I am puzzled, I believe I pay my tax rate on 66% of my dividends and on 50% of my capital gains. This is different on registered funds but we get killed on tax when we withdraw from any registered fund except TFSA. I'll take a capital gain over a dividend any day.
It is factored in. That is where the $5.55 annual dividend versus $5.00 is derived. Tax free accounts (Pensions, RIF's, RRSP's, IRA's, Roth's) hold the majority of publicly traded shares outside of mutual funds. In Canada, dividends are taxed at lower rates than capital gains until dividend income exceeds $60,000 annually when they are more or less equal. Most investors are not in the highest tax brackets where capital gains do have the advantage as you state, but for incomes below $100,000 dividends are taxed at lower rates. https://www.taxtips.ca/taxrates/on.htm
for me as a German investor, I have to pay 25% on dividends flat - there is no tax free and it doesn't increase with my income. Therefore, buybacks are welcome as reinvested dividends would only come out as 3.8$ with your numbers...
Also, rerating is worth something as you gain optionality.
"The present value of $3.33 in year two and $5.55 for the ensuing years at a 9% discount rate is a bit less than the present value of CAD$5.00 from the outset for the same period. Do the math yourself since I am tired of spoon feeding critics."
The PV of $5 after year 2, for 30 subsequent years, discounted at 9% is $47.13.
The PV of $3.33 after year 2, and then $5.55 for 30 subsequent years, discounted at 9% is $50.44.
Both of these assume the cash flows arriving at the year-end.
The buyback, if executed at a price that allows for a return greater than the discount rate, will generate a higher PV.
Inevitably we have seen management teams all over the place blow money on buybacks when equity prices are trading at high levels and I agree it makes no economic sense (from a shareholder perspective) when they do this.
A head to head comparison has the first "no buy-back" dividend paid on the day the buyback investors get their payment, so the first $5.00 dividend is undiscounted, the first $3.33 is one year later and so on. By the way, my PV analysis has the dividend model at $51.29 and the buyback model at $51.01 at a 9% discount rate. I am happy to send you the spreadsheet if you want. You can play with assumptions to make the buyback look better but it isn't from a strictly financial point of view. The assertion that the return on buybacks is greater than the discount rate presumes that this company will have future returns that exceed the average market return for decades and that is not supported by history. The return on the S&P for the past century excluding dividends is less than 6% and the energy sector has lagged the S&P for the past 10 years by a wide margin (http://www.lazyportfolioetf.com/sp-500-sector-returns/.)
Mr. Blair: Management have been rewarding themselves at a much higher level since the 1990's. Rarely do they work for the good of the shareholders unless they themselves own a very large position.
I am puzzled, I believe I pay my tax rate on 66% of my dividends and on 50% of my capital gains. This is different on registered funds but we get killed on tax when we withdraw from any registered fund except TFSA. I'll take a capital gain over a dividend any day.
this analysis fails to factor in increased per share metrics as share count goes down, which is the primary basis of buybacks over dividends
another thing it forgets is the tax advantages of buybacks over dividends as shareholders are taxed twice whereas buybacks are taxed once
It is factored in. That is where the $5.55 annual dividend versus $5.00 is derived. Tax free accounts (Pensions, RIF's, RRSP's, IRA's, Roth's) hold the majority of publicly traded shares outside of mutual funds. In Canada, dividends are taxed at lower rates than capital gains until dividend income exceeds $60,000 annually when they are more or less equal. Most investors are not in the highest tax brackets where capital gains do have the advantage as you state, but for incomes below $100,000 dividends are taxed at lower rates. https://www.taxtips.ca/taxrates/on.htm
for me as a German investor, I have to pay 25% on dividends flat - there is no tax free and it doesn't increase with my income. Therefore, buybacks are welcome as reinvested dividends would only come out as 3.8$ with your numbers...
Also, rerating is worth something as you gain optionality.
I prefer to see companies pay down debt with excess cash, and then pay dividends. I bird in the hand...
"The present value of $3.33 in year two and $5.55 for the ensuing years at a 9% discount rate is a bit less than the present value of CAD$5.00 from the outset for the same period. Do the math yourself since I am tired of spoon feeding critics."
The PV of $5 after year 2, for 30 subsequent years, discounted at 9% is $47.13.
The PV of $3.33 after year 2, and then $5.55 for 30 subsequent years, discounted at 9% is $50.44.
Both of these assume the cash flows arriving at the year-end.
The buyback, if executed at a price that allows for a return greater than the discount rate, will generate a higher PV.
Inevitably we have seen management teams all over the place blow money on buybacks when equity prices are trading at high levels and I agree it makes no economic sense (from a shareholder perspective) when they do this.
A head to head comparison has the first "no buy-back" dividend paid on the day the buyback investors get their payment, so the first $5.00 dividend is undiscounted, the first $3.33 is one year later and so on. By the way, my PV analysis has the dividend model at $51.29 and the buyback model at $51.01 at a 9% discount rate. I am happy to send you the spreadsheet if you want. You can play with assumptions to make the buyback look better but it isn't from a strictly financial point of view. The assertion that the return on buybacks is greater than the discount rate presumes that this company will have future returns that exceed the average market return for decades and that is not supported by history. The return on the S&P for the past century excluding dividends is less than 6% and the energy sector has lagged the S&P for the past 10 years by a wide margin (http://www.lazyportfolioetf.com/sp-500-sector-returns/.)
Mr. Blair: Management have been rewarding themselves at a much higher level since the 1990's. Rarely do they work for the good of the shareholders unless they themselves own a very large position.