> With a buyback, you have fewer shares after the buyback.
Not sure who "you" is but the company will have fewer shares outstanding, investors who don't sell will have the same and those investors will also now own a greater % of the company as well as a greater earnings per share.
> If you "reinvest" in the company you give up all the proceeds you received to buy back the shares that you just sold to the company
I am 100% not saying that as that would eliminate the benefit. The benefit is to long term investors who buy, hold and reinvest dividends and reinvesting dividends to buy more stock is key as that is where the historical exponential returns are because it increases your ownership share and future dividends.
That is where my example numbers come in because you can only reinvest to buy more shares and thus your ownership % the dividend amount minus tax amount whereas the company can spend the entirety of a dividend buying shares to remove them from the outstanding market. The difference between those two numbers (1.05 and 1.04 in my example) then compounds and effectively goes towards increasing share prices which do eventually get taxed but they get the benefit of compounding while the owner holds.
Also, while you need quite a few shares, you can estimate and sell the percentage of shares a company is buying back in order to keep the same % ownership thus acting like a dividend so I myself would prefer all companies I invest in to never give out dividends and only do buybacks unless their P/E ratio is truly absurd.
Oh in that case your numbers for the long-term investors in the buyback situation don't make sense. Their stock may be worth on an individual share basis, but their holdings are unchanged in value at best and usually worth less, because the company expended money in buying back the shares.
In most cases in the past decades, buybacks were accomplished using loans rather than profits, leaving the companies in worse financial positions. More than half of the companies that engaged in buybacks in the past decades are either bankrupt, declared bankruptcy in 2020, or are underperforming the market. Only a handful of companies that engaged in buybacks are doing okay, and those companies also issued dividends (see for example, Microsoft).
Not sure who "you" is but the company will have fewer shares outstanding, investors who don't sell will have the same and those investors will also now own a greater % of the company as well as a greater earnings per share.
> If you "reinvest" in the company you give up all the proceeds you received to buy back the shares that you just sold to the company
I am 100% not saying that as that would eliminate the benefit. The benefit is to long term investors who buy, hold and reinvest dividends and reinvesting dividends to buy more stock is key as that is where the historical exponential returns are because it increases your ownership share and future dividends.
That is where my example numbers come in because you can only reinvest to buy more shares and thus your ownership % the dividend amount minus tax amount whereas the company can spend the entirety of a dividend buying shares to remove them from the outstanding market. The difference between those two numbers (1.05 and 1.04 in my example) then compounds and effectively goes towards increasing share prices which do eventually get taxed but they get the benefit of compounding while the owner holds.
Also, while you need quite a few shares, you can estimate and sell the percentage of shares a company is buying back in order to keep the same % ownership thus acting like a dividend so I myself would prefer all companies I invest in to never give out dividends and only do buybacks unless their P/E ratio is truly absurd.