Interesting article on the effect of a buyback...
How Buybacks Warp The Price-To-Book Ratio......
AND... with a stock buyback, outstanding shares are reduced thereby driving EPS (assuming earnings remaining constant). As EPS increases, stock becomes more attractive. typically i like stock buybacks vs. increased yield (unless shares are housed in my ROTH). you agree?
Often a test of the "extremes" is a clarifying activity. what if the divy dropped to zero, what would happen tothe share price. Conversely, what if the divy doubled,what would happen to the share price. This should help with buy/sell decisions.
What you say about dividends is true but the same things can be said about bybacks.
'All else being equal, firms that are buying back stock will not experience as great a percentage decline in bear markets because the buybacks act as a protective cushion.'
One flaw in your claim is that all else isn't equal. if it is you are comparing apples and oranges. Of course with two otherwise identical companies the one with a divi will out perform. But the same is true for company with a buyback.
The comparison that must be made to make this evaluation is two otherwise identical companies but one with a divi and the other a buyback where the capital returned to shareholders is the same in the two cases.
Also you talke about 'if the cash remained on the balance sheet...' Well in a buyback (same with divi) the cash doesn not remain on the balance sheet. So that is by definition an straw man argument.
While true if shares are bought back at a premium to their value, it is not a good use of capital. But also if a company pays out a dividend of x% that could have been invested in the company and made X+Y% for the shareholders, then the divided is destroying potential value also.
Fact is that dividends and buybacks are both means to return 'excess' capital to the shareholders. Each has pros and cons as a means to to do such. But in the long run, how the capital is returned to the shareholders doesn't really impact the remaining of the company. As such, the future long term value of the company is the same.
Dividend and share buybacks will be discussed at the FEB board meeting. The dividend will not be restored to previous highs because it used 100% of BP's cashflow.
I wouldn't be surprised to see a settlement with the government before Feb and then the board can be confident raising the dividend to $2 to $2.2 per share and initiate a share buyback too!
You're welcome and let's enjoy the ride to $50! and then $62!