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Buying your own stock is like returning money to shareholders. It's effectively a dividend, by raising the stock price by the same amount they use to buy back s

Buying your own stock is like returning money to shareholders. It's effectively a dividend, by raising the stock price by the same amount they use to buy back stock. Like if they use $1 billion to buy back stock, the aggregate value of the outstanding stock should go up by $1 billion. Doesn't matter if they borrowed the money, the company retains the value. Having a high company value must have some benefits to them in other ways. Perhaps even less negative news articles in the press, and an easier time hiring good employees, just to name two.

ohiovr 7y ago
Stock value can decline.
- ohiovr 7y ago
  Once the corporate buy back stops the buying pressure it no longer contributes to its price. The buy backs will end simply because eventually they will not be able to raise the money even with using junk bonds.
mruts 7y ago
It’s like a dividend but better. It’s tax efficient and now the company has more shares it can deploy if it needs to raise capital in the future. Moreover, it sends a signal to the market that the company believes it’s stock price will continue to rise in the future. It’s kind of strange that people hate on buybacks all the time (people like Elizabeth Warren), but no one gives a rat’s ass about dividends.
- harryh 7y ago
  now the company has more shares it can deploy if it needs to raise capital in the future Er, no. That's not how it works. Companies can create new shares out of nothing anytime they want.
  - deleted 7y ago
    [deleted]
  - kevindkeogh 7y ago
    This is subject to corporate charter/bylaws and, usually, the 20% rule.
    - harryh 7y ago
      Yes, there are some limits on companies ability to do this but they're generally not especially relevant for the types of things companies use their own stock for (stock based compensation, acquisitions)
  - cowsandmilk 7y ago
    > Companies can create new shares out of nothing anytime they want. Companies have a number of authorized shares and typically need shareholder approval to increase it. Sure, they typically set the number of authorized shares high enough to run into the problem with any frequency, they can't "create new shares out of nothing anytime they want."
    - harryh 7y ago
      Consider the "they" in my "anytime they want" to be the shareholders. My point was that if the shareholders want to use stock for things like employee compensation or an acquisition they don't have to buy this stock from the market. They just make new shares.
  - mruts 7y ago
    The company can only create new shares if it has unissued capital. Granted this is kind of a arbitrary legal restriction, so it doesn’t really matter. But the real issue is that shareholders will be informed when new shares are issued and no one likes dilution. I’m not 100% sure, but I believe existing shares held by the company can be sold without notification until a quarterly report.
- cma 7y ago
  > It’s tax efficient [...] It’s kind of strange that people hate on buybacks all the time (people like Elizabeth Warren), but no one gives a rat’s ass about dividends. One follows from the other. It's because it allows a tax dodge.
  - mruts 7y ago
    The Democrats usually complain that the money should be used to increase salaries or whatever. Which is fine, I guess. But it’s not about a tax dodge (or at least that’s not the main point).
harryh 7y ago
the aggregate value of the outstanding stock should go up by $1 billion This isn't quite right. Look at it this way: There is a company that has the following assets 1) $100 in cash 2) $100 in other assets There are 200 outstanding shares, so each share is worth $1. The company spends its $100 in cash to buy back 100 shares. So now its asset list is: 1) $100 in other assets But there are now only 100 shares outstanding so each one is still worth $1. So why do a buyback if it doesn't raise the share price? Two reasons: 1) it returns cash to the shareholders who want it (those that sell the stock) 2) future gains in value will now accrue to fewer shares of outstanding stock
- mythz 7y ago
  This completely ignores demand which pushes the stock price up in the short-term, and with less shares outstanding, each share has a larger % of the company. i.e. if you buy 50% of a companies outstanding shares, there's no way you're going to be able to acquire the last 50% at the same price and is why when most acquisitions are announced they are purchased at a premium over their current valuation/share price. It's a form of returning capital to shareholders popular in US companies which by-passes US double-taxation of dividends and is often preferred by shareholders as they're able to choose when to realize their capital gains at their optimal convenience and at a cheaper tax rate than regular income. But they're typically performed when the company believes their share prices are undervalued and would like to acquire them at their perceived discount.
  - cbdumas 7y ago
    I think the idea is that because there is money going out the door in a buyback, rational investors should value the stock that much lower. And this lowered valuation should balance exactly with the price increase due to increased demand. Not sure it works out like that in practice though.
    - mythz 7y ago
      Investors don't get to value shares, they get to sell them and Buy Backs increases the demand for shares which pushes the stock price up in the short-term at least. A lot of the valuation of public companies are speculative based on their future potential earnings so a loss of unused capital shouldn't affect it too much, it's also a signal that the company believes their shares are currently undervalued, so they believe their Buy Backs are acquiring them at a discount.
deleted 7y ago
[deleted]
walshemj 7y ago
Well they company say's its like a dividend but with out guaranteed result - what it does do is theoretically increase the share price and may allow executives to trigger bonus schemes. I preferer the money - id make an exception for discount control on investment trusts though.
- dannyw 7y ago
  It’s significantly more tax efficient to receive stock buybacks (CG deferred until you sell) than even qualified dividends (taxed immediately). That’s why companies do buybacks.
  - walshemj 7y ago
    But its not a guarantee of "receiving" any thing the company makes vague promises which may or may not actually result in a gain to me, its also ignoring the time value of money. There are I think better and more transparent ways of returning $ to investors.
    - dodobirdlord 7y ago
      > But its not a guarantee of "receiving" any thing the company makes vague promises which may or may not actually result in a gain to me, its also ignoring the time value of money. I think you are confused. A buyback returns money to shareholders because the company has literally purchased the shares in exchange for money. Any other effects of a stock buyback are secondary. There's nothing vague about the promises, you're guaranteed to receive the money, and there's nothing to ignore with regard to the time value of money, because the shareholders immediately get money. Unless they decided not to sell, in which case, who cares? If they thought they would be better off taking the money they would have sold.
      - walshemj 7y ago
        No as a shareholder in a buy back I don't get the money directly to me (like I would with a special dividend) - I may or may not get a capital increase which is not the same thing. Your confusing a tender offer at over par with a generic buyback.
benj111 7y ago
Except that companies seem to be bad a timing share buybacks [1] Also your maths is slightly off. If the company uses $1bn to buy back stock, the company is now $1bn poorer. So whilst EPS etc will increase the assets per share may well decrease so I wouldn't necessarily expect the value of the outstanding stock to increase by $1 billion. [1] http://www.barelkarsan.com/2010/12/buybacks-in-style-at-wrong-time.html?m=1 http://www.barelkarsan.com/2010/12/buybacks-in-style-at-wron...
kgwgk 7y ago
> Buying your own stock is like returning money to shareholders. Right. Before, the shareholders have shares. Afterwards, they have shares and money. The total value has not changed at the moment of the operation (ignoring taxes, assuming infinity liquidity, that the information about the transaction was incorporated already in prices, etc.). > It's effectively a dividend, by raising the stock price by the same amount they use to buy back stock. It's effectively a dividend, but it's different in that the share price remains constant for a buyback and goes down for a dividend (again, in the ideal case). With a dividend: Before, the shareholders have X shares. Afterwards, they have money and X shares (which have a price lower than before, to keep the total constant). With a buyback: Before, the shareholders have X shares. Afterwards, they have money and Y shares (which have the same price as before, but there are less of them to keep the total constant). > Like if they use $1 billion to buy back stock, the aggregate value of the outstanding stock should go up by $1 billion. Nonsense. It's the other way around: the aggregate value of the outstanding stock should go down by $1 billion. Where "should" applies only in the ideal case, sure, but there is no way at all to construct an argument where it "should go up by $1 billion".
topmonk 7y ago
This doesn't account for low information investors, though. To buyback stock the company has to make an offer that enough investors are willing to sell. Once investors start to do so at these higher prices, the stock price goes up. To the low information investor, this looks to them like the stock is worth even more than it was before, because it made money for them (on paper, at least). And what about index funds? Regardless of the number of buybacks, the index fund isn't going to sell. This would also cause the stock price to rise. This idea that a stock buyback doesn't affect price only works in a market where everyone has perfect information. In real life this isn't the case.

ohiovr 7y ago

Stock value can decline.

ohiovr 7y ago
Once the corporate buy back stops the buying pressure it no longer contributes to its price. The buy backs will end simply because eventually they will not be able to raise the money even with using junk bonds.

mruts 7y ago

It’s like a dividend but better. It’s tax efficient and now the company has more shares it can deploy if it needs to raise capital in the future. Moreover, it sends a signal to the market that the company believes it’s stock price will continue to rise in the future. It’s kind of strange that people hate on buybacks all the time (people like Elizabeth Warren), but no one gives a rat’s ass about dividends.

harryh 7y ago
now the company has more shares it can deploy if it needs to raise capital in the future Er, no. That's not how it works. Companies can create new shares out of nothing anytime they want.
- deleted 7y ago
  [deleted]
- kevindkeogh 7y ago
  This is subject to corporate charter/bylaws and, usually, the 20% rule.
  - harryh 7y ago
    Yes, there are some limits on companies ability to do this but they're generally not especially relevant for the types of things companies use their own stock for (stock based compensation, acquisitions)
- cowsandmilk 7y ago
  > Companies can create new shares out of nothing anytime they want. Companies have a number of authorized shares and typically need shareholder approval to increase it. Sure, they typically set the number of authorized shares high enough to run into the problem with any frequency, they can't "create new shares out of nothing anytime they want."
  - harryh 7y ago
    Consider the "they" in my "anytime they want" to be the shareholders. My point was that if the shareholders want to use stock for things like employee compensation or an acquisition they don't have to buy this stock from the market. They just make new shares.
- mruts 7y ago
  The company can only create new shares if it has unissued capital. Granted this is kind of a arbitrary legal restriction, so it doesn’t really matter. But the real issue is that shareholders will be informed when new shares are issued and no one likes dilution. I’m not 100% sure, but I believe existing shares held by the company can be sold without notification until a quarterly report.
cma 7y ago
> It’s tax efficient [...] It’s kind of strange that people hate on buybacks all the time (people like Elizabeth Warren), but no one gives a rat’s ass about dividends. One follows from the other. It's because it allows a tax dodge.
- mruts 7y ago
  The Democrats usually complain that the money should be used to increase salaries or whatever. Which is fine, I guess. But it’s not about a tax dodge (or at least that’s not the main point).

harryh 7y ago

the aggregate value of the outstanding stock should go up by $1 billion This isn't quite right. Look at it this way: There is a company that has the following assets 1) $100 in cash 2) $100 in other assets There are 200 outstanding shares, so each share is worth $1. The company spends its $100 in cash to buy back 100 shares. So now its asset list is: 1) $100 in other assets But there are now only 100 shares outstanding so each one is still worth $1. So why do a buyback if it doesn't raise the share price? Two reasons: 1) it returns cash to the shareholders who want it (those that sell the stock) 2) future gains in value will now accrue to fewer shares of outstanding stock

mythz 7y ago
This completely ignores demand which pushes the stock price up in the short-term, and with less shares outstanding, each share has a larger % of the company. i.e. if you buy 50% of a companies outstanding shares, there's no way you're going to be able to acquire the last 50% at the same price and is why when most acquisitions are announced they are purchased at a premium over their current valuation/share price. It's a form of returning capital to shareholders popular in US companies which by-passes US double-taxation of dividends and is often preferred by shareholders as they're able to choose when to realize their capital gains at their optimal convenience and at a cheaper tax rate than regular income. But they're typically performed when the company believes their share prices are undervalued and would like to acquire them at their perceived discount.
- cbdumas 7y ago
  I think the idea is that because there is money going out the door in a buyback, rational investors should value the stock that much lower. And this lowered valuation should balance exactly with the price increase due to increased demand. Not sure it works out like that in practice though.
  - mythz 7y ago
    Investors don't get to value shares, they get to sell them and Buy Backs increases the demand for shares which pushes the stock price up in the short-term at least. A lot of the valuation of public companies are speculative based on their future potential earnings so a loss of unused capital shouldn't affect it too much, it's also a signal that the company believes their shares are currently undervalued, so they believe their Buy Backs are acquiring them at a discount.

deleted 7y ago

[deleted]

walshemj 7y ago

Well they company say's its like a dividend but with out guaranteed result - what it does do is theoretically increase the share price and may allow executives to trigger bonus schemes. I preferer the money - id make an exception for discount control on investment trusts though.

dannyw 7y ago
It’s significantly more tax efficient to receive stock buybacks (CG deferred until you sell) than even qualified dividends (taxed immediately). That’s why companies do buybacks.
- walshemj 7y ago
  But its not a guarantee of "receiving" any thing the company makes vague promises which may or may not actually result in a gain to me, its also ignoring the time value of money. There are I think better and more transparent ways of returning $ to investors.
  - dodobirdlord 7y ago
    > But its not a guarantee of "receiving" any thing the company makes vague promises which may or may not actually result in a gain to me, its also ignoring the time value of money. I think you are confused. A buyback returns money to shareholders because the company has literally purchased the shares in exchange for money. Any other effects of a stock buyback are secondary. There's nothing vague about the promises, you're guaranteed to receive the money, and there's nothing to ignore with regard to the time value of money, because the shareholders immediately get money. Unless they decided not to sell, in which case, who cares? If they thought they would be better off taking the money they would have sold.
    - walshemj 7y ago
      No as a shareholder in a buy back I don't get the money directly to me (like I would with a special dividend) - I may or may not get a capital increase which is not the same thing. Your confusing a tender offer at over par with a generic buyback.

benj111 7y ago

Except that companies seem to be bad a timing share buybacks [1] Also your maths is slightly off. If the company uses $1bn to buy back stock, the company is now $1bn poorer. So whilst EPS etc will increase the assets per share may well decrease so I wouldn't necessarily expect the value of the outstanding stock to increase by $1 billion. [1] http://www.barelkarsan.com/2010/12/buybacks-in-style-at-wrong-time.html?m=1 http://www.barelkarsan.com/2010/12/buybacks-in-style-at-wron...

kgwgk 7y ago

> Buying your own stock is like returning money to shareholders. Right. Before, the shareholders have shares. Afterwards, they have shares and money. The total value has not changed at the moment of the operation (ignoring taxes, assuming infinity liquidity, that the information about the transaction was incorporated already in prices, etc.). > It's effectively a dividend, by raising the stock price by the same amount they use to buy back stock. It's effectively a dividend, but it's different in that the share price remains constant for a buyback and goes down for a dividend (again, in the ideal case). With a dividend: Before, the shareholders have X shares. Afterwards, they have money and X shares (which have a price lower than before, to keep the total constant). With a buyback: Before, the shareholders have X shares. Afterwards, they have money and Y shares (which have the same price as before, but there are less of them to keep the total constant). > Like if they use $1 billion to buy back stock, the aggregate value of the outstanding stock should go up by $1 billion. Nonsense. It's the other way around: the aggregate value of the outstanding stock should go down by $1 billion. Where "should" applies only in the ideal case, sure, but there is no way at all to construct an argument where it "should go up by $1 billion".

topmonk 7y ago

This doesn't account for low information investors, though. To buyback stock the company has to make an offer that enough investors are willing to sell. Once investors start to do so at these higher prices, the stock price goes up. To the low information investor, this looks to them like the stock is worth even more than it was before, because it made money for them (on paper, at least). And what about index funds? Regardless of the number of buybacks, the index fund isn't going to sell. This would also cause the stock price to rise. This idea that a stock buyback doesn't affect price only works in a market where everyone has perfect information. In real life this isn't the case.