Buyback is an excellent tool to boost the compensation of insiders who have a lot of options. Usually it could be a tax advantage over paying dividends. The decision on how to use the extra cash should be how beneficial to the average stock holder.
Besides dividends and buybacks, corporation can use the extra cash to plow back to the business such as reducing debts, boosting research and development, acquiring companies...
If the company is in developing stage, it should plow it back to research and development. Matured companies like Microsoft give dividends as there is not much the company can improve in theory.
We buy the company's stock is not solely due to dividend, but the earning potential (i.e. expected E/P) and the market conditions.
Some companies gives good dividends to cover their problems. Check out C, AIG, BOA, Lehman Brothers, Stern... If they fool you twice, shame on you. They all gave good dividends. Check their performances and I rest my case.
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(c) TonyP4 2012. Written in 12/16/11. Last updated in 12/16/11.
Disclaimer:
Do not gamble your money you cannot afford to lose. Past performance is a guideline and does not guarantee future performance.
All my posts are for informational purposes only. I'm not a professional investment counselor. Seek one before you make any investment decision.
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Buyback is a tool for insider. I do not debate how the corporation should use the cash as it is all different for individual companies.
ReplyDeleteFor me, I prefer stock appreciation over dividend as I can control when to realize the gain (like this year and last year I realized a lot of long term capital gain) when my Federal tax rate is virtually 0.
However, when I buy stocks, I've to add dividends so I compare apple to apple.
When the insiders think their company's stock is under-valued (or they need extra cash for themselves), buyback is right. They usually know the value of the company better than the outsiders.
ReplyDeleteWhen the interest rate is high, they should retire some of the debts if they've enough cash to run the business.