I have heard a lot that reinvested dividends lead to the same result as the company buying back its stock when ignoring tax.
Also in general buybacks are more tax efficient.
I do get the math that when company X has a 100stocks at 100 dollars and 10k dollars in cash:
if they pay a 100 dollar div you will end up with a company with 100 stocks at 99 dollars, you will receive 100 and the cashpile is at 9.9k.
When you do a buyback of 100dollar.
Youll have 99 stocks at 100 dollars and 9.9k in cash in the company and can now sell one stock to have the same outcome as the dividend case.
However this completely ignores market trends. What if paying a dividend causes investors to buy the stock because of an ETF or individual strategy? What about the buying pressure from the buyback and how that affects the stock price? If buybacks are more tax efficient shouldnt rational investors pay more for companies that do buybacks instead of dividends? Isnt there for some reason the expectation or norm that a dividend will be more stable than buybacks?
I know that my math example is very simplistic and the hipotherical company makes no sense. Could we disciss this with the example of Berkshire Heathaway?
What would happen if Warren Buffet suddenly went public and said that BRKB will from now on pay dividends instead of buying back stocks.
Would this end up as a positive or a negarive or a neutral for shareholders? Does anyone have good maybe scientific sources on this?
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