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.
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).