Why do dividends still exist?

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Carlos Danger
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Re: Why do dividends still exist?

Post by Carlos Danger »

I'd prefer the tax inefficiency of being paid a dividend, and deciding myself whether or where to reinvest it, over the stupidity and/or greed of the company buying back its own stock while the price is high.

Of course I index, so I get all the good and bad management in the corporate world.
Dottie57
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Re: Why do dividends still exist?

Post by Dottie57 »

bhsince87 wrote: Fri Aug 09, 2019 8:43 pm
hungrywave wrote: Fri Aug 09, 2019 5:32 pm Why didn’t Apple Pay a dividend and instead did a buyback?
Apple does pay a dividend.
And it has done so for a number of years. It also does buybacks of stock.
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Re: Why do dividends still exist?

Post by Dottie57 »

Carlos Danger wrote: Sat Aug 10, 2019 9:43 am I'd prefer the tax inefficiency of being paid a dividend, and deciding myself whether or where to reinvest it, over the stupidity and/or greed of the company buying back its own stock while the price is high.

Of course I index, so I get all the good and bad management in the corporate world.
I too like dividends. I don’t reinvest at this point in my life.
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Abe
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Re: Why do dividends still exist?

Post by Abe »

My question is: What would happen if dividends did not exist?
Slow and steady wins the race.
alex_686
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Re: Why do dividends still exist?

Post by alex_686 »

Abe wrote: Sat Aug 10, 2019 10:00 am My question is: What would happen if dividends did not exist?
Do we still have Free Cash Flow to Equity? Stock buy backs and cash out mergers? If yes, not much.

If no, then we are not talking about investment theory anymore.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
MathIsMyWayr
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Re: Why do dividends still exist?

Post by MathIsMyWayr »

Abe wrote: Sat Aug 10, 2019 10:00 am My question is: What would happen if dividends did not exist?
It would be like an interest-free bond of an eternal term.
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David Jay
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Re: Why do dividends still exist?

Post by David Jay »

MathIsMyWayr wrote: Sat Aug 10, 2019 10:38 am
Abe wrote: Sat Aug 10, 2019 10:00 am My question is: What would happen if dividends did not exist?
It would be like an interest-free bond of an eternal term.
Maybe a zero-coupon bond with a variable interest rate and an eternal term? Because there is the expectation of a return (i.e. capital gain).
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patrick013
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Re: Why do dividends still exist?

Post by patrick013 »

alex_686 wrote: Sat Aug 10, 2019 5:55 am
patrick013 wrote: Fri Aug 09, 2019 7:48 pm
alex_686 wrote: Fri Aug 09, 2019 6:55 pm
It is interesting to compare and contract how the average company's dividend is treated verse a REITs dividend - which is obviously much more erratic.

What happens to EPS ?

operating reserve
dividends
research and tech dvelopment
expansion of profit centers
repairs and replacement
debt service

If a company pays an above average dividend it apparently has more money for that
and needs less for other categories. Perhaps even some buybacks.
I am not sure what you point is. All of the items you mention - with the exception of dividends - are "above the line" stuff. i.e. operation stuff. We are talking about "below the line", or financing stuff.

The question at hand is: What does it matter if a dollar is distributed to shareholders via dividends or by stock buy-back? With the OP making the argument that stock buy backs are more efficient from a tax perspective.
I'm just looking at the corporate budget briefly sometimes called earnings retention policy. Tells the finance people how to allocate earnings into better corporate strategies. The Directors would be the ones that establish which categories get what.

Actually I think buybacks are overrated. An open or voluntary buyback program isn't as bad as an involuntary buyback program. An involuntary program would require some per cent of the stock be bought back causing tax expense instead of tax efficiency. So at some level stock is sold that the investor may not want to sell, but would rather hold and sell and pay tax at a later date. Stock desired to be held would have to be repurchased then after paying the tax. So at some level of buyback the result can be unwanted. Just a few dozen shares at a time may be OK.

Some countries have actually outlawed buybacks but most have not.
age in bonds, buy-and-hold, 10 year business cycle
HootingSloth
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Re: Why do dividends still exist?

Post by HootingSloth »

The tax differences between buybacks and dividends are sometimes overstated. A stock redemption must be "substantially disproportionate" or it will be taxed as a dividend. If a corporation wants to return capital to all shareholders proportionately, or nearly proportionally, there would be no tax difference. And, as already mentioned, qualified dividends are taxed at capital gain rates and dividends paid out on shares held in tax advantaged accounts (or held by tax-exempt investors like pension funds) are not subject to tax at all.
Wakefield1
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Re: Why do dividends still exist?

Post by Wakefield1 »

usagi wrote: Sat Aug 10, 2019 2:25 am
totallystudly wrote: Fri Aug 09, 2019 8:15 pm IBM is a shining example of how buybacks don't increase share value and dividends would have been better for everyone
Bingo...and buybacks were used as a way for the C-Suite to raid the company coffers.
May I add that I don't think that buybacks guarantee that a stock can't go to zero some time in the future. And if you owned that stock and didn't sell in time you have nothing. (Except perhaps for a claim to use on your income tax return calculations)
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SimpleGift
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Re: Why do dividends still exist?

Post by SimpleGift »

One way of looking at the question "Why do dividends (and buybacks) still exist?" is to go back in history to the very first joint stock companies in the Netherlands in the late 1500s. Investors would get together to finance a sailing ship for trading in Asia, and if successful, the only way to collect their proportionate share of the profits was to dissolve and liquidate the company.

The innovation of the Dutch East India Company in the early 1600s, and the primary reason it stayed in business and flourished for nearly 200 years, was the periodic distribution of dividend payments (chart below). With these periodic payments, investors were content to allow the company to continue operating and it went on to become the world's most valuable company of its time.
Payments to shareholders were highly variable in the 1600s, and became smoother in the 1700s — averaging about 18% over the full 195 years of the company's existence.
JackoC
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Re: Why do dividends still exist?

Post by JackoC »

nisiprius wrote: Fri Aug 09, 2019 8:13 pm 1. According to the dividend discount theory of stock value, dividends are the root of stock value.
....
The reason why a non-dividend paying stock has a value is that it is expected that someday it will pay them. It has to pay them eventually in order to be worth owning. It's just a question of "pay me now or pay me later." Otherwise it's just speculation--like bitcoin, "I am buying it because I think it will go up."

The natural expectation is that the rate of growth of a young company is limited only by access to capital, and that it can use every dollar it gets.

2. As for buybacks, there are various buyback-focussed indexes and ETFs that track them. Yet I cannot remember anybody in this forum ever showing any interest in them.
1. That's a good explanation, but of the easy version of the question, which is 'why do public stock companies ever make payouts to shareholders?' For straightforward reasons, such as a) lack of internal projects with positive NPV discounted at the company's cost of capital (the difference between start ups and regulated utilities, etc), and that eventually happens, b) confidence: a tangible demonstration that accounting earnings are real, to some degree at least (it's not 100% proof because increased borrowing could fund a payout though OTOH investors can see that with sufficient transparency), and c) 'people like them' though arguably the rational version of c) is really b)

2. This is the harder version of the question: why, when making eventually necessary payouts, do companies still use dividends rather than stock buybacks? A buyback is a payout economically speaking just as much as a dividend is. The reasons are more obscure but principally variations on b) as above, a matter of confidence: by custom management is committed to a dividend increase and big dividend cuts tend to result in loss of confidence in, or even the jobs of, senior managers. Buybacks are still accepted as something to do more in sunny times, and with borrowed money (two reasons not to get carried away assuming the true long term payout rate of US companies is now much higher than the dividend yield: you really have to cyclically adjust buybacks, and be careful to include the effect of shifting the capital structure toward debt to pay for bursts of high buybacks, as has been true recently). But also practically 'people like them' (dividends that is, even over buybacks) whether there's a really good reason or not. Also with buybacks you do have in theory the possibility of the snake eating its tail and eventually disappearing but practically speaking investor demand for dividends makes that mainly theoretical.
Wakefield1
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Re: Why do dividends still exist?

Post by Wakefield1 »

Do managements sometimes engage in buybacks as a strategy to discourage takeover attempts of "their" companies by potential other owners who could possibly get a majority stake (if they can afford to buy up enough shares) and install other managers?
Might this possibly not be in the interest of small shareholders-particularly if management hasn't been doing all that well in running the company?
Northern Flicker
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Re: Why do dividends still exist?

Post by Northern Flicker »

nedsaid wrote: Sat Aug 10, 2019 2:37 am
JBTX wrote: Fri Aug 09, 2019 5:44 pm I recall reading, many years ago, that paying dividends tends to instill some financial discipline in management, in that it prevents you from throwing everything away in ill advised acquisitions, investments and bonuses. They have to prioritize.

How applicable that may still be I don't know.
Still applicable. KraftHeinz is the perfect example of value being destroyed through a merger. The shareholders of Kraft and the shareholders of Heinz would have been far better off getting a dividend here instead of capital gains that never came from a bad merger. Somehow folks think that merging and then firing employees always creates Value, it doesn't. What a disaster. Corporate mergers don't always work out.
Not merging may have worked out worse for both companies. We don’t have a way of knowing if the merger worked out better than the two companies staying independent of each other.
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Re: Why do dividends still exist?

Post by nisiprius »

JackoC wrote: Sat Aug 10, 2019 2:35 pm...A buyback is a payout economically speaking just as much as a dividend is...
Serious question: has anyone reading this personally had a big corporation buy back your shares and pay you money directly? That is, has a buyback ever put dollars from the stock issuer directly into your pocket? The check in the mail (or the online display of your bank account) shows a payment from Acme Pyrotektronics, not from the brokerage?

When a buyback occurs, do small retail investors, holding the stock in a brokerage account in street name, receive a notice of the buyback, and an opportunity to participate by selling directly to the issuer?

Yes, I get it that the buyback (in theory ought to, and in practice probably does) increase the value of everyone's shares, but that's not what I'm asking. I'm asking whether in real life dollars have flowed to you directly from the stock issuer, or whether it is only indirectly via an increase in market price?
Last edited by nisiprius on Sat Aug 10, 2019 4:54 pm, edited 3 times in total.
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permport
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Re: Why do dividends still exist?

Post by permport »

Buybacks don't necessarily have the same wealth impact that dividends do.

Ignoring taxes, dividends are wealth neutral.

Buybacks, if done at too high a price, actually decrease the wealth of remaining shareholders. Their impact on shareholder value is very sensitive on the purchase price.
Buy right and hold tight.
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nedsaid
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Re: Why do dividends still exist?

Post by nedsaid »

Northern Flicker wrote: Sat Aug 10, 2019 3:48 pm
nedsaid wrote: Sat Aug 10, 2019 2:37 am
JBTX wrote: Fri Aug 09, 2019 5:44 pm I recall reading, many years ago, that paying dividends tends to instill some financial discipline in management, in that it prevents you from throwing everything away in ill advised acquisitions, investments and bonuses. They have to prioritize.

How applicable that may still be I don't know.
Still applicable. KraftHeinz is the perfect example of value being destroyed through a merger. The shareholders of Kraft and the shareholders of Heinz would have been far better off getting a dividend here instead of capital gains that never came from a bad merger. Somehow folks think that merging and then firing employees always creates Value, it doesn't. What a disaster. Corporate mergers don't always work out.
Not merging may have worked out worse for both companies. We don’t have a way of knowing if the merger worked out better than the two companies staying independent of each other.
My guess is that probably 50% to 60% of mergers and acquisitions don't work out. I have seen companies acquired and spun off again. There probably is data on this out there somewhere but this is my educated guess from years of watching the markets. Lots of this is probably management boredom.
A fool and his money are good for business.
Wakefield1
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Re: Why do dividends still exist?

Post by Wakefield1 »

nisiprius wrote: Sat Aug 10, 2019 4:48 pm
JackoC wrote: Sat Aug 10, 2019 2:35 pm...A buyback is a payout economically speaking just as much as a dividend is...
Serious question: has anyone reading this personally had a big corporation buy back your shares and pay you money directly? That is, has a buyback ever put dollars from the stock issuer directly into your pocket? The check in the mail (or the online display of your bank account) shows a payment from Acme Pyrotektronics, not from the brokerage?

When a buyback occurs, do small retail investors, holding the stock in a brokerage account in street name, receive a notice of the buyback, and an opportunity to participate by selling directly to the issuer?

Yes, I get it that the buyback (in theory ought to, and in practice probably does) increase the value of everyone's shares, but that's not what I'm asking. I'm asking whether in real life dollars have flowed to you directly from the stock issuer, or whether it is only indirectly via an increase in market price?
This (buyback in a major oil company shares) might have indirectly allowed a dividend increase per share later.
fortyofforty
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Re: Why do dividends still exist?

Post by fortyofforty »

nedsaid wrote: Sat Aug 10, 2019 5:49 pm
Northern Flicker wrote: Sat Aug 10, 2019 3:48 pm
nedsaid wrote: Sat Aug 10, 2019 2:37 am
JBTX wrote: Fri Aug 09, 2019 5:44 pm I recall reading, many years ago, that paying dividends tends to instill some financial discipline in management, in that it prevents you from throwing everything away in ill advised acquisitions, investments and bonuses. They have to prioritize.

How applicable that may still be I don't know.
Still applicable. KraftHeinz is the perfect example of value being destroyed through a merger. The shareholders of Kraft and the shareholders of Heinz would have been far better off getting a dividend here instead of capital gains that never came from a bad merger. Somehow folks think that merging and then firing employees always creates Value, it doesn't. What a disaster. Corporate mergers don't always work out.
Not merging may have worked out worse for both companies. We don’t have a way of knowing if the merger worked out better than the two companies staying independent of each other.
My guess is that probably 50% to 60% of mergers and acquisitions don't work out. I have seen companies acquired and spun off again. There probably is data on this out there somewhere but this is my educated guess from years of watching the markets. Lots of this is probably management boredom.
As anyone who has used Exxon computers can attest, sometimes companies overreach or branch out into fields completely unrelated to their core business, to the detriment of shareholders.
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Re: Why do dividends still exist?

Post by Wakefield1 »

nedsaid wrote: Sat Aug 10, 2019 5:49 pm
Northern Flicker wrote: Sat Aug 10, 2019 3:48 pm
nedsaid wrote: Sat Aug 10, 2019 2:37 am
JBTX wrote: Fri Aug 09, 2019 5:44 pm I recall reading, many years ago, that paying dividends tends to instill some financial discipline in management, in that it prevents you from throwing everything away in ill advised acquisitions, investments and bonuses. They have to prioritize.

How applicable that may still be I don't know.
Still applicable. KraftHeinz is the perfect example of value being destroyed through a merger. The shareholders of Kraft and the shareholders of Heinz would have been far better off getting a dividend here instead of capital gains that never came from a bad merger. Somehow folks think that merging and then firing employees always creates Value, it doesn't. What a disaster. Corporate mergers don't always work out.
Not merging may have worked out worse for both companies. We don’t have a way of knowing if the merger worked out better than the two companies staying independent of each other.
My guess is that probably 50% to 60% of mergers and acquisitions don't work out. I have seen companies acquired and spun off again. There probably is data on this out there somewhere but this is my educated guess from years of watching the markets. Lots of this is probably management boredom.
Let me guess 80%. :happy
Seasonal
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Re: Why do dividends still exist?

Post by Seasonal »

nisiprius wrote: Sat Aug 10, 2019 4:48 pm
JackoC wrote: Sat Aug 10, 2019 2:35 pm...A buyback is a payout economically speaking just as much as a dividend is...
Serious question: has anyone reading this personally had a big corporation buy back your shares and pay you money directly? That is, has a buyback ever put dollars from the stock issuer directly into your pocket? The check in the mail (or the online display of your bank account) shows a payment from Acme Pyrotektronics, not from the brokerage?

When a buyback occurs, do small retail investors, holding the stock in a brokerage account in street name, receive a notice of the buyback, and an opportunity to participate by selling directly to the issuer?

Yes, I get it that the buyback (in theory ought to, and in practice probably does) increase the value of everyone's shares, but that's not what I'm asking. I'm asking whether in real life dollars have flowed to you directly from the stock issuer, or whether it is only indirectly via an increase in market price?
Two mechanics for buybacks:

1) Open market purchases. If you sell into the market, you generally don't know who's buying your shares. If you hold through a broker and order the broker to sell, you get paid the same way as any sell order.

2) Tender offer. The company sends out disclosure documents and forms for tendering (selling). If you hold through a broker, the broker sends you the disclosure document and a form to instruct it to tender. If you want to tender you fill out the form. The broker then tenders on behalf of all of its clients who want to tender, sends in the shares and distributes the proceeds to its clients.

You don't have any direct relation to the company, so you don't get paid by the company, the company deals with the direct holder (in reality, this will be DTC, which holds shares for brokers and other institutions, adding another layer between you and the company).
usagi
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Re: Why do dividends still exist?

Post by usagi »

The only danger I see with dividends is that company might get so focused on maintaining a dividend or maintaining its rate of increase that it may neglect investment. On the other hand I can see many ways that buybacks can be used in a manner that destroys shareholder value and transfer it to executives or simply vaporized on speculation. My personal view is dividends serve as a check on BOD and CEO shareholder abuse.
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Phineas J. Whoopee
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Re: Why do dividends still exist?

Post by Phineas J. Whoopee »

nisiprius wrote: Sat Aug 10, 2019 4:48 pm ...
When a buyback occurs, do small retail investors, holding the stock in a brokerage account in street name, receive a notice of the buyback, and an opportunity to participate by selling directly to the issuer?

Yes, I get it that the buyback (in theory ought to, and in practice probably does) increase the value of everyone's shares, but that's not what I'm asking. I'm asking whether in real life dollars have flowed to you directly from the stock issuer, or whether it is only indirectly via an increase in market price?
In a buyback no shareholder is required to sell their shares. It's either open market, in which case they can see the most recent price agreed to by the most eager buyer and most eager seller, or it's a tender offer. Shares as you say being held in street name, it can be up to the broker to inform the shareholders. Some might not, I don't know, but in a tender offer I should think they're supposed to, and anyway even that will move the market price. The information is also freely published via well-known and publicly-available channels, for those who wish to pay attention to corporate actions.

Nobody is required to sell their shares. The remaining shareholders each have a bigger slice of a smaller company (because it spent its cash on the buyback, just as it would have if it paid a dividend).

With respect to my personal experience, I have only ever directly owned shares in eight corporations, no big stakes, and none engaged in a buyback while I held. The largest holdings were of my employers' shares, including one spinoff, as part of employee benefits. The others were during my very limited two-year foray into buying stocks directly. Therefore I can't answer your question other than no, because it never came up for me.

I suppose it must happen sometimes within my index funds.

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Re: Why do dividends still exist?

Post by Longtermgrowth »

House Blend wrote: Sat Aug 10, 2019 9:33 am
MathWizard wrote: Fri Aug 09, 2019 9:54 pm With increasing use of stock options in executive pay, a share buyback when stock options can be exercised is a transfer of value from shareholders to executives with stock options.
Bingo.

There's an interesting recent article in the Atlantic arguing that share buybacks have become the go-to strategy for executives seeking to increase profits from their stock options.

The fact that they are more tax-efficient for shareholders is an afterthought.

The Stock-Buyback Swindle

American corporations are spending trillions of dollars to repurchase their own stock. The practice is enriching CEOs—at the expense of everyone else.
One class of shareholder, however, has benefited greatly from the temporary price jumps: the managers who initiate buybacks and are privy to their exact scope and timing. Last year, SEC Commissioner Robert Jackson Jr. instructed his staff to “take a look at how buybacks affect how much skin executives keep in the game.” This analysis revealed that in the eight days following a buyback announcement, executives on average sold five times as much stock as they had on an ordinary day. “Thus,” Jackson said, “executives personally capture the benefit of the short-term stock-price pop created by the buyback announcement.”
https://www.theatlantic.com/magazine/ar ... le/592774/
Don't know about everyone else, but I don't like the idea of CEO's having a golden toilet, etc, from what should be my profits :D .
Part of the reason I own a few dividend focused index funds in addition to total market funds. They are also not a bad way to tilt to value stocks :)
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Re: Why do dividends still exist?

Post by arcticpineapplecorp. »

isn't part of the reason they exist so people can tell how long it might take to get their money back (provided the company doesn't go belly up in the meantime and earnings are consistent, i.e., don't change). For instance if you buy a stock at $30 today and it pays $2 a year in dividends, isn't its p/e 15 ($30 / $2 = 15)? Wouldn't that mean if earnings stay constant, you'd be reimbursed your $30 after 15 years, just from the dividends alone (no price fluctuation)? Then after that the dividends would be gravy (and/or you'd get your $30 back, in which case all the dividends were the gravy, if you sell at $30 or higher before the company goes out of business). Worse case scenario (aside from company going belly up the moment after your stock purchase) the company goes out of business in year 16 after your $30 was paid back to you in dividends over 15 years (in the event you didn't sell and lost your original investment in year 16).

The lower the p/e the better because you'll get your investment back sooner rather than later. It's no coincidence that buying in 2008-March 2009 was beneficial because the p/e was lower than historical average, and you got paid back much more quickly (by March 2012) than if prices were higher.

So aren't dividends just a rough approximation of how long it might take for your investment to pay you back provided all else is equal/remains constant (which nothing ever does)?
It's "Stay" the course, not Stray the Course. Buy and Hold works. You should really try it sometime. Get a plan: www.bogleheads.org/wiki/Investment_policy_statement
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Phineas J. Whoopee
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Re: Why do dividends still exist?

Post by Phineas J. Whoopee »

arcticpineapplecorp. wrote: Sat Aug 10, 2019 8:29 pm isn't part of the reason they exist so people can tell how long it might take to get their money back (provided the company doesn't go belly up in the meantime and earnings are consistent, i.e., don't change). For instance if you buy a stock at $30 today and it pays $2 a year in dividends, isn't its p/e 15 ($30 / $2 = 15)? Wouldn't that mean if earnings stay constant, you'd be reimbursed your $30 after 15 years, just from the dividends alone (no price fluctuation)? Then after that the dividends would be gravy (and/or you'd get your $30 back, in which case all the dividends were the gravy, if you sell at $30 or higher before the company goes out of business). Worse case scenario (aside from company going belly up the moment after your stock purchase) the company goes out of business in year 16 after your $30 was paid back to you in dividends over 15 years (in the event you didn't sell and lost your original investment in year 16).

The lower the p/e the better because you'll get your investment back sooner rather than later. It's no coincidence that buying in 2008-March 2009 was beneficial because the p/e was lower than historical average, and you got paid back much more quickly (by March 2012) than if prices were higher.

So aren't dividends just a rough approximation of how long it might take for your investment to pay you back provided all else is equal/remains constant (which nothing ever does)?
I'm afraid you're describing bonds, not stocks.

The next sentence isn't aimed at you personally, arcticpineapplecorp. It's aimed at many posters in this thread, and not at you at all. Here it comes:

Stocks do not work like savings accounts.

PJW
rascott
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Re: Why do dividends still exist?

Post by rascott »

kosomoto wrote: Fri Aug 09, 2019 6:11 pm
hungrywave wrote: Fri Aug 09, 2019 6:05 pm
kosomoto wrote: Fri Aug 09, 2019 6:01 pm
hungrywave wrote: Fri Aug 09, 2019 5:59 pm
KyleAAA wrote: Fri Aug 09, 2019 5:50 pm Because many companies can't profitably reinvest the money into their business. It is not accurate to say not paying dividends would lead to an equivalent or greater increase in capital gains. In most situations, investors would be worse off.
Aren’t stock buybacks equivalent to dividends but with better tax efficiency? Utilities and other companies could just do that. Didn’t Apple do a large buy back rather than issue cash as a dividend? Isn’t that better for the investor?
If a company does buybacks consistently eventually the company will be private or the shares will become too expensive to buy.
Good thought but I’m not sure that is true. The stock could be split limitlessly. And stock held by the company would essentially be taken off the market. All these things are fluid and just require shareholder approval.
If the stock is being diluted at the same time they are buying shares back, they are not buying shares back.

A stock spilt is not dilution.
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Re: Why do dividends still exist?

Post by MathIsMyWayr »

nisiprius wrote: Sat Aug 10, 2019 4:48 pm
JackoC wrote: Sat Aug 10, 2019 2:35 pm...A buyback is a payout economically speaking just as much as a dividend is...
Serious question: has anyone reading this personally had a big corporation buy back your shares and pay you money directly? That is, has a buyback ever put dollars from the stock issuer directly into your pocket? The check in the mail (or the online display of your bank account) shows a payment from Acme Pyrotektronics, not from the brokerage?

When a buyback occurs, do small retail investors, holding the stock in a brokerage account in street name, receive a notice of the buyback, and an opportunity to participate by selling directly to the issuer?

Yes, I get it that the buyback (in theory ought to, and in practice probably does) increase the value of everyone's shares, but that's not what I'm asking. I'm asking whether in real life dollars have flowed to you directly from the stock issuer, or whether it is only indirectly via an increase in market price?
Not a direct answer to your question of receiving a check from a buyback, but recently Broadcom is buying Symantec in cash. Does it mean Symantec sharholders will receive a check?
https://www.prnewswire.com/news-release ... 99102.html
donaldfair71
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Re: Why do dividends still exist?

Post by donaldfair71 »

Outside of tax consequences (which make dividends look even worse), if one has a different opinion of buybacks than he/she does dividends, then the person doesn't really understand one or the other (perhaps both).

This isn't to say that either is good or bad. They just have the same impact. No more, no less, Ethan the other (save for taxes).
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Re: Why do dividends still exist?

Post by Phineas J. Whoopee »

MathIsMyWayr wrote: Sat Aug 10, 2019 9:08 pm
nisiprius wrote: Sat Aug 10, 2019 4:48 pm
JackoC wrote: Sat Aug 10, 2019 2:35 pm...A buyback is a payout economically speaking just as much as a dividend is...
Serious question: has anyone reading this personally had a big corporation buy back your shares and pay you money directly? That is, has a buyback ever put dollars from the stock issuer directly into your pocket? The check in the mail (or the online display of your bank account) shows a payment from Acme Pyrotektronics, not from the brokerage?

When a buyback occurs, do small retail investors, holding the stock in a brokerage account in street name, receive a notice of the buyback, and an opportunity to participate by selling directly to the issuer?

Yes, I get it that the buyback (in theory ought to, and in practice probably does) increase the value of everyone's shares, but that's not what I'm asking. I'm asking whether in real life dollars have flowed to you directly from the stock issuer, or whether it is only indirectly via an increase in market price?
Not a direct answer to your question of receiving a check from a buyback, but recently Broadcom is buying Symantec in cash. Does it mean Symantec sharholders will receive a check?
https://www.prnewswire.com/news-release ... 99102.html
Not so much a check, to take a picture of and deposit in one's bank account, but yes the shares will disappear from one's brokerage account and cash in their settlement fund will replace them.

Upthread I pointed out in a stock buyback situation, even with a tender offer nobody is required to sell. In the present instance, assuming all regulatory hurdles are passed, yes shareholders are required to sell at the price agreed by the boards of directors. Of course, prior to the sale closing, supposing it ever does, the Symantec shareholders can sell on the open market. For that matter, anyone can buy.

Relevant to this and other recent dividend threads, the press release says Broadcom will borrow the money to pay for the acquisition.

Also relevant, www.prnewswire.com is the well-known, publicly-available channel I referred to for those interested in keeping current with corporate actions.

PJW
rj342
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Re: Why do dividends still exist?

Post by rj342 »

In my opinion the OP has it exactly backwards.
Tax treatment of dividends *should* be made more favorable precisely because it promotes a bit more stability. A cash payout every quarter cant be faked or gamed, in a way that corps can fiddle with quarterly results, press releases etc to goose stock prices.
It would enable a return to more of the sustainable profit model vs the grow or die model that encourages overexpansion.
Or to be a bit more succinct, it would reward old fashioned investing more vs speculation (yes I know the distinction is not black and white).
Anyway... Dividends are a potentially indefinite income stream. Once you sell a stock its gone. Sold the seed corn.
3504PIR
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Re: Why do dividends still exist?

Post by 3504PIR »

People often look at dividends from the perspective of mutual fund ownership, which is natural if one owns mutual funds that pay dividends from underlying holdings. The way to look at dividends is from the perspective of a direct shareholder which makes it much simpler to me even though both are the same. A dividend is a method for shareholders to share in the profits which makes perfect sense, at least to me, as shareholders are the owners of the company.
burntout
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Re: Why do dividends still exist?

Post by burntout »

When I hold a stock that’s takes a big hit to its share price, I take comfort in the fact that at least I’m still getting that dividend, and that it’s usually now at a much higher rate relative to the value of the holding. This helps mitigate my urge to sell, ride out what is often a short term storm, and avoid a cap gains hit. I know it’s just behavioral but it does help.
RAchip
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Re: Why do dividends still exist?

Post by RAchip »

donaldfair71 wrote: Sat Aug 10, 2019 9:22 pm Outside of tax consequences (which make dividends look even worse), if one has a different opinion of buybacks than he/she does dividends, then the person doesn't really understand one or the other (perhaps both).

This isn't to say that either is good or bad. They just have the same impact. No more, no less, Ethan the other (save for taxes).
Can you explain how dividends and buybacks “ just have the same impact. No more, no less”?

If I sell into a buyback, I give up my shares for a price the company believes is less than fair value. That is nothing like a dividend. If I don't sell into a buyback I get nothing except the hope that the market price of my stock will go up. It may well go down. That also is nothing like a dividend.
ignition
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Re: Why do dividends still exist?

Post by ignition »

kosomoto wrote: Fri Aug 09, 2019 6:01 pm If a company does buybacks consistently eventually the company will be private or the shares will become too expensive to buy.
Why will the shares become too expensive to buy? Buybacks don't increase the PE of a stock.
Laika wrote: Fri Aug 09, 2019 7:03 pm
rbaldini wrote: Fri Aug 09, 2019 6:52 pm In what way is a dividend “guaranteed”?
Because it actually wound up in your bank account! :D Of course, future dividends can be cut or eliminated, just as companies can go bankrupt, laying waste your entire investment if you were counting only on capital gains.

The point, again, is that ALL companies must inevitably die. You can try to time sales of capital gains (speculative values), but the sum total of the dividends paid out over the years up to a company's death are the net genuine returns that it provided.
Why must all companies die? There are companies founded in the 1800's that are still around. Does it matter to you if a company dies 500 years from now? I think you will have sold quite a bit of your shares by then. :P
Ping Pong
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Re: Why do dividends still exist?

Post by Ping Pong »

Because all the quote web pages show dividend yield and not net payout yield.
ignition
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Re: Why do dividends still exist?

Post by ignition »

RAchip wrote: Sun Aug 11, 2019 5:58 am
donaldfair71 wrote: Sat Aug 10, 2019 9:22 pm Outside of tax consequences (which make dividends look even worse), if one has a different opinion of buybacks than he/she does dividends, then the person doesn't really understand one or the other (perhaps both).

This isn't to say that either is good or bad. They just have the same impact. No more, no less, Ethan the other (save for taxes).
Can you explain how dividends and buybacks “ just have the same impact. No more, no less”?

If I sell into a buyback, I give up my shares for a price the company believes is less than fair value. That is nothing like a dividend. If I don't sell into a buyback I get nothing except the hope that the market price of my stock will go up. It may well go down. That also is nothing like a dividend.
A buyback is the same as a reinvested dividend (e.g. a company pays you a dividend and you reinvest the dividend in the same company).

Now, you might want to invest your dividends in a different company or take the dividends as cash. In that case you'll have to sell some of your shares (that have hopefully appreciated thanks to the increase in EPS).
Seasonal
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Re: Why do dividends still exist?

Post by Seasonal »

Phineas J. Whoopee wrote: Sat Aug 10, 2019 9:27 pm
MathIsMyWayr wrote: Sat Aug 10, 2019 9:08 pm
nisiprius wrote: Sat Aug 10, 2019 4:48 pm
JackoC wrote: Sat Aug 10, 2019 2:35 pm...A buyback is a payout economically speaking just as much as a dividend is...
Serious question: has anyone reading this personally had a big corporation buy back your shares and pay you money directly? That is, has a buyback ever put dollars from the stock issuer directly into your pocket? The check in the mail (or the online display of your bank account) shows a payment from Acme Pyrotektronics, not from the brokerage?

When a buyback occurs, do small retail investors, holding the stock in a brokerage account in street name, receive a notice of the buyback, and an opportunity to participate by selling directly to the issuer?

Yes, I get it that the buyback (in theory ought to, and in practice probably does) increase the value of everyone's shares, but that's not what I'm asking. I'm asking whether in real life dollars have flowed to you directly from the stock issuer, or whether it is only indirectly via an increase in market price?
Not a direct answer to your question of receiving a check from a buyback, but recently Broadcom is buying Symantec in cash. Does it mean Symantec sharholders will receive a check?
https://www.prnewswire.com/news-release ... 99102.html
Not so much a check, to take a picture of and deposit in one's bank account, but yes the shares will disappear from one's brokerage account and cash in their settlement fund will replace them.

Upthread I pointed out in a stock buyback situation, even with a tender offer nobody is required to sell. In the present instance, assuming all regulatory hurdles are passed, yes shareholders are required to sell at the price agreed by the boards of directors. Of course, prior to the sale closing, supposing it ever does, the Symantec shareholders can sell on the open market. For that matter, anyone can buy.

Relevant to this and other recent dividend threads, the press release says Broadcom will borrow the money to pay for the acquisition.

Also relevant, www.prnewswire.com is the well-known, publicly-available channel I referred to for those interested in keeping current with corporate actions.

PJW
Broadcom is acquiring one of Symantec's businesses, not the whole company and not any of its shares, at least according to the linked press release. In other words, shareholders are not selling to Broadcom.

The usual situation in which shareholders are required to sell is a merger, which requires the approval of at least a majority of the shares (depending on the jurisdiction), not just the board of directors and any regulatory approvals. A merger may be preceded by a tender offer by the acquiror, typically conditioned on the acquiror buying enough shares to force a merger vote.
RAchip
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Re: Why do dividends still exist?

Post by RAchip »

ignition wrote: Sun Aug 11, 2019 6:43 am
RAchip wrote: Sun Aug 11, 2019 5:58 am
donaldfair71 wrote: Sat Aug 10, 2019 9:22 pm Outside of tax consequences (which make dividends look even worse), if one has a different opinion of buybacks than he/she does dividends, then the person doesn't really understand one or the other (perhaps both).

This isn't to say that either is good or bad. They just have the same impact. No more, no less, Ethan the other (save for taxes).
Can you explain how dividends and buybacks “ just have the same impact. No more, no less”?

If I sell into a buyback, I give up my shares for a price the company believes is less than fair value. That is nothing like a dividend. If I don't sell into a buyback I get nothing except the hope that the market price of my stock will go up. It may well go down. That also is nothing like a dividend.
A buyback is the same as a reinvested dividend (e.g. a company pays you a dividend and you reinvest the dividend in the same company).

Now, you might want to invest your dividends in a different company or take the dividends as cash. In that case you'll have to sell some of your shares (that have hopefully appreciated thanks to the increase in EPS).
I disagree. If I sell into a buyback, that is obviously not the same as a reinvested dividend. If I dont sell into a buyback I have the same number of shares and a HOPE that their market price will go up. Often it does NOT go up. If I get a dividend and reinvest it I have more shares and a greater dividend payment going forward. With more shares I have a better chance of a higher total “principal” value going forward.

Some will say: “but the stock price must go down after a dividend”. Wrong. Cash in a company has very little correlation to market price over the long term. People do not invest in companies to obtain an interest in idle cash that may never be distributed to them. People invest to get an interest in earnings and the general assumption is that all cash will be used to generate the future earnings that are effectively being purchased. That is why the metric most often used to measure value is p/e. P/e ignores cash (or more accurately just assumes it will be used to generate future earnings). This, ironically, is the argument for buybacks: extra cash in a company has minimal impact on market price so is it is better to dispose of it in a way that will increase p/e and therefore hopefully increase price. I would prefer to have cash as a dividend than hope that buyers will be fooled into paying a higher price for stock based on financial engineering.
bberris
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Re: Why do dividends still exist?

Post by bberris »

MathIsMyWayr wrote: Sat Aug 10, 2019 9:08 pm
nisiprius wrote: Sat Aug 10, 2019 4:48 pm
JackoC wrote: Sat Aug 10, 2019 2:35 pm...A buyback is a payout economically speaking just as much as a dividend is...
Serious question: has anyone reading this personally had a big corporation buy back your shares and pay you money directly? That is, has a buyback ever put dollars from the stock issuer directly into your pocket? The check in the mail (or the online display of your bank account) shows a payment from Acme Pyrotektronics, not from the brokerage?

When a buyback occurs, do small retail investors, holding the stock in a brokerage account in street name, receive a notice of the buyback, and an opportunity to participate by selling directly to the issuer?

Yes, I get it that the buyback (in theory ought to, and in practice probably does) increase the value of everyone's shares, but that's not what I'm asking. I'm asking whether in real life dollars have flowed to you directly from the stock issuer, or whether it is only indirectly via an increase in market price?
Not a direct answer to your question of receiving a check from a buyback, but recently Broadcom is buying Symantec in cash. Does it mean Symantec sharholders will receive a check?
https://www.prnewswire.com/news-release ... 99102.html
Yes. $12 per share.
ignition
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Re: Why do dividends still exist?

Post by ignition »

RAchip wrote: Sun Aug 11, 2019 7:34 am
ignition wrote: Sun Aug 11, 2019 6:43 am
RAchip wrote: Sun Aug 11, 2019 5:58 am
donaldfair71 wrote: Sat Aug 10, 2019 9:22 pm Outside of tax consequences (which make dividends look even worse), if one has a different opinion of buybacks than he/she does dividends, then the person doesn't really understand one or the other (perhaps both).

This isn't to say that either is good or bad. They just have the same impact. No more, no less, Ethan the other (save for taxes).
Can you explain how dividends and buybacks “ just have the same impact. No more, no less”?

If I sell into a buyback, I give up my shares for a price the company believes is less than fair value. That is nothing like a dividend. If I don't sell into a buyback I get nothing except the hope that the market price of my stock will go up. It may well go down. That also is nothing like a dividend.
A buyback is the same as a reinvested dividend (e.g. a company pays you a dividend and you reinvest the dividend in the same company).

Now, you might want to invest your dividends in a different company or take the dividends as cash. In that case you'll have to sell some of your shares (that have hopefully appreciated thanks to the increase in EPS).
I disagree. If I sell into a buyback, that is obviously not the same as a reinvested dividend.
Yes, obviously.
RAchip wrote: Sun Aug 11, 2019 7:34 am If I dont sell into a buyback I have the same number of shares and a HOPE that their market price will go up. Often it does NOT go up. If I get a dividend and reinvest it I have more shares and a greater dividend payment going forward. With more shares I have a better chance of a higher total “principal” value going forward.
A buyback is the same as a reinvested dividend. This is the mathematical truth.

Let's say a company is worth 1,000$ at 100 shares, so 10$ per share. You own 20 shares.

Scenario 1:
The company pays a 5% dividend or 50$ in total or 0.5$ per share. You have 20 shares so you receive 10$.

Let's say the company's value remains constant at 1,000$. You buy 1 share for 10$ with your dividend. You now have 21 shares worth 210$ and own 21% of the company.

Scenario 2:
The company does a buyback of 5% of the shares for 50$. It buys back 5 shares and destroys them: 95 shares are left. You haven't sold any shares and thus still have 20 shares.

The company's value again remains constant at 1,000$. You now have 21% of the company worth 210$ (20 / 95 * 1,000$). (Actually you have a little more in scenario 2: 21.05% of the company)
Last edited by ignition on Sun Aug 11, 2019 8:19 am, edited 1 time in total.
danaht
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Re: Why do dividends still exist?

Post by danaht »

I like dividends more than buybacks. Dividends are in some cases mandatory for the corporation to pay out if the corporation is a REIT (Real Estate Investment Trust). Some people have a passive strategy to live off of their dividends - which is great if you can do that. The one thing I don't like about buybacks is that when the corporation decides to buyback it's stock - it could be at an extremely high price. For example - in 2014, a lot of energy companies were buying back there shares - in the following year their stock plummeted due to an oil crash. During the oil crash - instead of buying shares - they were issuing shares at a 50% discount to survive. This had a net effect of buying high and selling low.
bberris
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Re: Why do dividends still exist?

Post by bberris »

rossington wrote: Sat Aug 10, 2019 4:29 am
minimalistmarc wrote: Sat Aug 10, 2019 2:46 am
yohac wrote: Fri Aug 09, 2019 5:49 pm Without dividends, there wouldn't be much incentive to buy stocks of slow-growth companies like utilities.
Their total return would be the same because the dividend would be used for a buy back or something else to add value
This is not true with respect to utilities. They are completely regulated by the states they provide services to. Their growth is determined by each state's regulatory commission. They do not have the freedom to operate the same as other independently traded public companies. But given the fact that they are allowed to pay a % of their regulated earnings as a dividend makes them attractive to income oriented investors. No share buy backs here.
I don't believe dividend rates are regulated, although they could be. Regulators use a return on capital gauge to determine utility rates.
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snackdog
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Re: Why do dividends still exist?

Post by snackdog »

I work for a large company which has paid a dividend for ages, almost always increased the dividend/share, and reminds investors every chance it gets that the dividend is sacred and the first place to "spend", even when quarterly profits are hugely negative. When earnings are high and other investment alternatives are limited, the balance is used to pay down debt and then some may be used for stock buy backs. Our management, like most, is strongly incentivized to move the stock price up short and mid term.

It has been a perception forever that any reduction in the dividend would crush our stock price. Thus, it remains. The perception must be reinforced by large institutional investors, who want the dividend as they like having some strong blue chips paying dividends and this one fits well. It is a niche in a way. There are also large individual investors and families who control giant stock portfolios, know nothing about investing, but like getting dividend checks quarterly as they use them as income which is received at a favorable tax rate relative to normal income.

Stock buybacks sound good to the investing public, and can be described to work in theory, but in reality it is impossible to measure their impact. To compare them to dividends seems like folly because they are so different in every way. They are a "swing" use of cash as a last resort. The same cash should not go to the dividend as the intent is to keep the dividend very stable and predictable, slowly increasing every year.
RAchip
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Re: Why do dividends still exist?

Post by RAchip »

You are confusing “worth” (or academic valuation) with market price. In scenario 1 you are assuming market price does not change (it stays at $10 per share). In scenario 2 you are assuming MARKET PRICE INCREASES to $10.5 per share.

In fact, the market price in scenario 1 may well increase dramatically depending on the value buyers place on large cash distributions.

Your argument is not “mathematical truth”. It is imbedded with assumptions about market price. Market price is not set based on “math.”
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Riprap
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Re: Why do dividends still exist?

Post by Riprap »

ignition wrote: Sun Aug 11, 2019 8:05 amA buyback is the same as a reinvested dividend. This is the mathematical truth.
I see folks like you giving math lessons all the time. Your idealized assumption is that management is buying back $1 worth of stock for $1. This almost never happens.

Corporations almost always overpay for their own stock. If they overpay too much, it would have been better to have paid taxes on dividends than be subjected to an involuntary buyback.

Paying too much in a buyback is a mathematical equivalent to paying taxes on a dividend.

Why don't you give a math lesson under that scenario?

Even WB won't buy back Berkshire stock if the market prices it too high.
ignition
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Re: Why do dividends still exist?

Post by ignition »

RAchip wrote: Sun Aug 11, 2019 8:41 am You are confusing “worth” (or academic valuation) with market price. In scenario 1 you are assuming market price does not change (it stays at $10 per share). In scenario 2 you are assuming MARKET PRICE INCREASES to $10.5 per share.
I'm only assuming the value of the company remains the same after the dividend payout and after the buyback. It is the same company after all with the same earnings... Just like you assume in below post that the company value remains the same after a dividend payout. Why would the company value go down after a buyback but not after a dividend payout :confused.
RAchip wrote: Sun Aug 11, 2019 7:34 am Some will say: “but the stock price must go down after a dividend”. Wrong. Cash in a company has very little correlation to market price over the long term. People do not invest in companies to obtain an interest in idle cash that may never be distributed to them. People invest to get an interest in earnings and the general assumption is that all cash will be used to generate the future earnings that are effectively being purchased. That is why the metric most often used to measure value is p/e. P/e ignores cash (or more accurately just assumes it will be used to generate future earnings). This, ironically, is the argument for buybacks: extra cash in a company has minimal impact on market price so is it is better to dispose of it in a way that will increase p/e and therefore hopefully increase price. I would prefer to have cash as a dividend than hope that buyers will be fooled into paying a higher price for stock based on financial engineering.
Riprap wrote: Sun Aug 11, 2019 8:52 am
ignition wrote: Sun Aug 11, 2019 8:05 amA buyback is the same as a reinvested dividend. This is the mathematical truth.
I see folks like you giving math lessons all the time. Your idealized assumption is that management is buying back $1 worth of stock for $1. This almost never happens.

Corporations almost always overpay for their own stock. If they overpay too much, it would have been better to have paid taxes on dividends than be subjected to an involuntary buyback.
That's not at all the assumption, it doesn't matter if the company is overvalued or not. The math remains the same. After all, you would be reinvesting your dividend in an overvalued company.
Riprap wrote: Sun Aug 11, 2019 8:52 am Paying too much in a buyback is a mathematical equivalent to paying taxes on a dividend.

Why don't you give a math lesson under that scenario?

Even WB won't buy back Berkshire stock if the market prices it too high.
Well he also doesn't pay out dividends.
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Riprap
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Re: Why do dividends still exist?

Post by Riprap »

ignition wrote: Sun Aug 11, 2019 9:39 amThat's not at all the assumption, it doesn't matter if the company is overvalued or not. The math remains the same. After all, you would be reinvesting your dividend in an overvalued company.
Now we're making some progress.

Maybe I choose to spend my dividend money some other way. Maybe I'm WB and want to buy an undervalued company with cash.

Or I'm a retiree and want to buy myself a new car.

Or I'm a BH and want to rebalance.

Or I just want to spend my $1 on $1 worth of <insert what you will here>. I'm not forced by the CEO and BOD to buy overpriced stock.

There are plenty of cases where there is no tax penalty receiving a dividend. Likewise, it's true that some tax payers are penalized heavily. But, this being America, most people don't like being told how to spend their money. I know I don't.
RAchip
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Re: Why do dividends still exist?

Post by RAchip »

The point of the basic responses to the OP was that every company in the DJIA and 80+% of companies in the S&P 500 pay dividends because the vast majority of investors like them, demand them and think they create value for them. Buybacks crept into the discussion. Buybacks were invented by lawyers and investment bankers (who get paid by co management) mostly to enrich company management because buybacks make common financial metrics (upon which a lot compensation is based) look better.
JackoC
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Re: Why do dividends still exist?

Post by JackoC »

nisiprius wrote: Sat Aug 10, 2019 4:48 pm
JackoC wrote: Sat Aug 10, 2019 2:35 pm...A buyback is a payout economically speaking just as much as a dividend is...
Serious question: has anyone reading this personally had a big corporation buy back your shares and pay you money directly? That is, has a buyback ever put dollars from the stock issuer directly into your pocket? The check in the mail (or the online display of your bank account) shows a payment from Acme Pyrotektronics, not from the brokerage?

When a buyback occurs, do small retail investors, holding the stock in a brokerage account in street name, receive a notice of the buyback, and an opportunity to participate by selling directly to the issuer?

Yes, I get it that the buyback (in theory ought to, and in practice probably does) increase the value of everyone's shares, but that's not what I'm asking. I'm asking whether in real life dollars have flowed to you directly from the stock issuer, or whether it is only indirectly via an increase in market price?
It's AFAIK virually always indirectly through market price increase, a 'normal' buyback that is, not a tender offer in a merger which might be called a stock repurchase in a broader sense. The company just sets a program of buying X shares which they buy in the market from people who are offering their shares for sale to whomever might buy them.

Which I guess might affect some 'behavioral' aspect of investor attitudes toward the process, but I don't see much significance analytically relative to the statement "A buyback is a payout economically speaking just as much as a dividend is". Whereas there is a real economic contrast to dividend/buybacks and companies reinvesting all profits rather than paying them out. That really isn't just a matter of how investors 'feel', it's the company saying it has enough internal growth projects with positive NPV at the company's cost of capital to reinvest all the profits, which might be the management just flattering itself to think that's so. And it's not demonstrating the reality of profit by being able to keep the company running while sending actual cash out the door to investors (albeit only some investors, those selling the shares repurchased, in case of buybacks). And again noting that a management could use increased borrowing to fund either dividends or buybacks, subject to investors learning of that if there's adequate transparency. The main difference IMO is one of custom, that managements and boards, reflecting prevailing investor sentiment, are conditioned to take dividend changes (and cuts especially) more seriously than buyback program changes. So dividends have greater weight than buybacks in signalling management's confidence in the sustainability of profits.
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