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0 pointsperl4ever6y ago0 comments

Share buybacks aren't necessarily done on a regular schedule nor do they imply the same sort of public commitment or are required to be paid for out of profits.

Saying they are just a more tax efficient alternative to dividends assumes that they are exactly substituted for dividend payments in amount and timing, but I don't think that's the case in practice.

Something that I've wondered is, if a company has excess capital why not, instead of acquisitions, dividends, or buybacks, just buy an S&P 500 index fund?

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5 comments · 3 top-level

mrep6y ago· 1 in thread

> Something that I've wondered is, if a company has excess capital why not, instead of acquisitions, dividends, or buybacks, just buy an S&P 500 index fund?

Because that would tie the value and riskiness of your company to the sp 500 which is inefficient as that effectively forces anyone who wants to invest in your company to also invest in the sp 500. Not everyone has a risk/reward preference that matches the sp 500. It's better to instead return profits to investors and let them reinvest into whatever they want.

perl4everOP6y ago

Not everyone owning a given company has a risk/reward preference that matches some hare-brained acquisition.

However, the S&P 500 is approximately the same as the stock market, and so I think it's arguable that "everyone" together does have about the same risk/reward preference.

Buybacks, even if better in the best of all possible worlds, make it difficult to change your mind, whereas an index fund could simply be sold, rather than having to issue more stock. It seems like a lower-friction alternative to accomplish something economically similar.

arbitrary_name6y ago· 1 in thread

Dividends are sticky: once the level is set, they are expected in perpetuity and any reduction is assumed to be indicative of poor performance or future performance. Buybacks have the benefit of not having that expectation attached.

perl4everOP6y ago

Sure, that's what I was alluding to, but I think it's obvious that the difference is not necessarily beneficial. People make commitments for valid reasons, and they are usually worth something.

cbanek6y ago

Sometimes they do take the profits and put them into investments, or how they hold cash reserves for future purchases, payroll, etc. for example: https://en.wikipedia.org/wiki/Braeburn_Capital

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