Dividend is different than a buyback. Buying back at a 3% earnings multiple is not equivalent to a 3% dividend.
It's much worse for shareholders. The company is investing in something that yields below the risk free rate of return.
Put another way, if they gave that same money back to shareholders via a distribution, the shareholders could earn more buying US treasuries with that distribution.
Buybacks are largely motivated by execs using company funds to increase their compensation, even if ROI is poor on the buyback. Otherwise they would never buyback at such low yields. Dividends don't go to option/RSU holders.
But anyway, a buyback at 10% earnings yield like Meta has, roughly, is a good use of funds
Buybacks have a lot of motivations. Execs trying to boost stock is certainly one. But shareholders do prefer buybacks. Claiming otherwise is just wrong. If a shareholder wants to get out of the equity and into bonds since rates are high they can cash out through the buyback.
> Put another way, if they gave that same money back to shareholders via a distribution
They literally are. Buybacks are just as much shareholder distributions as dividends.
Buybacks are not distributions. A company can buyback 99% of it's shares and if the stock goes to 0, the shareholder never got anything. Buybacks increase ownership percentage, and only if they outpace dilution via other means.
The airlines did a ton of buybacks over the years, and their stocks are down. Owning a larger percentage of a stock that's losing value doesn't do you much good.
To say blanket that shareholders prefer buybacks is just wrong. Ignorant shareholders may prefer buybacks at 3% ROI, smart shareholders will prefer activities that yield far higher.
If I can buy an IG bond that yields 6%, why would I want my company to use their cash to buy a 3% yielding asset? Just bubble era mentality fostered by a market that was distorted to the upside via ZIRP.
Buybacks are just distributions that give shareholders the option of taking the money or having the company reinvest it for them. If you think you can get better returns elsewhere take the distribution. If you don't let the company reinvest.
Buybacks are not distributions. They give you an increased ownership percentage. If the company goes bankrupt you never got any benefit from the buyback.
The return of the buyback is only known at the time you sell your shares, because the earnings yield and valuation of the company are dynamic, and buybacks defer the gain until time of sale.
A company buying back at low ROI is not equivalent to paying out dividends from cash flow
Don't know how to make it any clearer, seems you're using layman's knowledge and fundamentally misunderstand the mechanisms here
It's much worse for shareholders. The company is investing in something that yields below the risk free rate of return.
Put another way, if they gave that same money back to shareholders via a distribution, the shareholders could earn more buying US treasuries with that distribution.
Buybacks are largely motivated by execs using company funds to increase their compensation, even if ROI is poor on the buyback. Otherwise they would never buyback at such low yields. Dividends don't go to option/RSU holders.
But anyway, a buyback at 10% earnings yield like Meta has, roughly, is a good use of funds