a CD. I see other people on the internet expressing this perspective. I wish she had DRIPed but I still got a nice inheritance of KO shares.
But taking dividends in cash diminishes returns because the stock price is adjusted down for the dividend amount prior to opening on the ex-dividend date (although the prices tend to rise going into ex-dividend dates) and because you are losing value to dilution for those taking dividends in shares. Not to mention taxes paid on cash dividend income.
And if you take dividends in stock, you keep up with dilution (which can be offset by buybacks) but you may just be treading water depending on the performance of the share price. My point is that it's complicated.
Psychology when it comes to dividends is interesting. My grandmother had Coca Cola stock she bought in the early 1960s, always took cash dividends and thought of cash dividends like interest paid on a CD. I see other people on the internet expressing this perspective. I wish she had DRIPed but I still got a nice inheritance of KO shares.
But taking dividends in cash diminishes returns because the stock price is adjusted down for the dividend amount prior to opening on the ex-dividend date (although the prices tend to rise going into ex-dividend dates) and because you are losing value to dilution for those taking dividends in shares. Not to mention taxes paid on cash dividend income.
And if you take dividends in stock, you keep up with dilution (which can be offset by buybacks) but you may just be treading water depending on the performance of the share price. My point is that it's complicated.
Posted on 7/29/22 at 11:15 am to Turf Taint
Our company recently surprised us all with a nice bonus in addition to announcing a big guy back.
The raises for this year weren't great, so I guess they figure with all the cash, they might want to do something that very directly helped their employees.
The raises for this year weren't great, so I guess they figure with all the cash, they might want to do something that very directly helped their employees.
Posted on 7/30/22 at 7:06 am to Diseasefreeforall
Stock buy backs are not ideal, it usually means management cannot figure out where to place their cash to generate additional return inside the company.
Look at executive comp packages as well - stock buy backs also usually correlate to them hitting their targets, easier with lower shares outstanding.
Dividends are better bc that’s straight cash out and more in line with what a company is supposed to do.
Look at executive comp packages as well - stock buy backs also usually correlate to them hitting their targets, easier with lower shares outstanding.
Dividends are better bc that’s straight cash out and more in line with what a company is supposed to do.
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