I’m talking about the general demonization of buybacks you see popping up in US political discourse. People like AOC calling for buybacks to be banned. You never see dividends mentioned in this discussion.
But in any case, reinvestment is another way to drive up share price and it’s not always a good option for every company. Same thing with acquisitions.
Well distributing dividends, that are immediately taxed, is a basic part of capitalism that virtually everyone understands so you are either cool with dividends or an actual socialist/communist…. not that there is anything wrong with that.
When company’s stop doing their basic function of giving profits to their shareholders and the shareholders are somehow cool with that then even the most dimwitted among us can figure out they are up to no good and they are correct.
So it’s good politics and good policy.
Yeah I mean, taking a broadly popular policy position (corporations are getting favorable policies under the guise of helping people and then not doing it) and then focusing on the most popular and exploited part of it seems kinda standard good politics? But sure, they could round it out by mentioning dividends sometimes too.
Are there actually companies where a buy back would get treated differently in terms of calculating exec comp? That seems to be implied in a lot of the criticism.
That’s very possible if incentives are calculated on share price and not total return of the stock.
Or if you have shares that have been allocated to you in specific number, but on which you dont get dividends before they vest.
My experience (albeit not as a megacorp CEO) is that stock buybacks are nearly always preferred to dividends with respect to the expected return of typical stock compensation (RSUs, options, etc).
Then the issue here seems to be more about the complete failure of corporate governance in the US.
Capital gains are funny things. In the mid 2000s, I invested $X in an S&P 500 fund. This was before I knew about IRAs, so it just sat in a taxable account. By 2021, the investment had grown to $Y, and I donated the shares to charity.
Not only did I never pay taxes on the capital gains (Y - X), but I got to deduct all of Y on my income taxes that year.
This has been discussed here before, but this treatment is so bonkers that I still can’t believe it’s the law.
Levine talks about the buyback tax - he’s fairly ok with it.
One reason to worry about stock buybacks is that you think companies should never return money to shareholders. As far as I can tell this is a real thing that some people believe, though I do not really understand it myself. My model of corporate finance is:
- people give money to a company,
- the company does stuff with the money to try to earn a profit, and
- the company returns some of the profits to the people who gave it the money.
If you didn’t have Step 3 then the whole thing wouldn’t work: Corporations need some way to return money to shareholders. The main options are dividends (pay cash directly to each shareholder and let them keep the shares) and stock buybacks (pay cash to some shareholders to buy their shares). Buybacks have some big advantages; in particular, they are flexible: A company that has a big profit one year and no profit the next year can buy back stock the first year and not the second year. Dividends tend to be thought of as less flexible: A company that declares a 10-cent dividend one year is expected to keep it up the next year. This is not particularly grounded in science — there is no reason the company couldn’t cut its dividend when times get tough, and companies often, though grudgingly, do — but it does seem to be the case that dividends vary less than buybacks. [7] So companies are more often making affirmative decisions to do buybacks, so they get more attention, and if your view is that companies should never pay money back to shareholders — that they should just reinvest it in the business or pay higher salaries or whatever — then you tend to express that by disliking buybacks.
But buybacks have another advantage over dividends, from the company’s perspective, which is that they are tax-efficient. If you pay a dividend, in the US, every (taxable) shareholder pays (probably capital gains) taxes on the full amount of the dividend. But if you buy back stock, then only the shareholders who sell stock pay taxes: The ones who keep their stock (and presumably benefit from a higher stock price and more concentrated ownership) don’t have any taxable income. And even the ones who sell their stock only pay (capital gains) taxes on their gains: If they bought stock at $20 and sold it back to the company at $30, they have only $10 of taxable income, not $30. So the shareholders pay less tax on buybacks than on dividends, so shareholders prefer buybacks, so companies also like buybacks.
That is standard corporate finance advice, but from the perspective of, say, the US government, it might seem bad. Companies want to return money to shareholders, there are two roughly equivalent ways for them to do it, one is more traditional (dividends) and the other is newer and more controversial (buybacks), and the newer and more controversial one results in less tax revenue for the government.
If you run the government, this is I think a perfectly sensible reason to worry about stock buybacks. If this is your worry, though, you would not go around banning stock buybacks to require companies to invest all of their profits forever in building new factories. You would just … raise taxes on stock buybacks? I suppose you could do this in some complicated way in which a buyback is deemed to trigger taxable income for all shareholders, etc., such that the tax treatment of dividends and buybacks was exactly the same, but that seems exhausting. Easier to just slap an extra tax on buybacks, at the corporate level, to get some crude equivalence.
Anyway President Joe Biden put a 1% tax on buybacks, and in the State of the Union address last night he called for raising it to 4%:
The 1% stock buyback tax that was part of Biden’s Inflation Reduction Act went into effect at the start of this year, but it isn’t expected to tamp down corporations’ plans to repurchase their own shares, because the 1% rate is too low to act as a deterrent.
Democrats had hoped that increasing the cost of stock buybacks would prod companies to use their cash on hand to raise workers’ wages or invest in new endeavors, bolstering the economy.
The idea that companies shouldn’t return capital to shareholders still strikes me as odd, but it does seem like there’s room to raise buyback taxes to make them more equivalent to dividends.
I’m also OK with it, as long as the rationale is to harmonize taxation schemes between dividends and capital gains. Or even to incentivize dividends because the taxation can’t be deferred like capital gains. But it’s always discussed in these terms:
Like that’s the whole fucken point of companies!
Other than missing that qualified dividends are a thing, someone here keep repeating this exact same point……
Companies shouldn’t return capital to shareholders… as untaxed buybacks…. because they pervert public policy. That, and not your latest D conspiracy, is why Ds don’t mention dividends.
As you correctly say, if you are against dividends then you are a literal socialist/communist, not that there is anything wrong with that.
Also, you can be for dividends and pro capitalism while still supporting higher taxes on dividends
is there something else that caused goog to crash besides the dumb chat bot incident? cause that seems insane.
I think Microsoft having good AI search threatens their monopoly?
Not with that name it doesn’t. Have you tried turning “Bing” into a gerund or past participle? Bad!
Super anecdotal, but I think the layoffs have taken the shine off their incredible brand as a company and a place to work.
If google is just another tech company, then their value is pretty different.
While all this is true, you still would have had more money if you sold it and paid the capital gains taxes and didn’t get a deduction. So it’s not like you came out ahead (which is apparently what some people think happens).