Or do they then turnaround and give them to employees?
If its gone forever, then… why? They just bought something and burnt it? Isnt that like a waste of resources?
The stock market, still to this day is a very very strange thing…
It’s easy to see if you imagine there are only three shares and one of them is torn up. The other two now own the entire company.
It’s a way of giving money to shareholders without the value being realized in the sense of being immediately taxable.
The company has $100 "to spare" - they could pay a dividend (give me $10, you $40, $50 for "the others") - but they'd be taxed on the income they made to be able to pay this, and you and I would be taxed receiving the dividend. We'd net out maybe $8, maybe $7 per share.
Or they could buy my share for $100, and retire it. I get the $100 (and pay capital gains tax unless it was in an IRA or otherwise not an issue). You now own 4 shares of a 9 share company, which is worth the same, but your percentage is a big bigger now.
Getting rid of the double taxation of dividends would likely slow down or end most buybacks; the main advantage is that they let the shareholders decide if/when they take the tax hit.
You might have an easier time with some numbers.
A corporation called Hluska trades at a market cap of $100. Hluska has issued 100 shares. Now, let’s say that Hluska burns ten shares and the market cap stays the same. Now it trades at a market cap of $100 but it has 90 shares outstanding.
Stock holders will only lose stock if they sell stock. In that case, they will be taxed at a capital gains rate which is generally lower than the tax rate on income from dividends. So it’s a way to return capital to shareholders who want out in a tax effective way.
If it doesn’t work, it’s a waste of resources. Let’s go back to our example, that idiot Hluska was trading at $100 with 100 shares outstanding, burned 10 and now trades at a market cap of $80. In that case, yeah, it’s a waste of resources because each individual stock is worth less money post burn. But that doesn’t really happen very often. A better capitalized company than Hluska with its soaring $100 market cap should be able to withstand a burn event without crushing market cap by 20%.
Not in all cases, but many
Which is why GAAP earnings matter and not free cash flow
Even if you set your dividends to automatically reinvest via a DRIP program, you still pay taxes on dividends in the year in which they are issued. This reduces the effect of compounding.
> plus the stock
The key point in a buyback is that each share of stock becomes worth more because the company is divided into fewer units. So each share is worth more than it would be had the case instead been used to pay dividends.
