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"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.

by 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.
- twmahna 6y ago
  > It doesn't work this way. Companies aren't valued based on how much cash they have on hand. Uh, yea they are. A company’s valuation is based on both the cash they have on hand AND future discounted cash flows. Once you correct your understanding of this, you will see that GP is explaining things correctly.
  - ogre_codes 6y ago
    > Once you correct your understanding of this, you will see that GP is explaining things correctly. If a companies liquid assets are more than a small fraction of the companies value, then management is doing something seriously wrong. Some valuation formulas punish companies who have excessive cash on hand. Going to quote my original reply because I'm tired of repeating this point. > Share buybacks are absolutely a good deal for shareholders when a company is undervalued. If a company is undervalued, then the share price is less than the future earnings of the company. The value of their future earnings might be $1.01. If they buy back shares, they are paying $1 for $1.01 worth of future earnings which are realized by existing shareholders. A classic example of this is Apple buying back shares over the past 5-10 years or so (less clear now with share prices being so high). If a company is valued higher than the companies future earnings or the company needs to take on debt to buyback shares then it doesn't make any sense.

by beezle 6y ago

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.

twmahna 6y ago
> It doesn't work this way. Companies aren't valued based on how much cash they have on hand. Uh, yea they are. A company’s valuation is based on both the cash they have on hand AND future discounted cash flows. Once you correct your understanding of this, you will see that GP is explaining things correctly.
- ogre_codes 6y ago
  > Once you correct your understanding of this, you will see that GP is explaining things correctly. If a companies liquid assets are more than a small fraction of the companies value, then management is doing something seriously wrong. Some valuation formulas punish companies who have excessive cash on hand. Going to quote my original reply because I'm tired of repeating this point. > Share buybacks are absolutely a good deal for shareholders when a company is undervalued. If a company is undervalued, then the share price is less than the future earnings of the company. The value of their future earnings might be $1.01. If they buy back shares, they are paying $1 for $1.01 worth of future earnings which are realized by existing shareholders. A classic example of this is Apple buying back shares over the past 5-10 years or so (less clear now with share prices being so high). If a company is valued higher than the companies future earnings or the company needs to take on debt to buyback shares then it doesn't make any sense.