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"It doesn't matter if the stock is undervalued." Warren Buffett has written the opposite of this numerous times. Paying $1 for something that is worth 80 cents
by aczerepinski 12y ago
"It doesn't matter if the stock is undervalued."
Warren Buffett has written the opposite of this numerous times. Paying $1 for something that is worth 80 cents (even if it's your own stock) destroys shareholder value. The math and logic behind this is so basic, I don't understand how anyone could believe otherwise.
- eru 12y agoIt doesn't matter if the stock is undervalued for this narrow question of dividends vs stock repurchases. If an outside investor buys stock, of course, under/overvaluation matters.
- aczerepinski 12y agoSometimes it's easiest to illustrate the flaw in a theory by using extreme examples, so please forgive me for the hyperbole. Let's say you have a company with only $100M in discounted future earnings (and no significant balance sheet assets), but it is trading on the market for $1B. This 10x intrinsic value scenario isn't common in real life but we definitely see examples like it during market bubbles. The company wants to distribute $1M back to shareholders. If it pays a dividend, shareholders receive the full million less taxes - so perhaps $600-750k in their pockets. If on the other hand the company buys back $1M in stock, they are buying 0.1% of $100M in future earnings, or $100k. If my post doesn't make sense, google "Buffett on buybacks." He's written about the subject in a number of his annual letters.