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.
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.
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.
Thanks for laying out both sides, I’ve never had it all in one place to absorb
Excellent piece!