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I wonder. If you're an investor, all you really care about is how much your shares are earning you. If the amount of earnings per share goes up, then the value

• adventured 7y ago
  > all you really care about is how much your shares are earning you Properly you care about more than that: you want to know how the business is faring; the thing that actually has to support the EPS. You want to know that you're not watching a dwindling scenario, where you're losing the business and the buybacks are getting you just a bit more than treading water. That's where EPS juicing can be a dangerous camouflage. If juicing EPS with buybacks comes at the cost of longer term growth, it's a disaster for long-term shareholding. Incorrect capital allocation sinks a lot of ships. IBM, as one infamous example, played (is playing) an aggressive financial engineering game where they were seeing their business contract every quarter for years, yet juiced EPS through buybacks. It did absolutely nothing for the stock, which hasn't moved in ten years (Adobe is now worth more than IBM + the former Red Hat, ouch). All those profits shoveled into buybacks and it did nothing to drive consequential returns for shareholders. If shareholders are lucky they've yielded three or four percent per year the past decade, with inflation + buybacks + dividends (while a lot of other prominent tech companies have generated epic returns in that time). It could have gone into building a better cloud business which would have provided growth, which would have rewarded them with a PE ratio that isn't a dismal 13 (Apple has a multiple 2x that with very modest growth). In four or five years AWS will be as large as IBM's entire business (it's already nearly as profitable now). Shareholders have seen some EPS boost while the business gradually vanishes out from under them. Is it more likely that IBM's profits were better spent on buying shares back or driving business growth? You could have rolled up a massive cloud business for $50 billion in acquisitions between 2008-2018 (and ideally not stupidly paid twice what Red Hat was actually worth, near the peak of a stock market bubble).
• ethbro 7y ago
  The value of your shares goes up, in current terms, but your future expectations of growth should go down, which should temper the multiple.
  • __blockcipher__ 7y ago
    That’s simply false. You’re assuming a scenario where the company does buybacks because they’re losing market share, and then implying causality. To put it simply, wherher a company performs buybacks does not tell you what the future growth will be. All it tells you is that the company’s management believes shares are undervalued, or alternatively that they are irrational (to your point, I would characterize most share buybacks as irrational, but _certainly_ not apple’s)
    • ethbro 7y ago
      If a company habitually buys shares back, then yes, that does tell you something about future growth prospects, in comparison to share buybacks. It's a pretty clear sign of management saying "We see no better opportunity than to buy shares at the current price." This may be because management believes shares are undervalued. But it may also be because they have no alternative plans. And continued buybacks would seem to indicate the latter.