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Here’s the thing: if a company has 1 million dollars in cash, and a 2 million dollar market cap, and they spend the cash buying back 1 million worth of stock, t
by fallingfrog 7y ago
Here’s the thing: if a company has 1 million dollars in cash, and a 2 million dollar market cap, and they spend the cash buying back 1 million worth of stock, the total value of the company, including the cash they spent, has decreased by 1 million dollars and the stock price should therefore not change at all.
So why should these stock buybacks consistently be boosting the share price? Either investors are stupid, or the company is intentionally paying too much for its own stock so that the CEO can get a big bonus.
I know which one sounds more likely to me.
Edit: I suppose there is a third option: maybe the CEOs were assuming the stock price would rise forever, and were hoping to cash in on the speculative bubble, which is less fraudulent but more reckless. I don’t know which one is worse.
- exoque 7y agoThe stock price should change because the earnings per share will be higher in the future.
- fallingfrog 7y agoBut the company is poorer by the same amount as they spent on stocks, which if the stock price is correct should reduce earnings by the same amount, canceling out to no change in the stock price.
- pauljurczak 7y ago> if the stock price is correct The stock price is not correct, it is a cruel joke with very little connection to real economic activity.
- fallingfrog 7y agoMy point exactly
- exoque 7y agoYes, the market cap of the company is lowered by the amount it spends on the buy back, however the value per share stays the same. A year later the profit from the new year is included in the market cap which is divided by a lowet number of shares. This means the value of a single share is now higher while the market cap is the same as in the beginning. Or am i missing something?
- fallingfrog 7y agoYes you are, the company has given up a bunch of cash which could have been used to hire staff, buy capital and so on, so again if the stock price is correct they have decided to forego some profits due to the buyback, and it should cancel out.
- exoque 7y agoFair point.