RE: January receipt19 Feb 2021 17:16
As I'm a bit bored today here's a little to help you along your way to enlightenment:
1. If you sell your stock in the secondary market the company isn't returning capital to shareholders. That action is completely independent of the company. It is irrelevant to a discussion of buybacks and dividends.
2. Both dividends and stock buybacks take company cash (capital) and return it to shareholders. They're identical in that regard. They're both done for that reason.
3. The most significant asymmetry between the two is that if you, a shareholder, want to maintain the same pound/dollar investment in the company (money at risk) then in the case of dividends you have to reinvest your receipt by buying more shares in the open market with your dividends while with a stock buyback you simply do nothing. Conversely, if you want to take some money off the table (reduce your money at risk and deploy your share of the capital return elsewhere) with dividends you simply pocket the receipt whereas with a stock buyback you have to sell into the buyback programme. It is, therefore, the desires of key shareholders that tend to influence which form of capital return is preferred BY THEM. If they don't want to take money off the table they will prefer a buyback and allow sellers to take a disproportionate share of the capital return. For the company itself, both mechanisms are basically the same because...
4. In the case of a dividend cash leaves the company, the share count remains the same but the share price goes ex-div. All else being equal, the equity value of the company falls by the amount of the cash that exits the company. In the case of a stock buyback, cash leaves the company and goes to the sellers of shares, the share count falls and, all else being equal, the share price remains the same and the equity value of the company (#shares x price) falls by the amount of cash used. The fully diluted number of shares in circulation falls the moment the stock is purchased (and not when the shares are actually cancelled).
5. Another asymmetry between the two, and in the buyback's favour, is that taxation of each can be different. Dividends are most often subject to income tax while the sale of stock into a buyback programme will depend on your own capital gains/loss position and taxation thereof. In most places dividends are taxed at a higher rate than capital gains and hence dividends are a less efficient return of capital. Another reason why when key investors wish to maintain their money at risk they'll prefer capital returns via buybacks.
6. The payment of ordinary dividends has a long track record in signally the long term health of a free cash flow producing company. For this reason management teams are often loath to interrupt them except in the worst of circumstances. But GKP isn't such a company and has far more capital it can return in the shorter term than it ought to pay out over the very long term.
(cont...)
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