Stock buybacks have a distinct advantage over dividends: they're not taxable
Done correctly, it’s a synthetic dividend without the immediate tax burden on the shareholders. Those that want to cash out, can sell a portion of their higher priced shares.
IMO, there's an injustice here when things like stepped-up basis result in these gains never being taxed, but that seems like a separate issue from the question of wages vs. profits.
To be explicit, there is a decision tree where a company can decide whether to have wages increase or profit, then decide what to do with the profit, and the rise of stock buybacks vs. dividends is an answer to the second question, not the first.
The corporation pays corporate taxes on the money used for the buyback. The investors taxed are avoided because they haven’t realized their gains. When they eventually sell their shares they pay taxes.
If the company made the money from selling beer, it was triple taxed due to the alcohol tax! Wait, if the customer paid for the beer with earned income, the beer was quadruple taxed. But if he paid for the beer with dividend income, it was quintuple taxed!
In the stepped-up basis case I mentioned, the investor may never pay taxes on the gains.
> Done correctly, it’s a synthetic dividend without the immediate tax burden on the shareholders. Those that want to cash out, can sell a portion of their higher priced shares.
If you cash out you're still potentially paying taxes on capital gains.
The only way to avoid taxes while still profiting from the increased price of the shares (it seems to me) is to take a loan against your portfolio (possibly deduct that interest) and re-invest the money.
Retail Joe six-pack investor probably won't be able to do that; but it seems like the sort of thing a professional money manager might do?
That's assuming that the buy back actually increases the stock price by the amount spent and for those of us that hold stocks in an ISA (tax free) id much rather have a dividend
Done correctly, it’s a synthetic dividend without the immediate tax burden on the shareholders. Those that want to cash out, can sell a portion of their higher priced shares.