Why are share-buy-back programs not more popular?

[natureexplorer]

If companies are willing to change their dividend schedule because of possible tax increases, why don't they use the ultimate means of returning capital tax-efficiently - share-buy-back programs?

[talzara]

Because companies are poor allocators of capital, outside of their core business. That includes the financial business -- i.e., their own stock. Just as most acquisitions actually destroy shareholder value, most buybacks are done in a way that destroys shareholder value.

There were plenty of cash-rich companies that bought back stock in 2007 -- but not in March 2009, when the market was at a bottom.

Netflix did even worse. Not only did they buy high, but they also sold low. They bought back shares when NFLX was trading at 300, at a triple-digit P/E ratio. The stock then crashed to the 80s, whereupon Netflix discovered that they were low on cash, and proceeded to issue more stock!!!

My feeling is that a lot of buybacks are done at the peak because the CEO and the Board members have stock options, and want to artificially increase the price of the stock so that they can exercise them. There are companies that do use buybacks to increase shareholder value -- but they are not in the majority.

[Wagnerjb]

Because most people are poor at managing their finances and cash flow, and these people demand regular dividend checks in the mail. To please these shareholders, the company pays a modest dividend - one that can be sustained in good times and in bad, because cutting the dividend is a death sentence for your stock. However, companies have times when they are generating cash flows beyond what is needed for dividends and profitable capital expansion, and those amounts are used for stock buybacks.

Different shareholders have different desires, thus you see both types of payout to shareholders. Those individuals that can manage their own cash flows and those that care about tax efficiency are the types who prefer low-dividend or zero-dividend companies....and they typically buy a tax-managed fund to achieve this objective.

Best wishes.

[Karamatsu]

From first-hand experience, companies sometimes prefer to issue dividends rather than buy back stock when insiders hold large numbers of shares. Issuing a dividend allows them to suck the profits out of the company and into their own pockets as cash and (a) at a tax rate better than if they simply gave themselves bonuses (in most countries), (b) in a way that is perfectly legal, and (c) which the other shareholders can't sue them for (and may even thank them). If they did a share buy-back, yes, their shares would probably be worth more on paper but they would only be able to realize the gain by selling, which they don't want to do because it would mean loss of control and a reduced share of the pie when they sell the company. Furthermore doing a share-buyback does not, by any means, guarantee that the shares will rise in proportion to the capital expended in the buyback. It's vague and subject to the uncertainties of the market, business conditions, etc. But a dividend goes straight into their bank accounts and they like that. They may invest the money or just intend to use it for some personal project.

In any case, following the money often reveals the answer.

[FinancialDave]

Because companies are poor allocators of capital, outside of their core business. That includes the financial business -- i.e., their own stock. Just as most acquisitions actually destroy shareholder value, most buybacks are done in a way that destroys shareholder value.

There were plenty of cash-rich companies that bought back stock in 2007 -- but not in March 2009, when the market was at a bottom.

Netflix did even worse. Not only did they buy high, but they also sold low. They bought back shares when NFLX was trading at 300, at a triple-digit P/E ratio. The stock then crashed to the 80s, whereupon Netflix discovered that they were low on cash, and proceeded to issue more stock!!!

My feeling is that a lot of buybacks are done at the peak because the CEO and the Board members have stock options, and want to artificially increase the price of the stock so that they can exercise them. There are companies that do use buybacks to increase shareholder value -- but they are not in the majority.

I agree with the above that companies usually buy high (2006-2007) and sell low (2008-2009). Sometimes the reason is nothing more simple than the same reason most investors do -- they just cannot predict the future. Certainly the company I worked for was no different, buying at 55 and selling just few short years later at 15-20!

[TJSI]

For those investing for the long run and hoping to achive the Siegel return of about 7% real return, stock buybacks won't work. The Siegel return is achived by compounding dividends and growing your shares. Buybacks could be looked at as an anti-compounding program.

[Stryker]

It seemed to me when I used to study Value Line at the library between ten and twenty years ago, there were more buyback announcements than there were actual buybacks. Now if there's an actual buyback I'll take it, but much prefer a dividend increase.