It strikes me as odd that this analysis, coming from a distinguished academic, presents dividends and buybacks as mechanisms for returning cash to shareholders, implying that both are beneficial.
In reality, stock-based compensation is one of the most abused aspects of corporate finance in modern America. Over the past two decades, the rise in share buybacks has primarily served to offset the dilution caused by stock-based compensation, masking a transfer of wealth from external investors to insiders. The true cost of stock-based compensation is often understated in operating cash flows, whereas its actual impact is revealed in financing cash flows, where companies repurchase shares to neutralize dilution at the time of vesting.
Politicians have raised the prospect of taxing stock repurchases, but this entirely misses the point. Share buybacks can be hugely beneficial if done properly. Paying down equity capital should be viewed in the same way as reducing debt. The tax and regulatory attention needs to be on the abusive practices around stock based compensation that prevail today.
Most companies should not be lauded for repurchasing stock that they disingenuously dress up as a return of cash to shareholders. Similarly, most companies should not pay dividends - but very few CEOs are competent enough to understand this in the way that Buffett does. Why do business schools not teach this stuff? It really isn't rocket science.
Fantastic comment. I would love to see an updated 2025 detailed report on SBC from Mr. Damodaran especially highlighting the abusers (SaaS/Cloud) with double digit SBC/Revenue.
It strikes me as odd that this analysis, coming from a distinguished academic, presents dividends and buybacks as mechanisms for returning cash to shareholders, implying that both are beneficial.
In reality, stock-based compensation is one of the most abused aspects of corporate finance in modern America. Over the past two decades, the rise in share buybacks has primarily served to offset the dilution caused by stock-based compensation, masking a transfer of wealth from external investors to insiders. The true cost of stock-based compensation is often understated in operating cash flows, whereas its actual impact is revealed in financing cash flows, where companies repurchase shares to neutralize dilution at the time of vesting.
- The truth is that dividends destroy shareholder value and that reducing them, as exemplified by the German Economic Miracle, boosts economic prosperity (source: https://rockandturner.substack.com/p/how-dividends-destroy-shareholder-value).
- While share repurchases can create value when executed at prices below intrinsic value, exemplified by Henry Singleton (case study: https://rockandturner.substack.com/p/henry-singleton-learn-from-the-best), they are often mismanaged, leading to the erosion of shareholder equity.
Politicians have raised the prospect of taxing stock repurchases, but this entirely misses the point. Share buybacks can be hugely beneficial if done properly. Paying down equity capital should be viewed in the same way as reducing debt. The tax and regulatory attention needs to be on the abusive practices around stock based compensation that prevail today.
Most companies should not be lauded for repurchasing stock that they disingenuously dress up as a return of cash to shareholders. Similarly, most companies should not pay dividends - but very few CEOs are competent enough to understand this in the way that Buffett does. Why do business schools not teach this stuff? It really isn't rocket science.
Fantastic comment. I would love to see an updated 2025 detailed report on SBC from Mr. Damodaran especially highlighting the abusers (SaaS/Cloud) with double digit SBC/Revenue.
Thank you!