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I think you are operating from a seriously mistaken assumption of how stock buybacks work. When a company buys their own stock, there are simply fewer shares f

I think you are operating from a seriously mistaken assumption of how stock buybacks work. When a company buys their own stock, there are simply fewer shares free-floating, in the hands of owners. The company's profits therefore are divided among a smaller group, and each share receives a larger percentage of those profits. Imagine an extreme case where McDonald's buys every single share but one. That remaining stock-owner will therefore own 100% of McDonald's, and get every last profit made from the world's obese. All this requires no ongoing buybacks from the company. You do it once, and because the denominator shrinks, each stock appraises. After that, as long as profits remain stable, earnings per share will, and so should, absent external factors, the stock price.

Jimpulse 8y ago
The kicker is that these buybacks were financed with debt,
freehunter 8y ago
None of what you said conflicts with my understanding of how stock buybacks work. I never said it was an ongoing activity, just criticizing companies who do stock buybacks to artificially inflate their share price in a down market. My argument has nothing to do with profits or dividends or ownership, just share price. >a company buys their own stock... [and] each stock appraises That lines up exactly with what I've described. If you're saying I'm wrong, you're going to have to be more specific because I don't see where we disagree.
- daneyh 8y ago
  >just criticizing companies who do stock buybacks to artificially inflate their share price in a down market. My argument has nothing to do with profits or dividends or ownership, just share price. There is nothing inherently wrong with performing stock buybacks, from a cashflow perspective it is equivalent of paying a dividend, in fact it can be prudent from a tax perspective. You did imply that it is a continuous process when you suggested: > when the money runs out, the buybacks stop Performing a stock buyback based off the proceeds of debt in a down market makes perfect sense actually because you can significantly reduce your cost of capital if you believe your future cashflow will be strong enough to continue making coupon payments. You can issue debt at say 3.5% and buy out shares that require 7% cost of capital and as long as interest rate and credit risk don't drastically deteriorate significantly increase the value of your company from a simple capital markets operation.
  - freehunter 8y ago
    If that's what people understood as implied, it was not what I meant to imply and I apologize. What I meant by that was, you can only buy back stocks up until the point where you run out of money. Not that you HAVE to, but if your goal is to manipulate your share price, you can only do it up to the point where you're out of money. If I'm spending money from my savings account, there is no law saying I have to spend all the money in my savings account, just a law saying I can only spent up to the balance in my savings account. I guess you assumed I was arguing that companies who do buybacks must dump all of their money into buybacks, which I certainly did not mean to imply. Big difference between "able to" and "must". The point is, if you as a company are trying to manipulate your share price in a down market by buying back stocks and you choose to continue buying your stock until the market rises again, you're taking the risk that you will run out of money before the stock market rises again. At that point your share prices fall no matter what.
    - matt4077 8y ago
      > I guess you assumed I was arguing that companies who do buybacks must dump all of their money No, wrong again. People take issue with your representation of stock buybacks as "short-term market manipulation". The major effect of buybacks comes not (just) from the increase in demand, but from lowering the denominator future profits are divided by. It directly increases earnings per share.
      - freehunter 8y ago
        Okay I am done with this thread and everyone (what I can only assume is intentionally) putting words in my mouth that I never said, while ignoring words that I did say. I never said companies must spend all their money on stock buybacks, yet that argument is being used to paint me like an idiot. I never said every company who does buybacks is doing it to manipulate the market, yet that argument is being used to paint me like an idiot. I never said anything about dividends or profits or ownership, in fact I literally said I'm just criticizing companies who do buybacks in order to increase their share price during a down market, yet the argument that "not everyone who does buybacks is manipulating the market" keeps getting thrown at me like that thought has never crossed my mind. I know you think I'm an idiot but I did say words that have meaning and I used those words intentionally to convey the exact meaning that society has agreed those words are supposed to mean. It is not my fault you intentionally choose to ignore those words and their meaning. I've had enough of it. Either read my words then comment or don't comment at all. I'm sick of this, defending my comments against people who only have bad faith and want to pretend that they're smarter than me because they purposefully misread my comments. Your entire argument is based on an intentional misreading of words I never said and in direct response to the comment where I argued against that intentional misinterpretation and I'm not engaging with this any more.
deckar01 8y ago
A company regains the control and share of profit from the stock they buy back. The one remaining stock holder in that example would not hold 100% of profit or control of McDonalds, they would hold the same percentage of profit and control that their stock certificate was originally issued for. Edit: Downvoted? Source: > A buyback occurs when the issuing company pays shareholders the market value per share and re-absorbs that portion of its ownership that was previously distributed among public and private investors. https://www.investopedia.com/ask/answers/042015/why-would-company-buyback-its-own-shares.asp https://www.investopedia.com/ask/answers/042015/why-would-co...
- matt4077 8y ago
  So, then, with only a single owner left, owning the last remaining share: Who else gets parts of the profits, and which other people get to cast votes in elections to the board? Edit: Quote from your link By reducing the number of outstanding shares, a company's earnings per share (EPS) ratio is automatically increased – because its annual earnings are now divided by a lower number of outstanding shares.
  - deckar01 8y ago
    > While EPS is widely used as a way to track a company’s performance, shareholders do not have direct access to those profits. A portion of the earnings may be distributed as a dividend, but all or a portion of the EPS will be retained by the company. https://www.investopedia.com/terms/e/eps.asp https://www.investopedia.com/terms/e/eps.asp
    - matt4077 8y ago
      This is getting insane... Would you, please, apply your point to the original statement, namely: they would hold the same percentage of profit and control that their stock certificate was originally issued for. Then, pray tell, in your opinion, when a company buys back one of two remaining shares, making you the sole owner of the company, does this a) Have absolutely no effect on your share b) makes your share more valuable, because it has become a rare collectors' item or c) doubles the future percentage of profits your receive, from 50% to 100%, because irrespective of any profits distributed via dividends or not, the question was only about the share of those profits and not their absolute amount, and even under that strange misreading, even the profits you receive in absolute terms would double under the typical assumption of "all else being equal" and "nobody is really that stupid"
gamblor956 8y ago
When a company buys their own stock, there are simply fewer shares free-floating, in the hands of owners. The company's profits therefore are divided among a smaller group, and each share receives a larger percentage of those profits. Technically true, but the company had a choice about how to return profits to investors and chose the buyback over the dividend, so the remaining owners don't get a larger percentage of profits unless the company also issues a dividend. It's generally an either-or these days. Imagine an extreme case where McDonald's buys every single share but one. That remaining stock-owner will therefore own 100% of McDonald's, and get every last profit made from the world's obese. Not all McD's stock is publicly traded. Moreover, a fair amount of McD's stock cannot be legally sold due to it being owned by ESOPs. That being said, the remaining stock owner would not own 100% of McDs, they would own 1 share of McDs (and 100% of then-outstanding stock). There would still be several million shares authorized and in reserve that could be sold or re-issued at a moment's notice. The decision to sell/re-issue those shares is made by the company, not the owner, and the fact that he theoretically owns 100% of the company at that time is meaningless because he owns only a fractional percent of the company's authorized shares and thus has no actual power.
- ringshall 8y ago
  I’ve always been curious about this. Who, if anyone, owns the shares that are held in reserve? Surely they can’t be used to vote, unless they are held as an asset by the company in the same way the company might hold shares in other companies as assets. Do they exist on the balance sheet?
  - gamblor956 8y ago
    Nobody owns the shares in reserve and while in reserve they have no voting or dividend rights. While in reserve, they are neither assets or liabilities or really even anything other than a hypothetical number. Many companies used to disclose the number of shares in reserve, so that shareholders were aware of the potential dilution of their investment, but in an era of buybacks, that has become less popular.

Jimpulse 8y ago

The kicker is that these buybacks were financed with debt,

freehunter 8y ago

None of what you said conflicts with my understanding of how stock buybacks work. I never said it was an ongoing activity, just criticizing companies who do stock buybacks to artificially inflate their share price in a down market. My argument has nothing to do with profits or dividends or ownership, just share price. >a company buys their own stock... [and] each stock appraises That lines up exactly with what I've described. If you're saying I'm wrong, you're going to have to be more specific because I don't see where we disagree.

daneyh 8y ago
>just criticizing companies who do stock buybacks to artificially inflate their share price in a down market. My argument has nothing to do with profits or dividends or ownership, just share price. There is nothing inherently wrong with performing stock buybacks, from a cashflow perspective it is equivalent of paying a dividend, in fact it can be prudent from a tax perspective. You did imply that it is a continuous process when you suggested: > when the money runs out, the buybacks stop Performing a stock buyback based off the proceeds of debt in a down market makes perfect sense actually because you can significantly reduce your cost of capital if you believe your future cashflow will be strong enough to continue making coupon payments. You can issue debt at say 3.5% and buy out shares that require 7% cost of capital and as long as interest rate and credit risk don't drastically deteriorate significantly increase the value of your company from a simple capital markets operation.
- freehunter 8y ago
  If that's what people understood as implied, it was not what I meant to imply and I apologize. What I meant by that was, you can only buy back stocks up until the point where you run out of money. Not that you HAVE to, but if your goal is to manipulate your share price, you can only do it up to the point where you're out of money. If I'm spending money from my savings account, there is no law saying I have to spend all the money in my savings account, just a law saying I can only spent up to the balance in my savings account. I guess you assumed I was arguing that companies who do buybacks must dump all of their money into buybacks, which I certainly did not mean to imply. Big difference between "able to" and "must". The point is, if you as a company are trying to manipulate your share price in a down market by buying back stocks and you choose to continue buying your stock until the market rises again, you're taking the risk that you will run out of money before the stock market rises again. At that point your share prices fall no matter what.
  - matt4077 8y ago
    > I guess you assumed I was arguing that companies who do buybacks must dump all of their money No, wrong again. People take issue with your representation of stock buybacks as "short-term market manipulation". The major effect of buybacks comes not (just) from the increase in demand, but from lowering the denominator future profits are divided by. It directly increases earnings per share.
    - freehunter 8y ago
      Okay I am done with this thread and everyone (what I can only assume is intentionally) putting words in my mouth that I never said, while ignoring words that I did say. I never said companies must spend all their money on stock buybacks, yet that argument is being used to paint me like an idiot. I never said every company who does buybacks is doing it to manipulate the market, yet that argument is being used to paint me like an idiot. I never said anything about dividends or profits or ownership, in fact I literally said I'm just criticizing companies who do buybacks in order to increase their share price during a down market, yet the argument that "not everyone who does buybacks is manipulating the market" keeps getting thrown at me like that thought has never crossed my mind. I know you think I'm an idiot but I did say words that have meaning and I used those words intentionally to convey the exact meaning that society has agreed those words are supposed to mean. It is not my fault you intentionally choose to ignore those words and their meaning. I've had enough of it. Either read my words then comment or don't comment at all. I'm sick of this, defending my comments against people who only have bad faith and want to pretend that they're smarter than me because they purposefully misread my comments. Your entire argument is based on an intentional misreading of words I never said and in direct response to the comment where I argued against that intentional misinterpretation and I'm not engaging with this any more.

deckar01 8y ago

A company regains the control and share of profit from the stock they buy back. The one remaining stock holder in that example would not hold 100% of profit or control of McDonalds, they would hold the same percentage of profit and control that their stock certificate was originally issued for. Edit: Downvoted? Source: > A buyback occurs when the issuing company pays shareholders the market value per share and re-absorbs that portion of its ownership that was previously distributed among public and private investors. https://www.investopedia.com/ask/answers/042015/why-would-company-buyback-its-own-shares.asp https://www.investopedia.com/ask/answers/042015/why-would-co...

matt4077 8y ago
So, then, with only a single owner left, owning the last remaining share: Who else gets parts of the profits, and which other people get to cast votes in elections to the board? Edit: Quote from your link By reducing the number of outstanding shares, a company's earnings per share (EPS) ratio is automatically increased – because its annual earnings are now divided by a lower number of outstanding shares.
- deckar01 8y ago
  > While EPS is widely used as a way to track a company’s performance, shareholders do not have direct access to those profits. A portion of the earnings may be distributed as a dividend, but all or a portion of the EPS will be retained by the company. https://www.investopedia.com/terms/e/eps.asp https://www.investopedia.com/terms/e/eps.asp
  - matt4077 8y ago
    This is getting insane... Would you, please, apply your point to the original statement, namely: they would hold the same percentage of profit and control that their stock certificate was originally issued for. Then, pray tell, in your opinion, when a company buys back one of two remaining shares, making you the sole owner of the company, does this a) Have absolutely no effect on your share b) makes your share more valuable, because it has become a rare collectors' item or c) doubles the future percentage of profits your receive, from 50% to 100%, because irrespective of any profits distributed via dividends or not, the question was only about the share of those profits and not their absolute amount, and even under that strange misreading, even the profits you receive in absolute terms would double under the typical assumption of "all else being equal" and "nobody is really that stupid"

gamblor956 8y ago

When a company buys their own stock, there are simply fewer shares free-floating, in the hands of owners. The company's profits therefore are divided among a smaller group, and each share receives a larger percentage of those profits. Technically true, but the company had a choice about how to return profits to investors and chose the buyback over the dividend, so the remaining owners don't get a larger percentage of profits unless the company also issues a dividend. It's generally an either-or these days. Imagine an extreme case where McDonald's buys every single share but one. That remaining stock-owner will therefore own 100% of McDonald's, and get every last profit made from the world's obese. Not all McD's stock is publicly traded. Moreover, a fair amount of McD's stock cannot be legally sold due to it being owned by ESOPs. That being said, the remaining stock owner would not own 100% of McDs, they would own 1 share of McDs (and 100% of then-outstanding stock). There would still be several million shares authorized and in reserve that could be sold or re-issued at a moment's notice. The decision to sell/re-issue those shares is made by the company, not the owner, and the fact that he theoretically owns 100% of the company at that time is meaningless because he owns only a fractional percent of the company's authorized shares and thus has no actual power.

ringshall 8y ago
I’ve always been curious about this. Who, if anyone, owns the shares that are held in reserve? Surely they can’t be used to vote, unless they are held as an asset by the company in the same way the company might hold shares in other companies as assets. Do they exist on the balance sheet?
- gamblor956 8y ago
  Nobody owns the shares in reserve and while in reserve they have no voting or dividend rights. While in reserve, they are neither assets or liabilities or really even anything other than a hypothetical number. Many companies used to disclose the number of shares in reserve, so that shareholders were aware of the potential dilution of their investment, but in an era of buybacks, that has become less popular.