Share buy back programs- the new dividend?

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ChinchillaWhiplash
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Share buy back programs- the new dividend?

Post by ChinchillaWhiplash » Wed Jun 13, 2018 4:49 pm

So since stocks are at all time lows for dividend yields, looks like share buybacks have taken its place. How do you factor in this with stock valuations? Is capital being used in this manner to artificially inflate the price of a lot of stocks or is it considered an investment back into the company? How many companies are or have recently participated in a share buyback? Do you get the same effect as a share holder with buyback as if it paid these funds used for the buyback as dividends?

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JoMoney
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Re: Share buy back programs- the new dividend?

Post by JoMoney » Wed Jun 13, 2018 5:07 pm

-We are not at "all time lows for dividend yields". They were lower late 90's-2000.
-Buybacks have been a thing, of gradually growing impact since they were legalized in the early 1980's.
-I would have to pay taxes on a cash dividend, so the effect to me is not the same. Outside of taxes, and outside of opinion as to whether or not the stock is over-valued/under-valued, then it's irrelevant to me if they pay a dividend (and I reinvest by buying more shares), or if they reduce the number of shares outstanding thereby increasing the equity represented by my existing shares.

http://us.spindices.com/documents/addit ... yback.xlsx
https://www.yardeni.com/pub/buybackdiv.pdf
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Riprap
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Re: Share buy back programs- the new dividend?

Post by Riprap » Wed Jun 13, 2018 5:13 pm

ChinchillaWhiplash wrote:
Wed Jun 13, 2018 4:49 pm
How do you factor in this with stock valuations?
I don't. I buy index funds and don't worry about it.
ChinchillaWhiplash wrote:
Wed Jun 13, 2018 4:49 pm
Is capital being used in this manner to artificially inflate the price of a lot of stocks or is it considered an investment back into the company?
Who knows? Depends on the company. Warren Buffett famously says Berkshire only buys back stock when the market price is well below the intrinsic value (which is a number that only he and Charlie know). In that situation, it enhances shareholder value.
ChinchillaWhiplash wrote:
Wed Jun 13, 2018 4:49 pm
Do you get the same effect as a share holder with buyback as if it paid these funds used for the buyback as dividends?
Again, it depends on mispricing on way or another. If the security is undervalued, then you might be buy a $1 worth of stock for $.75. Of course it cuts both ways and a company can pay too much for it's own stock.

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Pajamas
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Re: Share buy back programs- the new dividend?

Post by Pajamas » Wed Jun 13, 2018 5:17 pm

A lot of buybacks don't really reduce the number of shares outstanding because they are then given to employees as compensation.

I also question the rationale for a publicly traded company to reduce its float if it is indeed being reduced. This is especially true for companies such as REITs that routinely issue shares to raise capital for growth. In many cases it simply amounts to speculating in the company's own shares. Frequently when companies engage in buybacks as a form of supporting the price of the stock, shares continue to drop and the buybacks don't look so smart in retrospect. If a company can't determine when its own stock is undervalued and then successfully speculate in its shares, who can?

Something similar that is interesting is Elon Musk buying shares of Tesla. He has declared war on short sellers of Tesla. I mean, when you already own $11 billion in shares, what's the point of buying another $25 millions' worth except to make a statement?

https://www.reuters.com/article/us-tesl ... SKBN1J930L

Something else to be aware of is that the announcement of a share repurchase does not mean that the shares will actually be purchased. I don't have figures at hand but it used to be that less than half of announced buybacks were consummated.

ChinchillaWhiplash
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Re: Share buy back programs- the new dividend?

Post by ChinchillaWhiplash » Wed Jun 13, 2018 5:23 pm

I'm thinking of this in the context of the total stock market, which obviously is what index funds hold. Very high corporate debt, large increase in leveraging to do buyback, large amount of new corporate bonds to raise capital, high P/E valuations. Would be nice to know how much of this is in the specific markets such as TSM, TDM, EM. How about government bonds with rapid increase in interest rate and their high debt. Which states, countries are in danger of default? Lots to think about.

Guess one source of capital to do buyback was probably created by the new corporate tax laws. This might keep the US market heading up for a while. Time will tell.
Last edited by ChinchillaWhiplash on Wed Jun 13, 2018 5:32 pm, edited 1 time in total.

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JoMoney
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Re: Share buy back programs- the new dividend?

Post by JoMoney » Wed Jun 13, 2018 5:31 pm

Pajamas wrote:
Wed Jun 13, 2018 5:17 pm
A lot of buybacks don't really reduce the number of shares outstanding because they are then given to employees as compensation...
Even if the net equity reduction was negative or zero after employees being given equity as compensation, it's still increasing the shareholders stake relative to the company issuing shares and there being no buyback... and kind of raises questions about a company that would issue a cash dividend to it's owners but give it's employees an equity stake as compensation - a rather bizzar sort of risk/wealth transfer going on in that situation.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

boglerdude
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Re: Share buy back programs- the new dividend?

Post by boglerdude » Thu Jun 14, 2018 10:52 pm

Say a company has a net worth (market cap?) of 100 million. 100 owners (shareholders) each with a million dollar share. The company spends 50 million cash savings to buy out half the owners/shareholders. Now the company's net worth is 50 million?

There are now 50 owners/shareholders, each share still worth 1 million?

But the company's income stream hasn't changed. Earnings per share has doubled? And so the PE ratio "improves" ?

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