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> a company which executes a share buyback will have no change in its stock price... this is also exactly equivalent to distributing profits in the form of a d
by JDDunn9 11y ago
> a company which executes a share buyback will have no change in its stock price... this is also exactly equivalent to distributing profits in the form of a dividend
This is false (conditionally). Most valuations look something like: earnings x growth + cash. If you have cash that you cannot reinvest at the same ROI that you have been growing at, you can increase shareholder value by removing the cash element, since it's dead weight. A buy back is a way to invest that cash at the same ROI that your company is growing at. A dividend would require the investors to re-invest that cash and get the same ROI that the company is growing at.
This is why it make sense for large, fast growing companies to buy back their shares and for large, slow-growing companies to issue dividends.
- knughit 11y agoFinance theory disagrees with you. A dividend lets the investors choose if they want to buy more shares (from the same sellers who would sell in a buyback) or mix their current shares with the cash.
- JDDunn9 11y agoInvestors buying more shares with dividends doesn't decrease the number of shares outstanding. If you increase the share price without decreasing the share count, you have created value out of thin air and are saying the company was more valuable without the cash than it was with it. The key is the asymmetry of information. The market price should reflect all public information. However the company has non-public information, which puts them in the best position to judge if money is best invested inside the company or out. Share buybacks are a legal form of insider-trading.
- phyalow 11y agoNumber of shares doesn't matter, enterprise value does and it doesn't change. Your implying that there would be a further equity issuance which doesn't routinely happen on buybacks.
- eru 11y agoExactly. If number of shares would matter, share splits would matter.
- JDDunn9 11y agoMarket cap = shares outstanding * share price. Reducing shares increases the price (while keeping market cap the same). Share splits increases the shares outstanding and decreases the price. So... yes, shares outstanding does matter.
- phyalow 11y agoNow you are confusing outstanding shares with market float. Shares repurchased become treasury stock and are now apart of equity.
- JDDunn9 11y agoWhether the company destroys the shares or retains them as treasury stock is irrelevant. Investors don't care if their share price went up by 10%, or if they effectively have 1.10 shares.
- tomp 11y ago> Investors buying more shares with dividends doesn't decrease the number of shares outstanding. If you increase the share price without decreasing the share count, you have created value out of thin air and are saying the company was more valuable without the cash than it was with it. You're wrong. When the company issues the dividend, the share price falls for precisely the amount issued. So if everybody used that money to buy the shares again, the share price should return (roughly) to the value before the dividend was paid. The number of shares outstanding wouldn't change.
- JDDunn9 11y agoYou're wrong. The market cap already had the cash priced into it, regardless of how it was used (as a dividend or re-invested). By your logic, a company whose profits remained flat and issued a dividend would become less valuable every year until it was worthless.
- tomp 11y agoNo, it happens just before the dividends. Say you own 1 share. It's trading for $20. Tomorrow the company pays $2 dividend. Then your share is worth $18 and you have $2 cash as well. Alternatively, if you're buying the share, you're willing to pay $20 for it today but only $18 tomorrow, because you know that you won't be getting a $2 dividend if you buy it. If you take future dividend payments into account, you also need to discount them. If you think that (discounted future dividends) > (stock price), that's a signal for you to buy. If enough investors reason this way, the price will rise until (discounted future dividends) ~~ (stock price).
- JDDunn9 11y agoThe market cap already reflects the value of all future earnings discounted to the present. The timing of dividend payments is irrelevant.
- tomp 11y agoEither you're stupid, or there's a misunderstanding. Probably the latter. Let me try again. Assume that δ is the discount factor (δ = 1 / (1 + r)), P is price, and D_i is the dividend in year i. Before dividend: P = D_0 + δ D_1 + δ^2 D_2 + δ^3 D_3 + ... After dividend: P = δ D_1 + δ^2 D_2 + δ^3 D_3 + ...
- deleted 11y ago[deleted]
- lyncnshare 11y agoOr at least if management thinks (or wants the investors to think) they can continue to exceed the ROI that a normal investor would get making their own decisions.