This post will detail my ideas of how buybacks are far superior than the value of dividends.
A company can do a couple different things to issue a monetary reward to its shareholders. The first, is to issue a dividend. A shareholder gets a monetary amount for holding a stock.
Say a company who's stock is worth $10 a share, with a total of 1 million shares, issues a $1 dividend. The company is not actually now worth $9 a share as some people would be led to believe, as there is a greater than zero chance that shareholders have automatic dividend reinvesting, or will use those dividends to buy more shares of the same company. This isn't always true because a company's sentiment and such can lead it to go higher or lower than expected due to dividends, so you can't always predict the movement of a company based on an issuing dividend.
The problem with a dividend issuance from a company is that it gives the shareholder a choice of what to do with the money -- go buy a new pair of shoes, go out for a nice meal, or buy shares from a different company. That means there is a less than 100% chance that those funds will be reinvested to buy shares.
This is where buybacks come in. Companies can buy back shares at any point they would like, whenever they feel like it would best benefit the company.
Say we have the same scenario, a company's stock is worth $10 and they buy back the same amount that the dividend would have been, 1 million dollars. So the company is now worth $11, right? Wrong again chief.
There is such thing as velocity of money in asset purchases. The amount of money spent on a company in stocks increases the value of the company much more than the money spent.
Microsoft currently trades around 24 million shares a day in volume, and they have 7.5 billion issued shares. That's about 9.5% of its total market cap traded per month. A spike of buying power over a short period of time, say a few weeks, would significantly boost the companies growth. I didn't calculate other companies average daily volume but for the sake of the experiment I chose the biggest company in the S&P and the Nasdaq.
Now dividends also have the same bonus. Money reinvested in the company also gives the velocity effect of volume spikes giving more value than what is spent, however those that do decide to reinvest their dividends don't all do so in sync and at the most opportune time, not quite creating the most efficient use of velocity, therefore making the buyback the more efficient use of capital, even when dividend reinvest percentage would be at 100%, which just doesn't happen.
Losing the amount of shares you own when you sell doesn't matter. You can sell fractional shares when you need to sell to get the amount of capital you need. All that matters in investing related to this topic is the total value of your portfolio.
Currently and in the past long term capital gains are always taxed better than dividend payments, and the investor gets to decide when to sell. For most of us, taking too many dividends isn't an issue but as you get older and have had enough dividend bearing stocks over the years, yearly dividends could be more income than you planned on taking, so you end up paying taxes you wouldn't have rather paid if a company was issuing buybacks the whole time.
Submitted November 30, 2021 at 12:04AM by RainbowUnicorns https://ift.tt/3DiK9Dz
