GeoffF100 wrote:Dod101 wrote:GeoffF100 wrote:
If the company instead buys back shares to the value of the dividend, the money again disappears from the company's balance sheet, and the company is worth less: exactly what it would have been if it had paid out a dividend. There are now, however, less shares in issue. Again, no money has been created and destroyed. The value of an investor's shareholding is worth exactly what it was before the buy back. He is neither richer nor poorer, but the money has disappeared from the company balance sheet, as it would do if a dividend had been paid.
If a company cannot invest money to generate at least the same return as the market, it should return money to shareholders. That does not always happen, however. I would much rather have buy backs than dividends, because I do not have to pay tax on them.
The position is better stated as fewer shares than less shares, but the substantive point is that the investor's shareholding (assuming he has not participated in the buyback) is no longer worth exactly what it was before the buy back. It is now worth rather more than it was before the buyback. It may not be reflected immediately (or ever) in the share price but the fact is that he has now got a larger economic stake in the company than he had before.
Yes, his shareholding is worth exactly what it was before the buy back. (Actually, there will be some costs in executing the buy back, and there will also be share price volatility, but that is just confusing matters.) The company is worth less after the buy back, because it no longer has the money that it spent on the buy back. (Look at the accounts.) On the other hand, there are now less shares in issue, so an investor owns a larger proportion of the company than he did before the buy back. The two factors cancel each other out. Your share holding is worth what it was before. You do not get to have your cake and eat it.
As scrumpyjack has pointed out a situation where your statement is not correct. Another is of course if the directors buy the shares at less than NAV, because that will increase the NAV per share for the continuing shareholders.
Dod