GoSeigen wrote:No, that is no more true than if the company pays the same amount to shareholders in dividends year after year. The two are interchangeable AFAICS. Don't forget the number of shares and therefore their price are notional for all intents and purposes and can be adjusted at the whim of the shareholders.
Apologies GS,
Don't worry I already knew about stock-splits! So on that note, I can convince myself that there are some similarities between buybacks and divs. However I also note that buybacks can be used by firms for different motives:
- returning cash to shareholders (interchangeable with divs according to some)
- reducing the firm's capital which without an equivalent increase in ROC implies the firm in question is entering a non-growth period
- reducing cash/debt ratio, changing capital structure, either to convert cheap debt into higher yield dividend returns or reduce firms attractiveness for takeover
To be honest I'm sadly convinced that in ULVR's case their motivation is probably summed up best by 2. or 3. However I'm currently more interested in discussing option 1. since although it's apparent that this is not ULVR's current motivation, it intrigues me more since many firms describe their BBs in a very positive way (as a returning cash, a dividend substitute), and the sustainability of such technique initially seemed questionable to me. But of course now I can accept that you are right, i.e. with stock-splits the firm may potentially always be able to increase the number of shares issued in circulation, and hence can continue to BB forever. Okay - unsustainability claim quashed.
Now that I've proved to myself to that a firm can choose to BB forever, what about shareholder value? So hypothetically a firm can buyback 50% of their stock, as a cash returning vehicle, if they are high quality firm. Then what? Well the consequence of the 50% BB is a doubling of EPS (good news for execs) and the doubling of earnings yield. We then wait for the share price to double, and when it does I sell, make a 100% profit on my shares, then the firm issue a 2-to-1 stock split, and the SP halves, I buy the same quantity of shares back. This all sounds great but in the real world I'm at the whims of the market place to rerate the shares which in a world of uncertainty may never happen, and even it does I have to time the market correctly to benefit from the dividend-equivalence suggestion. As far as I'm concerned this is clearly a-bird-in-hand decision for me favouring the instant cash dividend option, and unlike dividends; in both the initial buyback by the firm and when I sell/rebuy brokers make money on fees and spreads.
Given the only above it's very unclear to me why any shareholder would prefer the BB route over dividends, since there is more friction, uncertainty and redirection of the firms cash/profits away from them into the hands of financial institutions. In the real world however, it seems that the main reason the BB is preferred by some, is due to differential tax rates, i.e. CGT being 20% and income tax being 40% for higher rate payers. This seems to be incredibly at odds from a moral standpoint when considered against
your earlier fungibility remark used used to counter my flawed unsustainability claim.
However, sustainability aside, firstly it seems very clear that share buybacks are a poor substitute for cash dividends in terms of certainty, secondly any advantages they may possess are enjoyed by a very small section of society; corporate execs, HNWIs and financial agents.
Matt