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A share buyback should be stock price neutral at the time it is done - there is no change in the value of the company. Cash goes out the door while also reduci

by beezle 6y ago

A share buyback should be stock price neutral at the time it is done - there is no change in the value of the company. Cash goes out the door while also reducing shareholder equity. Avoiding the shananigans that management play with the buybacks alone is a laudable reason to eliminate them. But the more important reason is they are long term detrimental to the well being of most companies. Funds used to finance a buyback could be otherwise spent on r&d, new products and/or services, hiring better talent, etc. If the IRR of such activities is so low that a buyback is better, management is very poor or the company has no growth prospects (and possibly entering an end of life period).

skybrian 6y ago
It seems like this proves too much? By this argument, no company should pay dividends either and Apple has very poor management. It's not a given that every profitable company should spend all the money they earn and try to grow at the maximum rate possible.
ogre_codes 6y ago
> A share buyback should be stock price neutral at the time it is done - there is no change in the value of the company. Cash goes out the door while also reducing shareholder equity. There is no change in the value of the company. There are fewer shares outstanding though which means each existing share is worth more. Share buybacks are absolutely a good deal for shareholders when a company is undervalued. When a company is overvalued, dividends reward shareholders better. If a company is fairly valued, it largely depends on tax rates and whether the shareholder funds are in a tax sheltered account. [1] The problem comes in when executive compensation is based on share-price. Executives have massive motivation to buyback shares even when the company is overvalued. So long as share buybacks are on the table as an option, share value should never affect executive compensation or there is an inherent conflict of interest. Ideally, the company would hire a third party with no conflict of interest to determine best ways to return money to shareholders. [1] Tax incentives around dividends and buybacks are overdue for some reform.
- twmahna 6y ago
  > There is no change in the value of the company. There are fewer shares outstanding though which means each existing share is worth more. The company's value decreases by the buyback amount. Share price (ignoring positive signalling impact) remains unchanged. E.g. Company has $100 market cap with 10 outstanding shares at $10/share. Company does $10 buyback. Afterwards, company has $90 market cap with 9 outstanding shares at $10/share.
  - ogre_codes 6y ago
    Company shares are valued based on future earnings. If the company is undervalued, the value of remaining shares increases over time. As the future value of the shares taken off market is greater than the current share value. Lots of companies have gone this route; market cap increases over time and existing shares increase in value. If the company is overvalued, the shareholders just get screwed as the company is buying back shares which are already worth less than the future value of the companies earnings.
  - djbebs 6y ago
    Companies dont generally trade at their book value
- beezle 6y ago
  "There are fewer shares outstanding though which means each existing share is worth more." That worth has been reduced by the cash paid for the retired shares. So yes, each shareowner has a slightly larger percentage ownership but of a slightly smaller company. The way this can change is if future profitability exceeds that which is already expected and part of the current price.
  - ogre_codes 6y ago
    > That worth has been reduced by the cash paid for the retired shares. It doesn't work this way. Companies aren't valued based on how much cash they have on hand. They are valued based on the future value of their returns which should be several orders of magnitude more than whatever cash they are spending on buybacks. Apple has spent over $500b on buybacks over the past 10 years. By your logic, they should be smaller than they were when they started. A healthy company spending money on a buyback doesn't affect their ability to earn money in the future which is the basis for the companies valuation. Likewise, dividends don't devalue a company. A company is valued based on their future earning capacity, not based on how much cash they have on hand.

by beezle 6y ago

skybrian 6y ago

It seems like this proves too much? By this argument, no company should pay dividends either and Apple has very poor management. It's not a given that every profitable company should spend all the money they earn and try to grow at the maximum rate possible.

ogre_codes 6y ago

> A share buyback should be stock price neutral at the time it is done - there is no change in the value of the company. Cash goes out the door while also reducing shareholder equity. There is no change in the value of the company. There are fewer shares outstanding though which means each existing share is worth more. Share buybacks are absolutely a good deal for shareholders when a company is undervalued. When a company is overvalued, dividends reward shareholders better. If a company is fairly valued, it largely depends on tax rates and whether the shareholder funds are in a tax sheltered account. [1] The problem comes in when executive compensation is based on share-price. Executives have massive motivation to buyback shares even when the company is overvalued. So long as share buybacks are on the table as an option, share value should never affect executive compensation or there is an inherent conflict of interest. Ideally, the company would hire a third party with no conflict of interest to determine best ways to return money to shareholders. [1] Tax incentives around dividends and buybacks are overdue for some reform.

twmahna 6y ago
> There is no change in the value of the company. There are fewer shares outstanding though which means each existing share is worth more. The company's value decreases by the buyback amount. Share price (ignoring positive signalling impact) remains unchanged. E.g. Company has $100 market cap with 10 outstanding shares at $10/share. Company does $10 buyback. Afterwards, company has $90 market cap with 9 outstanding shares at $10/share.
- ogre_codes 6y ago
  Company shares are valued based on future earnings. If the company is undervalued, the value of remaining shares increases over time. As the future value of the shares taken off market is greater than the current share value. Lots of companies have gone this route; market cap increases over time and existing shares increase in value. If the company is overvalued, the shareholders just get screwed as the company is buying back shares which are already worth less than the future value of the companies earnings.
- djbebs 6y ago
  Companies dont generally trade at their book value
beezle 6y ago
"There are fewer shares outstanding though which means each existing share is worth more." That worth has been reduced by the cash paid for the retired shares. So yes, each shareowner has a slightly larger percentage ownership but of a slightly smaller company. The way this can change is if future profitability exceeds that which is already expected and part of the current price.
- ogre_codes 6y ago
  > That worth has been reduced by the cash paid for the retired shares. It doesn't work this way. Companies aren't valued based on how much cash they have on hand. They are valued based on the future value of their returns which should be several orders of magnitude more than whatever cash they are spending on buybacks. Apple has spent over $500b on buybacks over the past 10 years. By your logic, they should be smaller than they were when they started. A healthy company spending money on a buyback doesn't affect their ability to earn money in the future which is the basis for the companies valuation. Likewise, dividends don't devalue a company. A company is valued based on their future earning capacity, not based on how much cash they have on hand.