Do you understand what a stock buyback is? The purpose of issuing stock is to sell equity in a business to raise capital to invest in the business. If there are no attractive opportunities to invest then the business is obligated (but not required) to return that capital back to the shareholders. They can do that with a dividend but that’s a pain to start and stop or change. It’s a lot less complicated to undilute the existing shares by buying some of the shares back and dissolving them, thus increasing the value of the remaining shares in proportion to how many were dissolved. It doesn’t destroy money. The business can always issue new shares in the future and undo the buyback. It’s basically the same thing as paying off a loan or line of credit held by the shareholders.
It creates no direct economic value outside of artificially increasing stock prices by introducing false scarcity into the market. Stock buybacks should be illegal for all publicly traded companies. Especially because they aren't required to do that and they only do it because their board wants to be worth more on paper or have the ability to take out more loans using the more valuable stock as collateral.
outside of artificially increasing stock prices by introducing false scarcity into the market.
How can you introduce false scarcity into the stock market? The number of stocks is litterally an arbitrary number, reducing that number just means that each stock represents a greater portion of the company.
Especially because they aren't required to do that and they only do it because their board wants to be worth more on paper or have the ability to take out more loans using the more valuable stock as collateral.
So your problem with stock buybacks is that the people that invested in a company wants a return on the investment?
No, it's not. A dividend is a realized gain and is therefore taxable. Stock buybacks create increases in share price, creating an unrealized and untaxable gain.
How can you introduce false scarcity into the stock market? The number of stocks is litterally an arbitrary number, reducing that number just means that each stock represents a greater portion of the company.
When a company does a stock buyback, they dissolve the shares they purchased, meaning they no longer exist, driving the price of the remaining shares up because there are now fewer available.
So your problem with stock buybacks is that the people that invested in a company wants a return on the investment?
Nope. My problem is that it increases the ability of the ultra rich to borrow against their shares so they can avoid paying taxes on that very same money. But I'm not shocked you think this way since you didn't know the difference between a buyback and a dividend.
No, it's not. A dividend is a realized gain and is therefore taxable. Stock buybacks create increases in share price, creating an unrealized and untaxable gain.
Do you know why it's a buyback? What happens to the money they use to buy back? Hint: they're taxed.
Whether you give out dividends totaling $100m or a buy back totaling $100m, that $100m gets taxed.
When a company does a stock buyback, they dissolve the shares they purchased, meaning they no longer exist, driving the price of the remaining shares up because there are now fewer available.
Except you forgot to mention how the company also became less valuable because it just handed over all that cash for that buyback.
There are fewer shares in a less valuable company. What is the net effect? Not as straightforward as you claim.
Nope. My problem is that it increases the ability of the ultra rich to borrow against their shares so they can avoid paying taxes on that very same money. But I'm not shocked you think this way since you didn't know the difference between a buyback and a dividend.
The people who chose to participate in the stock buyback will pay taxes. The one who don't, won't. It's as simple as that.
The price per share goes up, but the market capitalization of the company stays about the same.
The same amount of cash that is returned to investors in a buyback and a dividend is exactly the same. Thus the amount that is taxed is exactly the same.
The only difference is who gets the cash and pays the taxes. In a dividend, every shareholder gets an equal amount of cash. In a buyback, only the shareholders that chose to sell their shares back to the company get all the cash.
No, it's not. A dividend is a realized gain and is therefore taxable. Stock buybacks create increases in share price, creating an unrealized and untaxable gain.
And what do you think happens to the gains for the people who had their stock bought back?
They can't force you to sell your stock, they buyback outstanding shares that are on the market. Nobodys investment account is getting affected in a negative way
When a company does a stock buyback, they dissolve the shares they purchased, meaning they no longer exist, driving the price of the remaining shares up because there are now fewer available.
So many words in your comment and so many things wrong. Since people pointed out the other things that you confidently speak incorrectly about, I’ll pick this one.
Companies rarely dissolve shares in a stock buyback. The shares purchased by the company are placed into a Treasury Stock account. Yes, some shares may be awarded in compensation packages, but that’s not at all the purpose of them. The main purpose of Treasury Stock is to raise capital. The stock is purchased by the company at market value, and then is typically sold at a later time when the stock price is higher. They are betting on themselves to increase value for their shareholders and then selling the shares for a profit and receiving cash to invest with. So, immediately, there is a benefit to the shareholders as price movement will be more significant as there are fewer shares outstanding, and this can be seen as bullish if the company is betting on themselves. Then when the shares are sold, the company receives a bunch of cash. This is a much better way to increasing value in an investment than simply authorizing more shares which decreases value immediately for all shareholders.
I’m not certain of Lowe’s employee benefits, but most publicly traded companies award full time employees stock options or individual shares after a certain milestone in their career which would can be taken from Treasury Stock.
Nope. My problem is that it increases the ability of the ultra rich to borrow against their shares so they can avoid paying taxes on that very same money.
Why not work to fix this problem instead of getting furious at the idea of something that's virtually equivalent to a dividend?
23
u/d0s4gw2 5d ago
Do you understand what a stock buyback is? The purpose of issuing stock is to sell equity in a business to raise capital to invest in the business. If there are no attractive opportunities to invest then the business is obligated (but not required) to return that capital back to the shareholders. They can do that with a dividend but that’s a pain to start and stop or change. It’s a lot less complicated to undilute the existing shares by buying some of the shares back and dissolving them, thus increasing the value of the remaining shares in proportion to how many were dissolved. It doesn’t destroy money. The business can always issue new shares in the future and undo the buyback. It’s basically the same thing as paying off a loan or line of credit held by the shareholders.