I agree with this point. The key difference, however, is different company policies regarding dividends and stock buybacks. As the data I provided show, companies buy back more stock when stock prices are higher, and buy back less when stock prices lower. Dividends, however, are much more predictable than stock buybacks, and so in practice, stock buybacks have provided less value to investors than dividends.
I think it's worth noting that companies also distribute more dividends when stock prices are higher, and distribute fewer dividends when stock prices are lower. Just trying to order the causality here a bit: it's big earnings that can contribute to
both the high stock price and increased return of capital to shareholders (whether via buybacks or dividends), rather than "woo, look at that stock price, let's party and buy back some shares and do some acquisitions and snort some coke off a stripper's ass!"
So sure,
if the stock is overvalued, a dividend is probably preferred to a buyback for the non-reinvesting ongoing shareholder, but that depends on him finding a less-overvalued company to invest that dividend in, in what may be an broadly-overvalued market.
I suppose this point is also true but it seems like it misses the overall point. I personally wouldn't want management of companies I invested to preferentially reward investors who sold their stock instead of rewarding current investors. And the data show that because of the timing of buybacks management generally rewards former investors instead of current investors.
Yep, I guess that's why that one report stresses "If the company of a stock that you own is buying back shares, you must recognize that doing nothing is doing something." Which is the same as dividends. Reinvesting the dividend, which can seem like a passive "do nothing" strategy, is in fact "doing something". Same with taking the dividend in cash and letting it sit in your bank account. But it's good to point that out for buybacks, since those are less-obviously "do something" moments than dividend payouts.
Ok, and a bunch of more-random thoughts:
In the context of this thread, I think we can say that if a company is simply trying to do a predictable, quarterly return of cash to shareholders, and has narrowed down the choice of what to do with their cash to either buybacks or dividends, buybacks are the better choice. That way investors get better tax treatment, and "dollar-cost averaging" will prevent underperformance. But for that extra "woo, let's party!" cash, I guess a special dividend might be preferred.
Maybe if we can wholly replace the psychological preference for dividends (through threads like this!), then all companies would fully switch over to using buybacks as their cash-return method and thus, buybacks would lose their market-trailing tendencies.
I guess the important thing we don't know is if the magnitude of buyback-underperformance is large enough to outweigh the preferential tax-treatment for a taxable investor. If not, then buybacks are still preferred for that investor, even at their current less-than-awesome success rate.
I've learned that both dividends and buybacks have downsides related to investor freedom, and your preference depends on which downside affects you more. The downside of a dividend is that it removes freedom from the investor regarding
when he gets his cash ("here it is, now pay tax on it!"), while the downside of a buyback is that it removes freedom regarding
where that cash goes ("I'm gonna reinvest it in this company for you, whether you think that's a good idea or not!")
Again, if an active, direct shareholder thinks it's a bad idea to reinvest in a company, I'm not sure why he's holding that company in the first place, and so he shouldn't have much reason to complain about that forced-reinvestment. And switching to the context of passive investing, the idea that stock can be "overvalued" or "undervalued" doesn't even make sense, so this underperformance of buybacks might not even be a real thing for a passive investor. At the least, the buyback performance would have to be compared against the performance of passively-reinvested dividends to make a valid comparison.
