IBM Message Board - Msg: 4394838

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Technology Stocks : IBM

IBM 310.49

+0.4%

3:59 PM EST

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To: Hsien W. Chang who wrote (3027)	5/9/1998 5:12:00 PM
From: Bill Martin	Read Replies (1) of 8218

Re: Can you explain to me the difference between stock repurchasing and paying out cash flow as dividend. One difference generally cited is the tax consequence. Just for the sake of argument, presume that IBM pays a 40% marginal tax rate and so do you (combined Fed + State). If IBM makes $1 of pretax profit then they end up with $0.60 after taxes. If they pay out that $0.60 in dividends and you pay another 40%, then you only pocket $0.36 after tax from IBM's $1 of pretax profit. The government(s) by contrast have pocketed $0.64 from IBM's $1 of pre-tax profit -- more than you do on dividends! If they buy back stock instead you don't pay any personal income tax on the benefit (presumably the stock price having been driven up) until you finally sell the stock, when you only pay the capital gains rate. I'm not sure, but I believe the money they use to buy back the stock is after-tax to the company involved. Bill

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