this is missing a BIG BENEFIT of buybacks over dividends, especially in stocks that are yielding 20-30-40% FCF yields. buybacks are PRE TAX funds that can be utilized to buyback shares, whereas dividends are taxed (again) by the government once issued to shareholders. For most shareholders who may buy more shares anyways (myself included esp at FCF yields of 30-40%), why would ANYONE want a dividend blows my mind especially when buybacks make my shares more valuable over the long run
If Suncor can buyback 20-30% of their shares over the next few years, I'd MUCH prefer that over a variable dividend that I would reinvest in shares anyways
You are right if the 20 to 40% FCF is a persistent and reliable phenomenon. You are wrong if it is a temporary situation. If you hold your shares in an RRSP or TFSA you would prefer dividends since you can choose what to buy and the buyback may be in a company that is not your best choice. Buybacks are not "pre tax funds", they are made with after tax funds within the buying corporation. The tax effect of dividends versus capital gains is set out in the chart in the article and depends on your personal tax situation. One risk you ignore is that companies that buy back shares just issue more shares to management and you get no benefit at all. Capital letters don't make your point more relevant or persuasive.
you're making the false assumption that companies which buyback stock are issuing MORE shares than they normally would, which is not something I am assuming in my calculation
In your scenario, you're assuming the worst case scenario with management trying to dilute their shareholders instead of raise the value of the underlying shares. If that is the case, maybe you should consider investing in other companies that don't try to screw over their shareholders
If the company pays me $100 in dividends, I lose 20% of that in taxes to the government, which only allows me to buy $80 in additional stock.
If the company keeps that $100 and uses it for stock buybacks, they can buy $100 of their own stock, which is 25% more stock buying power than if I bought the stock with my double-taxed dividends
I get the math. It only works if three circumstances hold: (1) The shares are held in a taxable account and your personal tax rate on dividends is non-zero (taxable income over $48,000 (2) The buyback is below fair value and (3) The after tax dividend cannot be invested elsewhere for a higher return. If you hold more than one energy company with FCF of 20% to 40% and the buyback is in the one with 20%, you would be farther ahead getting a dividend and investing it in the one with 40% FCF. Get the math?
Markets rarely undervalue stocks and when they do, that undervaluation is more often than not temporary. Markets price stocks at FCF yields of 20 to 40% for a reason and that reason is tyically a market consensus that the yield reflects high risk rather than high opportunity.
The McKinsey study quite clearly demonstrates that buybacks (which from time to time work out well) do not generally produce higher returns. When they are rife in a total sector of the market rather than unique to a certain company, they more often than note lead to losses.
You can lead a horse to water but you can't make it drink.
I agree . The buybacks do not always reduce the shares outstanding .often the CEO or directors are granted options or deferred shares as a bonus which increases there ownership and restores or increases the number of shares outstanding
Imo it is always better to return profits (via dividends) to the investor to provide them the decision of what to do with the money.
this is missing a BIG BENEFIT of buybacks over dividends, especially in stocks that are yielding 20-30-40% FCF yields. buybacks are PRE TAX funds that can be utilized to buyback shares, whereas dividends are taxed (again) by the government once issued to shareholders. For most shareholders who may buy more shares anyways (myself included esp at FCF yields of 30-40%), why would ANYONE want a dividend blows my mind especially when buybacks make my shares more valuable over the long run
If Suncor can buyback 20-30% of their shares over the next few years, I'd MUCH prefer that over a variable dividend that I would reinvest in shares anyways
You are right if the 20 to 40% FCF is a persistent and reliable phenomenon. You are wrong if it is a temporary situation. If you hold your shares in an RRSP or TFSA you would prefer dividends since you can choose what to buy and the buyback may be in a company that is not your best choice. Buybacks are not "pre tax funds", they are made with after tax funds within the buying corporation. The tax effect of dividends versus capital gains is set out in the chart in the article and depends on your personal tax situation. One risk you ignore is that companies that buy back shares just issue more shares to management and you get no benefit at all. Capital letters don't make your point more relevant or persuasive.
you're making the false assumption that companies which buyback stock are issuing MORE shares than they normally would, which is not something I am assuming in my calculation
In your scenario, you're assuming the worst case scenario with management trying to dilute their shareholders instead of raise the value of the underlying shares. If that is the case, maybe you should consider investing in other companies that don't try to screw over their shareholders
If the company pays me $100 in dividends, I lose 20% of that in taxes to the government, which only allows me to buy $80 in additional stock.
If the company keeps that $100 and uses it for stock buybacks, they can buy $100 of their own stock, which is 25% more stock buying power than if I bought the stock with my double-taxed dividends
Get the math?
I get the math. It only works if three circumstances hold: (1) The shares are held in a taxable account and your personal tax rate on dividends is non-zero (taxable income over $48,000 (2) The buyback is below fair value and (3) The after tax dividend cannot be invested elsewhere for a higher return. If you hold more than one energy company with FCF of 20% to 40% and the buyback is in the one with 20%, you would be farther ahead getting a dividend and investing it in the one with 40% FCF. Get the math?
Markets rarely undervalue stocks and when they do, that undervaluation is more often than not temporary. Markets price stocks at FCF yields of 20 to 40% for a reason and that reason is tyically a market consensus that the yield reflects high risk rather than high opportunity.
The McKinsey study quite clearly demonstrates that buybacks (which from time to time work out well) do not generally produce higher returns. When they are rife in a total sector of the market rather than unique to a certain company, they more often than note lead to losses.
You can lead a horse to water but you can't make it drink.
Good luck with your investments.
I agree . The buybacks do not always reduce the shares outstanding .often the CEO or directors are granted options or deferred shares as a bonus which increases there ownership and restores or increases the number of shares outstanding