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The stock price doesn't reflect growth at least not directly. The price reflects expectation of future earnings. If the company is never going to grow but makes
by bluecalm 7y ago
The stock price doesn't reflect growth at least not directly. The price reflects expectation of future earnings. If the company is never going to grow but makes stable 1M per year in profit then that company is worth something. Let's say it's worth around 16M as that's around the break even point at which people prefer to have cash over company stock. If now that company uses 1M in yearly profit to buy back shares it's still worth 16M but every individual outstanding share is worth more as it now represents bigger part of the same pie. Therefore after the buyback the share price should increase. We can also say by exactly how much (barring any other new information).
This is finance 101 really. Buybacks are just more tax efficient because they are not taxed at the time of the buyback but at the time the stock holders sell.
- sokoloff 7y agoThe company (therefore remaining shareholders) no longer has that $1M that they spent on the buyback, meaning the total pie is actually smaller as well as having fewer shares/slices outstanding.
- cellular 7y agoDoes your analysis hold true if the company never pays out dividends?
- bluecalm 7y agoYes, what dividends have to do with it? The company has value no matter if it pays the dividends or not. Controlling it has value for example as it may be worth something when bought by another company. You can also always dissolve it and pay the cash back to shareholders or you can buy back the stock which is a form of dividend (one when you're automatically reinvesting into the company stock).