> Stock buybacks are mostly a tax dodge. But that's not the full reason for their popularity. For stockholders, they're no better than dividends.
Aren't they better for stockholders as well?
Suppose I have 1 share of stock, and I will sell it two years from now.
If the company pays out dividends, won't those be taxed as income at my marginal rate? Whereas if the company does a stock buy back, then two years down the road the marginal value that would have been paid out in dividends is now captured in the stock price. So instead of paying the marginal rate, I pay capital gains on that amount.
I might be missing something, but it seems like a tax dodge that benefits all (except the government).
You are correct that they are usually taxed like capital gains (up to 23.8% currently), but stock buybacks allow deferment of these taxes, which is usually better. If you hold the stock until you die and don't reach estate tax levels, then the stock gets passed on essentially tax free, making stock buyback even better.
With dividends, you pay the tax immediately/that year.
With capital gains, you don't pay until you sell.
If one looks long-term enough, you could also sell when you are in a lower income tax bracket or the government has lowered capital gains for random political reasons.
I'm Canadian, and we have something similar. But it only applies to corporations that are resident in Canada (where Canadian corporate taxes are paid on retained earnings?). I think the intent is to recognize the tax already paid on earnings, not necessarily to make it like taxable like capital gains... but it's all a wash.
It seems that qualified dividends in U.S. are limited in similar ways.
My confusion makes sense in retrospect: I have generally held stock from U.S. markets, so I don't often benefit from the credit. I believe dividends were always counted directly as taxable income.
So... supposing that you're in the U.S. and your stock isn't U.S.-based, wouldn't buybacks always be more tax favorable?
Yes, but tax policy changes. If taxes were even, there would be no difference between dividends & stock buy backs for stock holders, but there would still be a difference for option holders.
Aren't they better for stockholders as well?
Suppose I have 1 share of stock, and I will sell it two years from now.
If the company pays out dividends, won't those be taxed as income at my marginal rate? Whereas if the company does a stock buy back, then two years down the road the marginal value that would have been paid out in dividends is now captured in the stock price. So instead of paying the marginal rate, I pay capital gains on that amount.
I might be missing something, but it seems like a tax dodge that benefits all (except the government).