I've never understood this take. Buybacks cannot be analogous to dividends because they require you to relinquish your stake in the company to realize the gains.
That's only true if you own single shares that you can't divide. If the market cap of the company is divided in enough shares that everyone can sell their portion of the buyback then it can be exactly like the dividend. And investors often directly reinvest the dividends so if you are holding an index fund that reinvests dividends, buybacks or dividends are the same except for any tax differences. If you're holding an index fund you also don't have the problem of the shares not being divisible, because someone else is managing that in aggregate for you.
Example: You own 10% of company with market cap $100M. You have $10M.
Dividend scenario: company pays 3% dividend, you get $300k. You have $10M + $300k = $10.3 million.
Buyback scenario: company buys it's own stock for the same amount. You own 10.3% of the company. You have $10.3 million. If you want, you can sell stock to get $300k in cash.
The only difference is that in the buyback scenario you can decide when to sell (and pay taxes).
Slight nit: The math you're using is creating money from nothing. You started off with $10M and by dark magic you now have $10.3M.
What really happens is that you start off with $10M in stock.
With dividends you get $300K in cash, but now the company doesn't have that cash anymore so its value is reduced by $300K, so you end up with $300K in cash and stock which is now only worth $9.7M.
With buybacks you sell $300K worth of stock to the company. Then you have $300K in cash and the $9.7M in shares you didn't sell which are still worth the same amount because even though the company has less cash it also has fewer outstanding shares and those cancel out.
This is ignoring the effect on valuation of separating the business from the cash -- if the business is more productive than the cash then that may indeed make the share price increase, because then you have a more concentrated investment in the more productive business instead of having the investment diluted by being forced to also invest in an ordinary pile of cash that happens to be part of the same corporation.
> The math you're using is creating money from nothing. You started off with $10M and by dark magic you now have $10.3M.
I think the idea was that the company is worth $100mn at the beginning and it accumulates $3mn of cash over the year that it wants to distribute somehow to remain a $100mn company.
Mmm, that perspective doesn't really reflect the, I guess, party liquidity in a practical scenario.
The company has money, they trade at $X. In a trivial sense it means you can buy a share for $X +- some spread.
The capital return mechanism is that the company now owns the share, and can retire it, the part that really isn't important is who they got it from.
It's sort of like electrons in a metal, they're just sort of around. Worrying about the behavior in specific instances doesn't paint the picture of the aggregate behavior.
That’s a difference, but they are still analogous. Not realizing the gain is actually a helpful tax avoidance strategy. I’m investing long term, I’d rather not realize the gain.
It's a public buyout offer, not profit sharing.