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.
Are you suggesting that a company should never pay dividends?
Dividend versus buybacks are basically the same thing other than dividends are taxable and buybacks can be adjusted for amount of cash in excess of high return internal investment whereas as dividends become sticky.
While there is always theory and practice, if a company does not have a good internal place to deploy the capital they should give the excess capital back to the owners.
Of course managements screw around with the dilution of equity schemes to manage earnings But this is an alignment problem not an indictment of buybacks as a tool
To use Berkshire as the basis of the virtue of never paying a dividend suffers from a sample size of one by and extraordinary pair of investors whose returns in recent years have declined but have maybe the best long term track record in modern history.
A dividend is a partial distribution of balance sheet capital - said differently, a partial liquidation of the company, which is highly tax inefficient.
A buy back is a reduction in equity financing, the most expensive form of capital market financing. Why do companies strive to pay down debt capital but not equity capital? It's upside down back to front thinking.
I am also not saying that companies should never pay a dividend - but it should be a last resort means of allocating surplus capital. Tobacco companies in a declining industry for example.
Berkshire is not a sample size of one. Amazon is another, Teledyne was another and I could list hundreds more.
Richard Branson summed it up well. He said investors provided me with capital so that Virgin group could invest it at highly accretive rates of return, not because they wanted me to hand them back 5% on a silver platter every year, which then needs to be reinvested somewhere. Why not cut out the middle man, avoid the tax drain, and simply reinvest the money in the Virgin group? If the investor doesn't like the way we are reinvesting capital, he is free to take his capital elsewhere.
You either want a high yielding asset in which case buy a bond, but don't look for capital growth - or you want a growth asset, in which case yield is an anathema.
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.
He deserves his distinguished characterization.
Are you suggesting that a company should never pay dividends?
Dividend versus buybacks are basically the same thing other than dividends are taxable and buybacks can be adjusted for amount of cash in excess of high return internal investment whereas as dividends become sticky.
While there is always theory and practice, if a company does not have a good internal place to deploy the capital they should give the excess capital back to the owners.
Of course managements screw around with the dilution of equity schemes to manage earnings But this is an alignment problem not an indictment of buybacks as a tool
To use Berkshire as the basis of the virtue of never paying a dividend suffers from a sample size of one by and extraordinary pair of investors whose returns in recent years have declined but have maybe the best long term track record in modern history.
Dividends and buybacks are not the same thing.
A dividend is a partial distribution of balance sheet capital - said differently, a partial liquidation of the company, which is highly tax inefficient.
A buy back is a reduction in equity financing, the most expensive form of capital market financing. Why do companies strive to pay down debt capital but not equity capital? It's upside down back to front thinking.
I am also not saying that companies should never pay a dividend - but it should be a last resort means of allocating surplus capital. Tobacco companies in a declining industry for example.
Berkshire is not a sample size of one. Amazon is another, Teledyne was another and I could list hundreds more.
Richard Branson summed it up well. He said investors provided me with capital so that Virgin group could invest it at highly accretive rates of return, not because they wanted me to hand them back 5% on a silver platter every year, which then needs to be reinvested somewhere. Why not cut out the middle man, avoid the tax drain, and simply reinvest the money in the Virgin group? If the investor doesn't like the way we are reinvesting capital, he is free to take his capital elsewhere.
You either want a high yielding asset in which case buy a bond, but don't look for capital growth - or you want a growth asset, in which case yield is an anathema.
Please take the time to read this: https://rockandturner.substack.com/p/how-dividends-destroy-shareholder-value . It will help you better understand the case I am making.
You don't have to agree, but at least understand the counter view.
Thank you!