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NewsMaterial3 min readDisconfirmAI Editorial

Global Study of 9,034 Buybacks Challenges Dividend Supremacy: How Tax Drag and Low Reinvestment Rates Alter Capital Allocation Judgments

The widely cited claim that "dividends account for the lion's share of stock market returns" is challenged by Michael Mauboussin’s research, which shows it relies on a theoretical assumption of 100% reinvestment, whereas private investors historically reinvest only about 10% of dividends. A study by Manconi et al. covering 9,034 buyback announcements across 31 non-US markets found that undervalued small-cap value stocks generate significant excess returns following buybacks. This article synthesizes this evidence to argue under what conditions buybacks outperform dividends and why boards in persistently undervalued markets like the UK should reconsider their capital allocation strategies.

2026-11-13 16:05 GMT+8

"Dividends account for the lion's share of stock market returns"—this phrase is repeated so often in investment circles that it has become common sense. However, it rests on a fatal premise: the assumption that investors reinvest every penny they receive back into the same stock. In his 2014 Credit Suisse report, Michael Mauboussin pointed out that this assumption does not hold up in reality. Dividends are taxable events; investors receive amounts that have already been subject to tax deductions. More critically, historical data shows that private investors actually reinvest only about 10% of their dividend income into the relevant stocks. This means the narrative of "dividend-driven returns" is largely a product of the theoretical world rather than the actual experience of investors.

This does not mean buybacks are automatically superior to dividends. The global buyback study published by Manconi, Peyer, and Vermaelen in 2018—which examined 9,034 buyback announcements across 31 non-US markets between 1998 and 2010—offers a more precise conclusion: on average, buyback announcements by non-US companies are indeed followed by significant short-term and long-term excess returns. However, the authors simultaneously emphasized that "not all buybacks are created equal." Excess returns are significantly larger for small-cap, undervalued value stocks, and are more pronounced in markets with lower liquidity and poorer efficiency.

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This brings us back to Warren Buffett’s judgment in 1984: when a company with an excellent business and comfortable financial position finds its shares trading far below intrinsic value, no alternative action can benefit shareholders as surely as repurchases. Decades later, the hard numbers from Manconi et al. provide empirical support for this intuition. However, the article also points out an important omission in Buffett’s statement: buybacks benefit shareholders who continue to hold. For investors looking to exit, buybacks may not be the most effective way to realize value.

The other side of buybacks also needs to be faced squarely. The US Securities and Exchange Commission (SEC) once found that insiders sold five times as much stock in the eight days following a buyback announcement as on ordinary days, and the number of insiders disposing of shares after repurchase announcements was twice the normal level. The Atlantic magazine’s August 2019 long-read article, "The Stock-Buyback Swindle," was based on such evidence, accusing buybacks of becoming a tool for CEOs to enrich themselves at the expense of other shareholders. SEC Commissioner Rob Jackson stated bluntly: Boards of directors that allow buybacks to occur without transparency regarding CEOs selling into them raise serious questions about the board’s leadership.

Therefore, the key issue is not whether buybacks are good or bad in general, but the specific conditions: Is the company truly undervalued? Does management have the sincerity to continue execution? Is the board transparent about insider transactions? For companies with reasonable or even high valuations, buybacks may simply be using shareholders' money to buy back their own stock at high prices. Conversely, for companies whose share prices remain below intrinsic value—particularly small-cap value stocks in the UK market that have been persistently undervalued—failing to buy back shares is the true capital allocation failure.

The author of this article expects that fewer investors will automatically favor dividends over buybacks when facing clearly undervalued companies in the future. He believes that since the United States—the world’s most mature capital market—has already taken the lead in shifting toward a more active buyback culture, boards in persistently undervalued markets like the UK will eventually follow suit. The real question is: Can today’s decision-makers learn to allocate capital more intelligently, or must shareholders replace them first?

Sources

  • undervalued-shares.comUndervalued Shares↗
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