May 24, 2023·edited May 24, 2023Liked by Vince Martin
I agree that buybacks are more tax-efficient, given how we tax dividends today.
I still don't like them, because buybacks assume that management and boards are good judges of when shares are undervalued. That's not really their job, nor are they expected to be good at it. The Board's job is strategy, capital allocation and oversight (among other things), management's job is execution. We've also seen, in recent years, plenty of examples of when they've exercised staggeringly poor judgment on the question of when shares are over-/under-valued (e.g., BBBY). I don't blame them for it, since I don't expect them (or anyone else, for that matter) to be experts on the subject.
If (and this is a big if) Congress can legislate to exempt DRIPPed dividends from taxation, then all returns of capital to shareholders can be done as dividends; and the decision of whether to be taxed now (pocket the dividend) or taxed later (DRIPping the dividend now and sell the shares at some future date), is left in the hands of the owners of the capital, not in the Board's hands and (often) imperfect judgment.
FWIW, I agree that proposals like taxing buybacks and its idiot cousin, taxing unrealized capital gains, are stupid beyond belief.
BBBY is a fascinating case study here, I think. Between Oct '20 and Mar '22, the company repurchased $990 million in stock. Debt at November 26th was $1.026 billion. So it seems like, hey, they ran the company into the ground via buybacks.
But...would it be any different if they had, for instance, paid $990 million in special dividends? They'd be in the same boat.
And could you argue that the buybacks were actually the right strategy — for shareholders, at least?
BBBY burned $890 million in the first three quarters of FY23 - and that wasn't inventory build. They were going to go under anyway. Shareholders either could cash out entirely via the buyback, or, again, keep the same ownership stake and harvest a dividend.
Obviously, the board didn't think they were executing some PE-lite strategy of pulling cash out of the business and leaving the risk to employees, vendors, landlords, etc. They thought they were pulling cash out of a business that was going to generate more cash after they did ~$160M in FCF in FY21. And, FWIW, the market kind of agreed, even ignoring the 'meme' rally.
I agree that buybacks are more tax-efficient, given how we tax dividends today.
I still don't like them, because buybacks assume that management and boards are good judges of when shares are undervalued. That's not really their job, nor are they expected to be good at it. The Board's job is strategy, capital allocation and oversight (among other things), management's job is execution. We've also seen, in recent years, plenty of examples of when they've exercised staggeringly poor judgment on the question of when shares are over-/under-valued (e.g., BBBY). I don't blame them for it, since I don't expect them (or anyone else, for that matter) to be experts on the subject.
If (and this is a big if) Congress can legislate to exempt DRIPPed dividends from taxation, then all returns of capital to shareholders can be done as dividends; and the decision of whether to be taxed now (pocket the dividend) or taxed later (DRIPping the dividend now and sell the shares at some future date), is left in the hands of the owners of the capital, not in the Board's hands and (often) imperfect judgment.
FWIW, I agree that proposals like taxing buybacks and its idiot cousin, taxing unrealized capital gains, are stupid beyond belief.
BBBY is a fascinating case study here, I think. Between Oct '20 and Mar '22, the company repurchased $990 million in stock. Debt at November 26th was $1.026 billion. So it seems like, hey, they ran the company into the ground via buybacks.
But...would it be any different if they had, for instance, paid $990 million in special dividends? They'd be in the same boat.
And could you argue that the buybacks were actually the right strategy — for shareholders, at least?
BBBY burned $890 million in the first three quarters of FY23 - and that wasn't inventory build. They were going to go under anyway. Shareholders either could cash out entirely via the buyback, or, again, keep the same ownership stake and harvest a dividend.
Obviously, the board didn't think they were executing some PE-lite strategy of pulling cash out of the business and leaving the risk to employees, vendors, landlords, etc. They thought they were pulling cash out of a business that was going to generate more cash after they did ~$160M in FCF in FY21. And, FWIW, the market kind of agreed, even ignoring the 'meme' rally.
In a certain way this article should not exist because reasonable people should already know and understand those things.
It will always be a mistery to me why buybacks and dividends create such a big and never-ending debate.
yeah, it's truly bizarre. It's like a single tax deduction being a massive part of a presidential election campaign or something
Thanks for laying out both sides, I’ve never had it all in one place to absorb
Excellent piece!