Payout policy

Payout policy

1. 1. Why have US firms shifted heavily from dividends toward share buybacks since the 1980s?

   1982 SEC rule clarified buybacks weren't market manipulationTax preference for capital gains (deferrable) over ordinary dividend incomeStock-based compensation became a larger share of pay, and buybacks offset its dilutionGreater flexibility (no commitment to a sustainable per-period level)
2. 2. A firm with $100M of excess cash, 50M shares at $40, market cap $2B. Compare $2 special dividend vs $100M buyback at $40. In an idealized tax-free world:

   Dividend leaves shareholders better offBuyback leaves shareholders better offBoth leave per-shareholder wealth at $40 (cash + remaining shares); MM-equivalentBoth reduce shareholder wealth
3. 3. Why is dividend cuts considered a stronger negative signal than reducing or pausing buybacks?

   Dividends are regulated more strictlyOnce announced, dividends are sticky — cutting them suggests management has lost confidence; buybacks are pre-announced as programs with no specific commitmentDividend cuts trigger criminal liabilityBuybacks aren't taxed
4. 4. When are buybacks value-destroying for remaining shareholders?

   Never; they always raise EPSWhen the share price the firm pays exceeds the intrinsic value — overpaying transfers wealth to selling shareholders at the expense of those who holdOnly during recessionsWhen the firm has no debt