The closest parallel is probably with the dot com bubble where some companies (notably Cisco & IBM) loaned money to purchase network equipment to their own customers. Since those customers weren't profitable (or arguably even financially viable companies at all) the whole thing exploded rather spectacularly.
Cisco probably did the least bad out of all those telecom/networking companies, and I don't think IBM was ever a big player. So many companies saw the start of their demise then--Lucent, Nortel Networks, Ericcson, etc.
Last decade, some companies (that had more money that they knew what to do with) used that money to buy shares back. This decade, this company (that has more money that they know what to do with) invests in either "AI" or "AI datacenter" companies — and these use that money to buy the company products.
A company buying back shares is spending money to purchase an asset on the open market.
A company involved in round tripping passes fictional money in a circle and every company that touches it claims both revenue and expenses simply for passing it along.
A dividend is taxed. Share buybacks decrease the supply of outstanding shares so the hope is that the share price will increase. If shares are not sold, then there is an increase in value without incurring taxes.
The trick is essentially to buyback your own shares and destroy them. That effectively redistributes the value you bought to other shareholders, much like a dividend would.
How is that better you may ask? two reasons:
- Most investors prefer to accumulate rather than receiving cash. If you post dividends, they are immediately subject to withholding tax, so you get taxed before reinvesting.
- In a lot of cases, capital gains tax and withholding tax are different, the former being much lower than the latter. This is especially the case for funds with foreign UBOs, which incur 2x15% WH tax at the source.
- Buybacks are just more flexible, those that want cash can sell, those who prefer to accumulate are happy to stay, there's no real downside.
You can only realize the tax if the stock owners sell the stock (vs. giving them a dividend which triggers the tax on payment). It is more of a tax delay but since many people who bought these stocks have more money than they need, they no longer need to sell and they don't need the dividends much. So a buyback is just injecting that money back into their shares tax-free.
Yes, that's sort of what I thought must be happening. There's no "trick" involved. It's like saying salaries are a "trick" to avoid dividend tax. They'll still pay tax on it when they sell it.
Well we can argue on the meaning of trick I guess.
Share buybacks are essentially a way to achieve the same effect as dividends, but in a non-obvious way, which has the benefit of avoiding taxation. That's a "trick" in my book, but I guess terminology doesn't matter that much.
> They'll still pay tax on it when they sell it.
Not but it's not _equivalent_. The tax paid on capital gains is not the same as the withholding tax. And paying tax _after_ compounding is not the same as paying it _before_.
Share buybacks are _effectively_ a trick to circumvent withholding tax for investors not willing to divest.
> which has the benefit of avoiding taxation. That's a "trick" in my book
But why? Minimising tax legally is...legal, and not a trick. That's all tax avoidance is.
> The tax paid on capital gains is not the same as the withholding tax.
That seems totally fine - if the rules are different then that's up to the people who write the rules. It's not a trick to choose to be paid via one method or another.
> But why? Minimising tax legally is...legal, and not a trick. That's all tax avoidance is.
I think we are lost in translation here. I am not a native English speaker, so there may be a subtle implication in "trick" that you see and I don't.
I meant "trick" as in "trick of the trade", a clever/crafty way of achieving something that may not be obvious for less experienced individuals.
Re-phrasing my original comment for clarity: "Share buybacks are just a technique to lower WH tax, why do you see this as anything related to round tripping as related in this article?".
I mean management is going to think the stock is always undervalued.
Slightly offtopic: If a company does a stock buyback because they think its undervalued, what happens next? Does the stock go up and they're satisfied? Does the stock go up and then they sell it?
If they're selling it to realize profits, I say that it tantamount to pump-and-dump. If they sell it just to hike the price, why not distribute dividends with their excess cash reserves?
The purpose of a stock buyback is to increase the shares value. This allows investors to choose to realize profits, but this is not a "pump and dump" because having less outstanding shares fundamentally drives the price up. There is nothing wrong with stock buybacks.
The reason this is often done instead of a special dividend is that dividends create an immediate taxable event for all investors, which is considered less flexible than the capital gains tax associated with a stock buyback.
Besides the tax treatment difference, it's mostly a signalling/communication choice: share buybacks increase EPS which is a nice story, whereas dividends signal reliable profits.
I respectfully disagree. I think that stock buybacks distort the market and dividends don't. If our markets could be either based on A: a nice story or B: reliable profits, the choice for stability and growth is bright and clear.
