I don't understand stock buybacks

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Topic Author
refinedchain
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I don't understand stock buybacks

Post by refinedchain » Sun Mar 31, 2019 1:56 pm

If a company issues stock buybacks in lieu of declaring dividends, how does the average investor materially benefit from the buybacks? It seems stock buybacks are only favorable if you intend to re-invest the dividend anyway. Otherwise, it seems like the dividend would be the clear favorite for most investors.

Here is an allegory illustrating my confusion:
I live in a small rural neighborhood with 10 members in our HOA. Our houses are small and are worth only $100k each. One day many years ago, one of my neighbors accidentally uncovered a particularly rich oil deposit under our collective land.

Our HOA owned the mineral rights to the land at the time. The HOA sold the mineral rights to have it pumped in exchange for a healthy $100k dividend each year. The HOA weighed two options that year:
- Declare a dividend of $10k to the 10 neighbors
- Buy-back a neighbor's house for $100k.

At first everyone was on board with receiving the dividend - it would be really unfair to give just one neighbor the full benefit of the income stream that year. But then the HOA's accountant said that buying out a neighbor's house is actually more tax-efficient than receiving a dividend. The accountant assured us, "This is great for you! Every house that gets bought-back gives you greater ownership of the HOA and thus greater ownership of that $100k/year!" So we agreed that every year the HOA would buy-back a neighbor's house at random.

Every year it went on like this, and every year, someone (besides me) had their house bought out for $100k. While I was never picked, I remained enthusiastic, knowing that each buyback was increasing my overall share of the earnings in the HOA.

Well about a decade later, when I became the sole member of the HOA, a funny thing happened: the oil well dried up.

Lesson learned: do not invest in an oil MLP that issues stock buybacks.

RAchip
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Re: I don't understand stock buybacks

Post by RAchip » Sun Mar 31, 2019 2:03 pm

In theory, buybacks increase the value of your shares. Less shares outstanding so EPS goes up.

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vineviz
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Re: I don't understand stock buybacks

Post by vineviz » Sun Mar 31, 2019 2:06 pm

refinedchain wrote:
Sun Mar 31, 2019 1:56 pm
If a company issues stock buybacks in lieu of declaring dividends, how does the average investor materially benefit from the buybacks? It seems stock buybacks are only favorable if you intend to re-invest the dividend anyway. Otherwise, it seems like the dividend would be the clear favorite for most investors.
For most investors there should be no clear favorite. The rest of investors should prefer the buyback.

Both are returning cash to shareholders, they are just doing it via different mechanisms. Here's a more on-point allegory: if someone hands you a $5 bill, are you richer if you put it pants pocket or your shirt pocket?
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

pdavi21
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Re: I don't understand stock buybacks

Post by pdavi21 » Sun Mar 31, 2019 2:10 pm

The real question is why are you investing in a company that you aren't willing to reinvest dividends into.

You should immediately sell your shares and invest in index funds or, if you must buy individual securities, companies that you would want to reinvest dividends into.
"We spend a great deal of time studying history, which, let's face it, is mostly the history of stupidity." -Stephen Hawking

jdilla1107
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Re: I don't understand stock buybacks

Post by jdilla1107 » Sun Mar 31, 2019 2:13 pm

I don't understand the allegory. Doesn't the sole HOA member now own 10 houses worth $1M at the end of the story? He started with 1 house and now owns 10 houses. Seems like a big win.

A stock buy back just reduces the number of shares. If you want the dividend instead, you just sell some shares.
Last edited by jdilla1107 on Sun Mar 31, 2019 2:18 pm, edited 1 time in total.

HEDGEFUNDIE
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Re: I don't understand stock buybacks

Post by HEDGEFUNDIE » Sun Mar 31, 2019 2:16 pm

jdilla1107 wrote:
Sun Mar 31, 2019 2:13 pm
I don't understand the allegory

- Doesn't the sole HOA member now own 10 houses worth $1M at the end of the story? He started with 1 house and now owns 10 houses. Seems like a big win.
The point of the allegory is that the business shut down immediately after all the shares were bought back. All the shares became worthless. If the HOA had decided to pay dividends instead, you would have cash sitting in the bank instead of worthless shares.

jdilla1107
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Re: I don't understand stock buybacks

Post by jdilla1107 » Sun Mar 31, 2019 2:19 pm

HEDGEFUNDIE wrote:
Sun Mar 31, 2019 2:16 pm
jdilla1107 wrote:
Sun Mar 31, 2019 2:13 pm
I don't understand the allegory

- Doesn't the sole HOA member now own 10 houses worth $1M at the end of the story? He started with 1 house and now owns 10 houses. Seems like a big win.
The point of the allegory is that the business shut down immediately after all the shares were bought back. All the shares became worthless. If the HOA had decided to pay dividends instead, you would have cash sitting in the bank instead of worthless shares.
But, the houses that were bought back are not worthless. The sole member now owns all 10 houses. So, his share of the profits went into buying the houses. His profit was converted into acquiring 9 additional houses. He got 9 houses as payment for his mineral rights.

To relate this story to share buybacks, the HOA could have sold some houses (without mineral rights) as they acquired them. (If they thought the houses would not hold their value)
Last edited by jdilla1107 on Sun Mar 31, 2019 2:27 pm, edited 1 time in total.

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unclescrooge
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Re: I don't understand stock buybacks

Post by unclescrooge » Sun Mar 31, 2019 2:23 pm

jdilla1107 wrote:
Sun Mar 31, 2019 2:19 pm
HEDGEFUNDIE wrote:
Sun Mar 31, 2019 2:16 pm
jdilla1107 wrote:
Sun Mar 31, 2019 2:13 pm
I don't understand the allegory

- Doesn't the sole HOA member now own 10 houses worth $1M at the end of the story? He started with 1 house and now owns 10 houses. Seems like a big win.
The point of the allegory is that the business shut down immediately after all the shares were bought back. All the shares became worthless. If the HOA had decided to pay dividends instead, you would have cash sitting in the bank instead of worthless shares.
But, the houses that were bought back are not worthless. The sole member now owns all 10 houses. So, his share of the profits went into buying the houses. His profit was converted into acquiring 9 additional houses. He got 9 houses as payment.

To relate this story to share buybacks, the HOA could have sold some houses (without mineral rights) as they acquired them. (If they thought the houses would not hold their value)
I'm also confused by what happened to these 10 extra houses worth $1m.

If the sole remaining homeowner chooses to burn them down, that's his fault, not his accountant's for suggesting buying them in lieu of distributing a dividend.

alex_686
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Re: I don't understand stock buybacks

Post by alex_686 » Sun Mar 31, 2019 2:24 pm

RAchip wrote:
Sun Mar 31, 2019 2:03 pm
In theory, buybacks increase the value of your shares. Less shares outstanding so EPS goes up.
Actually, technically speaking, buy-backs don't affect the share price. It is issuing dividends that cause share value to decrease. See the foundational work of Miller and Modigliani - winner of the Nobel Prize. While EPS goes up, so does the volatility of earnings. The higher the volatility of earnings, the less those earnings are worth. In theory, a wash. Holds up fairly well in real life too.

The value of a company is its Free Cash Flow to Equity. It does not matter how you get that free cash flow. It could be a steady stream of dividends, it could be one lumpy payout from a all cash merger. Or a stock buy back, which falls in-between.

Topic Author
refinedchain
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Re: I don't understand stock buybacks

Post by refinedchain » Sun Mar 31, 2019 2:28 pm

unclescrooge wrote:
Sun Mar 31, 2019 2:23 pm

I'm also confused by what happened to these 10 extra houses worth $1m.

If the sole remaining homeowner chooses to burn them down, that's his fault, not his accountant's for suggesting buying them in lieu of distributing a dividend.
I would concede I am not very creative and am not sure what I would do with 10 houses in a small rural neighborhood with a defunct oil rig next door.

alex_686
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Re: I don't understand stock buybacks

Post by alex_686 » Sun Mar 31, 2019 2:30 pm

unclescrooge wrote:
Sun Mar 31, 2019 2:23 pm
jdilla1107 wrote:
Sun Mar 31, 2019 2:19 pm
HEDGEFUNDIE wrote:
Sun Mar 31, 2019 2:16 pm
jdilla1107 wrote:
Sun Mar 31, 2019 2:13 pm
I don't understand the allegory

- Doesn't the sole HOA member now own 10 houses worth $1M at the end of the story? He started with 1 house and now owns 10 houses. Seems like a big win.
The point of the allegory is that the business shut down immediately after all the shares were bought back. All the shares became worthless. If the HOA had decided to pay dividends instead, you would have cash sitting in the bank instead of worthless shares.
But, the houses that were bought back are not worthless. The sole member now owns all 10 houses. So, his share of the profits went into buying the houses. His profit was converted into acquiring 9 additional houses. He got 9 houses as payment.

To relate this story to share buybacks, the HOA could have sold some houses (without mineral rights) as they acquired them. (If they thought the houses would not hold their value)
I'm also confused by what happened to these 10 extra houses worth $1m.
The OP is doing it's math wrong.

Step 1: House is worth $100k.

Step 2: Oil is discovered. If we use a discount rate of 10% and assume that the oil will last forever, the oil discovery is worth 1,000k, (100k per year / 10% per year)

Step 3: House is now worth $200k (100k original value + 100k in oil dividends).

Step 4: Much like what the OP is suggesting, but it is going to take 20 years...

Now, see my prior post on Free Cash Flow to Equity. Do you want a small immediate payout today ($200k) or a large payout 20 years from now (2,00k - you own 10 100k homes plus another 1,000 k for being the sole owner of the oil dividends)? If the discount rate of 10% is correctly incorporating the time value of money and risk you should be indifferent. If not, you are using the wrong discount rate.
Last edited by alex_686 on Sun Mar 31, 2019 2:32 pm, edited 1 time in total.

jdilla1107
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Re: I don't understand stock buybacks

Post by jdilla1107 » Sun Mar 31, 2019 2:31 pm

refinedchain wrote:
Sun Mar 31, 2019 2:28 pm
unclescrooge wrote:
Sun Mar 31, 2019 2:23 pm

I'm also confused by what happened to these 10 extra houses worth $1m.

If the sole remaining homeowner chooses to burn them down, that's his fault, not his accountant's for suggesting buying them in lieu of distributing a dividend.
I would concede I am not very creative and am not sure what I would do with 10 houses in a small rural neighborhood with a defunct oil rig next door.
Sell them. They were worth 100k before mineral rights were discovered.

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unclescrooge
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Re: I don't understand stock buybacks

Post by unclescrooge » Sun Mar 31, 2019 2:49 pm

jdilla1107 wrote:
Sun Mar 31, 2019 2:31 pm
refinedchain wrote:
Sun Mar 31, 2019 2:28 pm
unclescrooge wrote:
Sun Mar 31, 2019 2:23 pm

I'm also confused by what happened to these 10 extra houses worth $1m.

If the sole remaining homeowner chooses to burn them down, that's his fault, not his accountant's for suggesting buying them in lieu of distributing a dividend.
I would concede I am not very creative and am not sure what I would do with 10 houses in a small rural neighborhood with a defunct oil rig next door.
Sell them. They were worth 100k before mineral rights were discovered.
Also, your share of income in year 1 was 100k divided by 11. In year two, it would have been 100k/10 and so on.

RAchip
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Re: I don't understand stock buybacks

Post by RAchip » Sun Mar 31, 2019 3:00 pm

“technically speaking, buy-backs don't affect the share price”

Haha, then what is the purpose of buybacks? If a company trades at 17x eps and you reduce the number of shares then the eps that you multiply by 17 goes up meaning the share price should go up.

If buybacks dont affect stock price then how do they benefit stockholders?

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vineviz
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Re: I don't understand stock buybacks

Post by vineviz » Sun Mar 31, 2019 3:04 pm

alex_686 wrote:
Sun Mar 31, 2019 2:24 pm
RAchip wrote:
Sun Mar 31, 2019 2:03 pm
In theory, buybacks increase the value of your shares. Less shares outstanding so EPS goes up.
Actually, technically speaking, buy-backs don't affect the share price. It is issuing dividends that cause share value to decrease. See the foundational work of Miller and Modigliani - winner of the Nobel Prize. While EPS goes up, so does the volatility of earnings. The higher the volatility of earnings, the less those earnings are worth. In theory, a wash.
It's only a wash if the cash was valued by the market at $0 when it was on the company's balance sheet. That almost never happens.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

HEDGEFUNDIE
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Re: I don't understand stock buybacks

Post by HEDGEFUNDIE » Sun Mar 31, 2019 3:07 pm

RAchip wrote:
Sun Mar 31, 2019 3:00 pm
“technically speaking, buy-backs don't affect the share price”

Haha, then what is the purpose of buybacks? If a company trades at 17x eps and you reduce the number of shares then the eps that you multiply by 17 goes up meaning the share price should go up.

If buybacks dont affect stock price then how do they benefit stockholders?
The reason stock buybacks don’t affect share price is because the company spent its cash to buy back those shares. There are fewer shares now but the company is also worth less.

HEDGEFUNDIE
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Re: I don't understand stock buybacks

Post by HEDGEFUNDIE » Sun Mar 31, 2019 3:17 pm

jdilla1107 wrote:
Sun Mar 31, 2019 2:19 pm
HEDGEFUNDIE wrote:
Sun Mar 31, 2019 2:16 pm
jdilla1107 wrote:
Sun Mar 31, 2019 2:13 pm
I don't understand the allegory

- Doesn't the sole HOA member now own 10 houses worth $1M at the end of the story? He started with 1 house and now owns 10 houses. Seems like a big win.
The point of the allegory is that the business shut down immediately after all the shares were bought back. All the shares became worthless. If the HOA had decided to pay dividends instead, you would have cash sitting in the bank instead of worthless shares.
But, the houses that were bought back are not worthless. The sole member now owns all 10 houses. So, his share of the profits went into buying the houses. His profit was converted into acquiring 9 additional houses. He got 9 houses as payment for his mineral rights.

To relate this story to share buybacks, the HOA could have sold some houses (without mineral rights) as they acquired them. (If they thought the houses would not hold their value)
I agree with you, the allegory is imperfect because it introduces a second asset class into the mix - namely the houses.

Fundamentally, these are the equivalent scenarios

1. Receiving a dividend and automatically reinvesting it = the company buying back stock (not yours) and you continuing to hold your shares
2. Receiving a dividend and moving it to cash = the company buying back stock (not yours) and you selling shares so that you are exposed to the equivalent EPS as before the buyback.

MrJones
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Re: I don't understand stock buybacks

Post by MrJones » Sun Mar 31, 2019 3:25 pm

vineviz wrote:
Sun Mar 31, 2019 2:06 pm
Here's a more on-point allegory: if someone hands you a $5 bill, are you richer if you put it pants pocket or your shirt pocket?
OP, the above is a much better analogy.

Your allegory seems to suffer from a false analogy fallacy. It is way too complicated and has too many unanswered questions.

If Enron did buybacks and then eventually went up in a scandal, losing money on Enron stock had nothing to do with them doing buybacks, and all to do with an accounting scandal. That's the case with your analogy. Here's more:

There's no clear connection between the well unexpectedly drying up and buybacks. That just seems like a poorly-run business.

Didn't you end up with 10 houses, and $1M?

If you wanted to reduce your risk in a single investment, why didn't you do that every year by selling enough of your interest to account for the increase in value? Because real estate is an all-or-nothing deal? Again, not the case with stocks.

MrJones
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Re: I don't understand stock buybacks

Post by MrJones » Sun Mar 31, 2019 3:32 pm

refinedchain wrote:
Sun Mar 31, 2019 2:28 pm
unclescrooge wrote:
Sun Mar 31, 2019 2:23 pm

I'm also confused by what happened to these 10 extra houses worth $1m.

If the sole remaining homeowner chooses to burn them down, that's his fault, not his accountant's for suggesting buying them in lieu of distributing a dividend.
I would concede I am not very creative and am not sure what I would do with 10 houses in a small rural neighborhood with a defunct oil rig next door.
Are you trolling us? If you bought Apple stocks, and went through 10 buybacks, does that somehow automatically make you the (uncreative) sole owner of the business?
Last edited by MrJones on Sun Mar 31, 2019 6:16 pm, edited 1 time in total.

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unclescrooge
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Re: I don't understand stock buybacks

Post by unclescrooge » Sun Mar 31, 2019 4:45 pm

HEDGEFUNDIE wrote:
Sun Mar 31, 2019 3:07 pm
RAchip wrote:
Sun Mar 31, 2019 3:00 pm
“technically speaking, buy-backs don't affect the share price”

Haha, then what is the purpose of buybacks? If a company trades at 17x eps and you reduce the number of shares then the eps that you multiply by 17 goes up meaning the share price should go up.

If buybacks dont affect stock price then how do they benefit stockholders?
The reason stock buybacks don’t affect share price is because the company spent its cash to buy back those shares. There are fewer shares now but the company is also worth less.
No, therev are fewer shares but the company is worth the same.
If you got a pizza into 8 slices vs 6, do you get more pizza?
The benefit is future earnings are higher on a per share basis and thus each share would be worth more.

Trader Joe
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Re: I don't understand stock buybacks

Post by Trader Joe » Sun Mar 31, 2019 4:47 pm

refinedchain wrote:
Sun Mar 31, 2019 1:56 pm
If a company issues stock buybacks in lieu of declaring dividends, how does the average investor materially benefit from the buybacks? It seems stock buybacks are only favorable if you intend to re-invest the dividend anyway. Otherwise, it seems like the dividend would be the clear favorite for most investors.

Here is an allegory illustrating my confusion:
I live in a small rural neighborhood with 10 members in our HOA. Our houses are small and are worth only $100k each. One day many years ago, one of my neighbors accidentally uncovered a particularly rich oil deposit under our collective land.

Our HOA owned the mineral rights to the land at the time. The HOA sold the mineral rights to have it pumped in exchange for a healthy $100k dividend each year. The HOA weighed two options that year:
- Declare a dividend of $10k to the 10 neighbors
- Buy-back a neighbor's house for $100k.

At first everyone was on board with receiving the dividend - it would be really unfair to give just one neighbor the full benefit of the income stream that year. But then the HOA's accountant said that buying out a neighbor's house is actually more tax-efficient than receiving a dividend. The accountant assured us, "This is great for you! Every house that gets bought-back gives you greater ownership of the HOA and thus greater ownership of that $100k/year!" So we agreed that every year the HOA would buy-back a neighbor's house at random.

Every year it went on like this, and every year, someone (besides me) had their house bought out for $100k. While I was never picked, I remained enthusiastic, knowing that each buyback was increasing my overall share of the earnings in the HOA.

Well about a decade later, when I became the sole member of the HOA, a funny thing happened: the oil well dried up.

Lesson learned: do not invest in an oil MLP that issues stock buybacks.
Company stock buybacks increase the value of your company shares. This is a good thing for you.

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Re: I don't understand stock buybacks

Post by HEDGEFUNDIE » Sun Mar 31, 2019 4:57 pm

unclescrooge wrote:
Sun Mar 31, 2019 4:45 pm
HEDGEFUNDIE wrote:
Sun Mar 31, 2019 3:07 pm
RAchip wrote:
Sun Mar 31, 2019 3:00 pm
“technically speaking, buy-backs don't affect the share price”

Haha, then what is the purpose of buybacks? If a company trades at 17x eps and you reduce the number of shares then the eps that you multiply by 17 goes up meaning the share price should go up.

If buybacks dont affect stock price then how do they benefit stockholders?
The reason stock buybacks don’t affect share price is because the company spent its cash to buy back those shares. There are fewer shares now but the company is also worth less.
No, therev are fewer shares but the company is worth the same.
If you got a pizza into 8 slices vs 6, do you get more pizza?
The benefit is future earnings are higher on a per share basis and thus each share would be worth more.
A company that spent $1B on stock buybacks is worth the same after the buyback?

It’s literally worth $1B less.

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unclescrooge
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Re: I don't understand stock buybacks

Post by unclescrooge » Sun Mar 31, 2019 6:02 pm

HEDGEFUNDIE wrote:
Sun Mar 31, 2019 4:57 pm
unclescrooge wrote:
Sun Mar 31, 2019 4:45 pm
HEDGEFUNDIE wrote:
Sun Mar 31, 2019 3:07 pm
RAchip wrote:
Sun Mar 31, 2019 3:00 pm
“technically speaking, buy-backs don't affect the share price”

Haha, then what is the purpose of buybacks? If a company trades at 17x eps and you reduce the number of shares then the eps that you multiply by 17 goes up meaning the share price should go up.

If buybacks dont affect stock price then how do they benefit stockholders?
The reason stock buybacks don’t affect share price is because the company spent its cash to buy back those shares. There are fewer shares now but the company is also worth less.
No, therev are fewer shares but the company is worth the same.
If you got a pizza into 8 slices vs 6, do you get more pizza?
The benefit is future earnings are higher on a per share basis and thus each share would be worth more.
A company that spent $1B on stock buybacks is worth the same after the buyback?

It’s literally worth $1B less.
Tell that Warren buffet. He disputes your logic.

Of course, we know GE loved throwing away they money on their overvalued stock.

MrJones
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Re: I don't understand stock buybacks

Post by MrJones » Sun Mar 31, 2019 6:15 pm

HEDGEFUNDIE wrote:
Sun Mar 31, 2019 4:57 pm
unclescrooge wrote:
Sun Mar 31, 2019 4:45 pm
HEDGEFUNDIE wrote:
Sun Mar 31, 2019 3:07 pm
RAchip wrote:
Sun Mar 31, 2019 3:00 pm
“technically speaking, buy-backs don't affect the share price”

Haha, then what is the purpose of buybacks? If a company trades at 17x eps and you reduce the number of shares then the eps that you multiply by 17 goes up meaning the share price should go up.

If buybacks dont affect stock price then how do they benefit stockholders?
The reason stock buybacks don’t affect share price is because the company spent its cash to buy back those shares. There are fewer shares now but the company is also worth less.
No, therev are fewer shares but the company is worth the same.
If you got a pizza into 8 slices vs 6, do you get more pizza?
The benefit is future earnings are higher on a per share basis and thus each share would be worth more.
A company that spent $1B on stock buybacks is worth the same after the buyback?

It’s literally worth $1B less.
There's more to it than that. Buybacks increase EPS, which is why the stock value increases.

marcopolo
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Re: I don't understand stock buybacks

Post by marcopolo » Sun Mar 31, 2019 6:19 pm

HEDGEFUNDIE wrote:
Sun Mar 31, 2019 4:57 pm
unclescrooge wrote:
Sun Mar 31, 2019 4:45 pm
HEDGEFUNDIE wrote:
Sun Mar 31, 2019 3:07 pm
RAchip wrote:
Sun Mar 31, 2019 3:00 pm
“technically speaking, buy-backs don't affect the share price”

Haha, then what is the purpose of buybacks? If a company trades at 17x eps and you reduce the number of shares then the eps that you multiply by 17 goes up meaning the share price should go up.

If buybacks dont affect stock price then how do they benefit stockholders?
The reason stock buybacks don’t affect share price is because the company spent its cash to buy back those shares. There are fewer shares now but the company is also worth less.
No, therev are fewer shares but the company is worth the same.
If you got a pizza into 8 slices vs 6, do you get more pizza?
The benefit is future earnings are higher on a per share basis and thus each share would be worth more.
A company that spent $1B on stock buybacks is worth the same after the buyback?

It’s literally worth $1B less.
[OT comment removed by admin LadyGeek]

What if after buying back the shares, the company simply held the shares in a brokerage account. So, now instead of having $1B in cash in their account, they have $1B of their own stock, how is the company worth $1B less?
Once in a while you get shown the light, in the strangest of places if you look at it right.

inbox788
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Re: I don't understand stock buybacks

Post by inbox788 » Sun Mar 31, 2019 6:22 pm

HEDGEFUNDIE wrote:
Sun Mar 31, 2019 4:57 pm
A company that spent $1B on stock buybacks is worth the same after the buyback?

It’s literally worth $1B less.
Many companies that can afford to spend $1B on stock buybacks are literally worth billions of dollars MORE!
Apple began buying back shares at the end of 2012. Over the span of six years, Apple has spent $239 billion buying back 2.1 billion shares at an average price of $115 per share. As seen in Exhibit 1, Apple’s total number of shares outstanding has been on a steady decline and is now 25% below peak levels. This is another way of saying Apple has repurchased 25% of itself over the past six years.
https://www.aboveavalon.com/notes/2018/ ... re-buyback

RAchip
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Re: I don't understand stock buybacks

Post by RAchip » Sun Mar 31, 2019 6:30 pm

If a stock historically trades at about a p/e of 17 and it has $1 per share in earnings, its market price would be $17 per share. If it buys back shares so that its earnings per share goes up from $1 per share to $1.10 per share you would expect its stock to trade at $18.70 per share (17 x $1.10).

Stock buy backs in theory increase the market price of stock. Buy-backs are not giving away money for nothing. The company is buying an asset (stock) that is worth at least what is being paid and hopefully more.

HEDGEFUNDIE
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Re: I don't understand stock buybacks

Post by HEDGEFUNDIE » Sun Mar 31, 2019 6:52 pm

marcopolo wrote:
Sun Mar 31, 2019 6:19 pm
HEDGEFUNDIE wrote:
Sun Mar 31, 2019 4:57 pm
unclescrooge wrote:
Sun Mar 31, 2019 4:45 pm
HEDGEFUNDIE wrote:
Sun Mar 31, 2019 3:07 pm
RAchip wrote:
Sun Mar 31, 2019 3:00 pm
“technically speaking, buy-backs don't affect the share price”

Haha, then what is the purpose of buybacks? If a company trades at 17x eps and you reduce the number of shares then the eps that you multiply by 17 goes up meaning the share price should go up.

If buybacks dont affect stock price then how do they benefit stockholders?
The reason stock buybacks don’t affect share price is because the company spent its cash to buy back those shares. There are fewer shares now but the company is also worth less.
No, therev are fewer shares but the company is worth the same.
If you got a pizza into 8 slices vs 6, do you get more pizza?
The benefit is future earnings are higher on a per share basis and thus each share would be worth more.
A company that spent $1B on stock buybacks is worth the same after the buyback?

It’s literally worth $1B less.
[OT comment removed by admin LadyGeek]

What if after buying back the shares, the company simply held the shares in a brokerage account. So, now instead of having $1B in cash in their account, they have $1B of their own stock, how is the company worth $1B less?
[OT comment removed by admin LadyGeek]

Stock that is bought back is retired. It disappears. The shares outstanding are reduced. The remaining shareholders each own a slightly larger portion of the company than before.

But the company, to buy back that stock, had to spend cash that was on its balance sheet.

So as a remaining shareholder you get a slightly larger slice of a slightly smaller pie.

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Re: I don't understand stock buybacks

Post by HEDGEFUNDIE » Sun Mar 31, 2019 6:54 pm

inbox788 wrote:
Sun Mar 31, 2019 6:22 pm
HEDGEFUNDIE wrote:
Sun Mar 31, 2019 4:57 pm
A company that spent $1B on stock buybacks is worth the same after the buyback?

It’s literally worth $1B less.
Many companies that can afford to spend $1B on stock buybacks are literally worth billions of dollars MORE!
Apple began buying back shares at the end of 2012. Over the span of six years, Apple has spent $239 billion buying back 2.1 billion shares at an average price of $115 per share. As seen in Exhibit 1, Apple’s total number of shares outstanding has been on a steady decline and is now 25% below peak levels. This is another way of saying Apple has repurchased 25% of itself over the past six years.
https://www.aboveavalon.com/notes/2018/ ... re-buyback
Apple becoming more valuable has nothing to do with the stock buyback and everything to do with the fact it’s a hugely profitable company.
Last edited by HEDGEFUNDIE on Sun Mar 31, 2019 7:00 pm, edited 1 time in total.

marcopolo
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Re: I don't understand stock buybacks

Post by marcopolo » Sun Mar 31, 2019 6:57 pm

I think perhaps some the confusio0n around buybacks is that there are effectively a number of things going on at once that may cloud how they are perceived.

I think it helps to think about it as a three step process:

1) Company buys shares of their stock
2) Company distributes those shares to remaining shareholders
3) Company does a reverse split of their shares

To illustrate, consider this example.
A company has a market cap of $2B, with 2B outstanding shares (worth $1 each) held by 2M people owning 1000 share each.
The company has $1B sitting in the bank (this is part of their market cap).

1) Company spend the $1B in cash to buy up 1B shares from 1M shareholders. The remaining 1M shareholders hold on to their shares still worth $1 each
2) Company distributes the 1B shares they now own to the 1M share holders still remaining.
The company is now only worth $1B. Each of the 1M shareholder has 2000 shares worth $.50 each. The value of each share drops, just like it would if a cash dividend was paid. These shareholders could sell the new share they got if they prefer a cash dividend. The company has effectively returned the cash it was holding to their shareholders, in the form of new shares.
3) Company 2:1 reverse split. Now each shareholder has 1000 share worth $1 each, and they have a claim on twice the fraction of future earning than they did before.

This is effectively what happens when a company buys back shares and retires them (steps 2 and 3 happen behind the scenes).

This gives the shareholder better control of how to realize the dividend that was distributed, and usually is more tax-efficient, which is why a stock buyback is preferable to a cash dividend in most cases.
Once in a while you get shown the light, in the strangest of places if you look at it right.

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Re: I don't understand stock buybacks

Post by marcopolo » Sun Mar 31, 2019 7:00 pm

HEDGEFUNDIE wrote:
Sun Mar 31, 2019 6:52 pm
marcopolo wrote:
Sun Mar 31, 2019 6:19 pm
HEDGEFUNDIE wrote:
Sun Mar 31, 2019 4:57 pm
unclescrooge wrote:
Sun Mar 31, 2019 4:45 pm
HEDGEFUNDIE wrote:
Sun Mar 31, 2019 3:07 pm


The reason stock buybacks don’t affect share price is because the company spent its cash to buy back those shares. There are fewer shares now but the company is also worth less.
No, therev are fewer shares but the company is worth the same.
If you got a pizza into 8 slices vs 6, do you get more pizza?
The benefit is future earnings are higher on a per share basis and thus each share would be worth more.
A company that spent $1B on stock buybacks is worth the same after the buyback?

It’s literally worth $1B less.
I don't think you understand how stocks work.

What if after buying back the shares, the company simply held the shares in a brokerage account. So, now instead of having $1B in cash in their account, they have $1B of their own stock, how is the company worth $1B less?
No, you’re the one who doesn’t understand how stocks work.

Stock that is bought back is retired. It disappears. The shares outstanding are reduced. The remaining shareholders each own a slightly larger portion of the company than before.

But the company, to buy back that stock, had to spend cash that was on its balance sheet.

So as a remaining shareholder you get a slightly larger slice of a slightly smaller pie.
It is the retiring, not the buyback, that reduces the company value. But, this is exactly how a cash dividend works as well. By retiring the stock, the company is effectively distributing the cash they held in the form of new equity. The shareholder can always sell some if they prefer a cash dividend. See my post above for an example.
Once in a while you get shown the light, in the strangest of places if you look at it right.

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Re: I don't understand stock buybacks

Post by HEDGEFUNDIE » Sun Mar 31, 2019 7:15 pm

marcopolo wrote:
Sun Mar 31, 2019 6:57 pm
I think perhaps some the confusio0n around buybacks is that there are effectively a number of things going on at once that may cloud how they are perceived.

I think it helps to think about it as a three step process:

1) Company buys shares of their stock
2) Company distributes those shares to remaining shareholders
3) Company does a reverse split of their shares

To illustrate, consider this example.
A company has a market cap of $2B, with 2B outstanding shares (worth $1 each) held by 2M people owning 1000 share each.
The company has $1B sitting in the bank (this is part of their market cap).

1) Company spend the $1B in cash to buy up 1B shares from 1M shareholders. The remaining 1M shareholders hold on to their shares still worth $1 each
2) Company distributes the 1B shares they now own to the 1M share holders still remaining.
The company is now only worth $1B. Each of the 1M shareholder has 2000 shares worth $.50 each. The value of each share drops, just like it would if a cash dividend was paid. These shareholders could sell the new share they got if they prefer a cash dividend. The company has effectively returned the cash it was holding to their shareholders, in the form of new shares.
3) Company 2:1 reverse split. Now each shareholder has 1000 share worth $1 each, and they have a claim on twice the fraction of future earning than they did before.

This is effectively what happens when a company buys back shares and retires them (steps 2 and 3 happen behind the scenes).

This gives the shareholder better control of how to realize the dividend that was distributed, and usually is more tax-efficient, which is why a stock buyback is preferable to a cash dividend in most cases.
I agree entirely with this explanation.

It plainly shows that the stock price is unchanged post-buyback, even though each remaining share has double the claim on future earnings, because the assets of the company have halved.

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Re: I don't understand stock buybacks

Post by marcopolo » Sun Mar 31, 2019 7:20 pm

HEDGEFUNDIE wrote:
Sun Mar 31, 2019 7:15 pm
marcopolo wrote:
Sun Mar 31, 2019 6:57 pm
I think perhaps some the confusio0n around buybacks is that there are effectively a number of things going on at once that may cloud how they are perceived.

I think it helps to think about it as a three step process:

1) Company buys shares of their stock
2) Company distributes those shares to remaining shareholders
3) Company does a reverse split of their shares

To illustrate, consider this example.
A company has a market cap of $2B, with 2B outstanding shares (worth $1 each) held by 2M people owning 1000 share each.
The company has $1B sitting in the bank (this is part of their market cap).

1) Company spend the $1B in cash to buy up 1B shares from 1M shareholders. The remaining 1M shareholders hold on to their shares still worth $1 each
2) Company distributes the 1B shares they now own to the 1M share holders still remaining.
The company is now only worth $1B. Each of the 1M shareholder has 2000 shares worth $.50 each. The value of each share drops, just like it would if a cash dividend was paid. These shareholders could sell the new share they got if they prefer a cash dividend. The company has effectively returned the cash it was holding to their shareholders, in the form of new shares.
3) Company 2:1 reverse split. Now each shareholder has 1000 share worth $1 each, and they have a claim on twice the fraction of future earning than they did before.

This is effectively what happens when a company buys back shares and retires them (steps 2 and 3 happen behind the scenes).

This gives the shareholder better control of how to realize the dividend that was distributed, and usually is more tax-efficient, which is why a stock buyback is preferable to a cash dividend in most cases.
I agree entirely with this explanation.

It plainly shows that the stock price is unchanged post-buyback, even though each remaining share has double the claim on future earnings, because the assets of the company have halved.
I may have misunderstood you. I thought you were making the case that a dividend would give better value to the shareholder than a stock buyback.
Once in a while you get shown the light, in the strangest of places if you look at it right.

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Re: I don't understand stock buybacks

Post by inbox788 » Sun Mar 31, 2019 7:22 pm

HEDGEFUNDIE wrote:
Sun Mar 31, 2019 6:54 pm
Apple becoming more valuable has nothing to do with the stock buyback and everything to do with the fact it’s a hugely profitable company.
It's not only Apple, other profitable companies have cash for buybacks too, and it's a self feeding cycle with great momentum. Unprofitable companies don't have $1B to spend on buybacks.
Cisco Systems Inc. (CSCO): +16.0% YTD, +31.6% 1-year, $25 billion buyback
Wells Fargo & Co. (WFC): +0.3% YTD, +4.7% 1-year, $22.6 billion buyback
PepsiCo Inc. (PEP): -8.4% YTD, +1.6% 1-year, $15 billion buyback
Amgen Inc. (AMGN): +5.5% YTD, +5.9% 1-year, $10 billion buyback
Alphabet Inc. (GOOGL), the parent of Google: +5.0% YTD, +30.7% 1-year, $8.6 billion buyback
Visa Inc. (V): +7.3% YTD, +39.9% 1-year, $7.5 billion buyback
eBay Inc. (EBAY): 15.3% YTD, 28.9% 1-year, $6 billion buyback
Applied Materials Inc. (AMAT): +10.3% YTD, +58.0%, $6 billion buyback
Mondelez International Inc. (MDLZ): +2.7% YTD, +3.4% 1-year, $6 billion buyback
Lowe's Companies Inc. (LOW): +3.3% YTD, +25.1% 1-year, $5 billion buyback
https://www.investopedia.com/news/10-st ... -buybacks/

https://www.marketbeat.com/stock-buybacks/

These companies are going to be some of the biggest winners if the market keeps going up and some of the biggest losers if we crash.
Last edited by inbox788 on Sun Mar 31, 2019 7:23 pm, edited 1 time in total.

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Re: I don't understand stock buybacks

Post by HEDGEFUNDIE » Sun Mar 31, 2019 7:22 pm

marcopolo wrote:
Sun Mar 31, 2019 7:20 pm
HEDGEFUNDIE wrote:
Sun Mar 31, 2019 7:15 pm
marcopolo wrote:
Sun Mar 31, 2019 6:57 pm
I think perhaps some the confusio0n around buybacks is that there are effectively a number of things going on at once that may cloud how they are perceived.

I think it helps to think about it as a three step process:

1) Company buys shares of their stock
2) Company distributes those shares to remaining shareholders
3) Company does a reverse split of their shares

To illustrate, consider this example.
A company has a market cap of $2B, with 2B outstanding shares (worth $1 each) held by 2M people owning 1000 share each.
The company has $1B sitting in the bank (this is part of their market cap).

1) Company spend the $1B in cash to buy up 1B shares from 1M shareholders. The remaining 1M shareholders hold on to their shares still worth $1 each
2) Company distributes the 1B shares they now own to the 1M share holders still remaining.
The company is now only worth $1B. Each of the 1M shareholder has 2000 shares worth $.50 each. The value of each share drops, just like it would if a cash dividend was paid. These shareholders could sell the new share they got if they prefer a cash dividend. The company has effectively returned the cash it was holding to their shareholders, in the form of new shares.
3) Company 2:1 reverse split. Now each shareholder has 1000 share worth $1 each, and they have a claim on twice the fraction of future earning than they did before.

This is effectively what happens when a company buys back shares and retires them (steps 2 and 3 happen behind the scenes).

This gives the shareholder better control of how to realize the dividend that was distributed, and usually is more tax-efficient, which is why a stock buyback is preferable to a cash dividend in most cases.
I agree entirely with this explanation.

It plainly shows that the stock price is unchanged post-buyback, even though each remaining share has double the claim on future earnings, because the assets of the company have halved.
I may have misunderstood you. I thought you were making the case that a dividend would give better value to the shareholder than a stock buyback.
No, what I was arguing against was the simplistic, erroneous idea that stock buyback -> increased EPS -> increased share price.

Which totally ignores the fact that excess cash is reflected in share prices and is used to pay for the buyback!
Last edited by HEDGEFUNDIE on Sun Mar 31, 2019 7:27 pm, edited 1 time in total.

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Re: I don't understand stock buybacks

Post by HEDGEFUNDIE » Sun Mar 31, 2019 7:24 pm

inbox788 wrote:
Sun Mar 31, 2019 7:22 pm
HEDGEFUNDIE wrote:
Sun Mar 31, 2019 6:54 pm
Apple becoming more valuable has nothing to do with the stock buyback and everything to do with the fact it’s a hugely profitable company.
It's not only Apple, other profitable companies have cash for buybacks too, and it's a self feeding cycle with great momentum. Unprofitable companies don't have $1B to spend on buybacks.
Cisco Systems Inc. (CSCO): +16.0% YTD, +31.6% 1-year, $25 billion buyback
Wells Fargo & Co. (WFC): +0.3% YTD, +4.7% 1-year, $22.6 billion buyback
PepsiCo Inc. (PEP): -8.4% YTD, +1.6% 1-year, $15 billion buyback
Amgen Inc. (AMGN): +5.5% YTD, +5.9% 1-year, $10 billion buyback
Alphabet Inc. (GOOGL), the parent of Google: +5.0% YTD, +30.7% 1-year, $8.6 billion buyback
Visa Inc. (V): +7.3% YTD, +39.9% 1-year, $7.5 billion buyback
eBay Inc. (EBAY): 15.3% YTD, 28.9% 1-year, $6 billion buyback
Applied Materials Inc. (AMAT): +10.3% YTD, +58.0%, $6 billion buyback
Mondelez International Inc. (MDLZ): +2.7% YTD, +3.4% 1-year, $6 billion buyback
Lowe's Companies Inc. (LOW): +3.3% YTD, +25.1% 1-year, $5 billion buyback
https://www.investopedia.com/news/10-st ... -buybacks/
I don’t think we disagree.

Profitable companies generate cash.

Cash can be used to pay back shareholders, either through dividend or stock buyback.

The more profitable a company, the more it can pay dividends or buy back stock.

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Re: I don't understand stock buybacks

Post by marcopolo » Sun Mar 31, 2019 7:30 pm

HEDGEFUNDIE wrote:
Sun Mar 31, 2019 7:22 pm
marcopolo wrote:
Sun Mar 31, 2019 7:20 pm
HEDGEFUNDIE wrote:
Sun Mar 31, 2019 7:15 pm
marcopolo wrote:
Sun Mar 31, 2019 6:57 pm
I think perhaps some the confusio0n around buybacks is that there are effectively a number of things going on at once that may cloud how they are perceived.

I think it helps to think about it as a three step process:

1) Company buys shares of their stock
2) Company distributes those shares to remaining shareholders
3) Company does a reverse split of their shares

To illustrate, consider this example.
A company has a market cap of $2B, with 2B outstanding shares (worth $1 each) held by 2M people owning 1000 share each.
The company has $1B sitting in the bank (this is part of their market cap).

1) Company spend the $1B in cash to buy up 1B shares from 1M shareholders. The remaining 1M shareholders hold on to their shares still worth $1 each
2) Company distributes the 1B shares they now own to the 1M share holders still remaining.
The company is now only worth $1B. Each of the 1M shareholder has 2000 shares worth $.50 each. The value of each share drops, just like it would if a cash dividend was paid. These shareholders could sell the new share they got if they prefer a cash dividend. The company has effectively returned the cash it was holding to their shareholders, in the form of new shares.
3) Company 2:1 reverse split. Now each shareholder has 1000 share worth $1 each, and they have a claim on twice the fraction of future earning than they did before.

This is effectively what happens when a company buys back shares and retires them (steps 2 and 3 happen behind the scenes).

This gives the shareholder better control of how to realize the dividend that was distributed, and usually is more tax-efficient, which is why a stock buyback is preferable to a cash dividend in most cases.
I agree entirely with this explanation.

It plainly shows that the stock price is unchanged post-buyback, even though each remaining share has double the claim on future earnings, because the assets of the company have halved.
I may have misunderstood you. I thought you were making the case that a dividend would give better value to the shareholder than a stock buyback.
No, what I was arguing against was the simplistic, erroneous idea that stock buyback -> increased EPS -> increased share price.

Which totally ignores the fact that excess cash is reflected in share prices and is used to pay for the buyback!
Agreed. EPS can often increase because there is less cash drag after a buyback, assuming the business is generating better returns than the cash was. But, you are right it is not a given.
Once in a while you get shown the light, in the strangest of places if you look at it right.

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Re: I don't understand stock buybacks

Post by LadyGeek » Sun Mar 31, 2019 7:35 pm

I removed some off-topic comments. As a reminder, see: General Etiquette
At all times we must conduct ourselves in a respectful manner to other posters.
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Re: I don't understand stock buybacks

Post by corpgator » Sun Mar 31, 2019 7:50 pm

Stock buybacks should be illegal and were rarely used until the 80s. A dividend should be more than enough, but insiders can't benefit from dividends like they can from buybacks.

They extract profits that can be re-invested in the company and instead gives them to shareholders and especially top executives who can manipulate the stock to extract the most profit for themselves. Stock buybacks lead to higher share prices which in turn help executives get bigger bonuses for having those higher share prices without actually helping the business in any way. Now total share buybacks surpass total dividends each year.

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Re: I don't understand stock buybacks

Post by munemaker » Sun Mar 31, 2019 8:07 pm

vineviz wrote:
Sun Mar 31, 2019 2:06 pm

For most investors there should be no clear favorite. ...
Both are returning cash to shareholders, they are just doing it via different mechanisms. Here's a more on-point allegory: if someone hands you a $5 bill, are you richer if you put it pants pocket or your shirt pocket?
Stock dividends are taxed immediately. Stock buybacks result in a higher stock price which will be taxed at the capital gains rate if and when you sell the stock. And there are some people (non-investors) that are pushing back on stock buybacks for that reason.

So...if I was paying a higher tax rate immediately on the $5 dividend in my pants pocket vs paying a lower tax rate in the distant future for the $5 unrealized gain in my shirt pocket, I will take the shirt pocket, ok?
Last edited by munemaker on Sun Mar 31, 2019 9:14 pm, edited 1 time in total.

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Re: I don't understand stock buybacks

Post by munemaker » Sun Mar 31, 2019 9:11 pm

corpgator wrote:
Sun Mar 31, 2019 7:50 pm
Stock buybacks should be illegal and were rarely used until the 80s. A dividend should be more than enough, but insiders can't benefit from dividends like they can from buybacks.

They extract profits that can be re-invested in the company and instead gives them to shareholders and especially top executives who can manipulate the stock to extract the most profit for themselves. Stock buybacks lead to higher share prices which in turn help executives get bigger bonuses for having those higher share prices without actually helping the business in any way. Now total share buybacks surpass total dividends each year.
Sorry, but stock buybacks should not be illegal. If companies can issue stock when they need capital, they should be able to buy it back when they have excess capital. Sure, shareholders (and corporate executives who are paid in stock) make money, but that's why we invest.

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Re: I don't understand stock buybacks

Post by willthrill81 » Sun Mar 31, 2019 9:24 pm

Both stock buybacks and dividends are, in the absence of taxes, neutral in their impact to investors. Neither creates or destroys value.

If I own a company and transfer $100 from the business's checking account to my own (i.e. dividend), my net worth hasn't changed.

If I, my brother, and my sister own a company and we use cash from the business to buy out my brother's share (i.e. stock buyback), my net worth hasn't changed.

Neither instance results in me having greater net worth than I had to begin with.
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Re: I don't understand stock buybacks

Post by Bacchus01 » Sun Mar 31, 2019 9:37 pm

HEDGEFUNDIE wrote:
Sun Mar 31, 2019 4:57 pm
unclescrooge wrote:
Sun Mar 31, 2019 4:45 pm
HEDGEFUNDIE wrote:
Sun Mar 31, 2019 3:07 pm
RAchip wrote:
Sun Mar 31, 2019 3:00 pm
“technically speaking, buy-backs don't affect the share price”

Haha, then what is the purpose of buybacks? If a company trades at 17x eps and you reduce the number of shares then the eps that you multiply by 17 goes up meaning the share price should go up.

If buybacks dont affect stock price then how do they benefit stockholders?
The reason stock buybacks don’t affect share price is because the company spent its cash to buy back those shares. There are fewer shares now but the company is also worth less.
No, therev are fewer shares but the company is worth the same.
If you got a pizza into 8 slices vs 6, do you get more pizza?
The benefit is future earnings are higher on a per share basis and thus each share would be worth more.
A company that spent $1B on stock buybacks is worth the same after the buyback?

It’s literally worth $1B less.
If book value or balance sheet is your measure of a company’s worth, then maybe you’re right.

But that is not how most businesses are valued.

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Re: I don't understand stock buybacks

Post by Bacchus01 » Sun Mar 31, 2019 9:39 pm

corpgator wrote:
Sun Mar 31, 2019 7:50 pm
Stock buybacks should be illegal and were rarely used until the 80s. A dividend should be more than enough, but insiders can't benefit from dividends like they can from buybacks.

They extract profits that can be re-invested in the company and instead gives them to shareholders and especially top executives who can manipulate the stock to extract the most profit for themselves. Stock buybacks lead to higher share prices which in turn help executives get bigger bonuses for having those higher share prices without actually helping the business in any way. Now total share buybacks surpass total dividends each year.
Bonuses are rarely paid on stock price anymore.

But they can be valued on stock price, and “manipulating” the stock price to be higher somehow is good for shareholders, no? Why would it be bad?

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Re: I don't understand stock buybacks

Post by munemaker » Sun Mar 31, 2019 9:42 pm

willthrill81 wrote:
Sun Mar 31, 2019 9:24 pm
Both stock buybacks and dividends are, in the absence of taxes, neutral in their impact to investors. Neither creates or destroys value.
True, but we do not live in a world that where taxes are absent so why make such a statement? Quite the opposite. So stock buybacks are much preferred over dividends due to their favorable tax treatment. The situation is very similar to why a capital gain is tax preferable relative to a dividend.

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Re: I don't understand stock buybacks

Post by willthrill81 » Sun Mar 31, 2019 9:44 pm

munemaker wrote:
Sun Mar 31, 2019 9:42 pm
willthrill81 wrote:
Sun Mar 31, 2019 9:24 pm
Both stock buybacks and dividends are, in the absence of taxes, neutral in their impact to investors. Neither creates or destroys value.
True, but we do not live in a world that where taxes are absent so why make such a statement?
The reason I said that is to illustrate the point made in the last sentence. It's already been stated in this thread repeatedly that in taxable accounts, dividends are less favorable, so I didn't feel the need to repeat it, but it's certainly true. In a tax-advantaged account, they truly are neutral.

And yes, some of us are blessed to have no need at all for taxable accounts. 8-)
Last edited by willthrill81 on Sun Mar 31, 2019 9:46 pm, edited 1 time in total.
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Re: I don't understand stock buybacks

Post by HEDGEFUNDIE » Sun Mar 31, 2019 9:45 pm

Bacchus01 wrote:
Sun Mar 31, 2019 9:37 pm
HEDGEFUNDIE wrote:
Sun Mar 31, 2019 4:57 pm
unclescrooge wrote:
Sun Mar 31, 2019 4:45 pm
HEDGEFUNDIE wrote:
Sun Mar 31, 2019 3:07 pm
RAchip wrote:
Sun Mar 31, 2019 3:00 pm
“technically speaking, buy-backs don't affect the share price”

Haha, then what is the purpose of buybacks? If a company trades at 17x eps and you reduce the number of shares then the eps that you multiply by 17 goes up meaning the share price should go up.

If buybacks dont affect stock price then how do they benefit stockholders?
The reason stock buybacks don’t affect share price is because the company spent its cash to buy back those shares. There are fewer shares now but the company is also worth less.
No, therev are fewer shares but the company is worth the same.
If you got a pizza into 8 slices vs 6, do you get more pizza?
The benefit is future earnings are higher on a per share basis and thus each share would be worth more.
A company that spent $1B on stock buybacks is worth the same after the buyback?

It’s literally worth $1B less.
If book value or balance sheet is your measure of a company’s worth, then maybe you’re right.

But that is not how most businesses are valued.
This is a Finance 101 concept.

The market (not book) equity value of a company is equal to the excess cash on the balance sheet plus the discounted cash flows expected to be generated by the operating assets of the company.

If I had the choice of buying one of two companies that were identical except for the fact that one has $1B more cash than the other, than that first company would cost me $1B more than the second. How could it be otherwise?

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Re: I don't understand stock buybacks

Post by willthrill81 » Sun Mar 31, 2019 9:49 pm

HEDGEFUNDIE wrote:
Sun Mar 31, 2019 9:45 pm
Bacchus01 wrote:
Sun Mar 31, 2019 9:37 pm
HEDGEFUNDIE wrote:
Sun Mar 31, 2019 4:57 pm
unclescrooge wrote:
Sun Mar 31, 2019 4:45 pm
HEDGEFUNDIE wrote:
Sun Mar 31, 2019 3:07 pm


The reason stock buybacks don’t affect share price is because the company spent its cash to buy back those shares. There are fewer shares now but the company is also worth less.
No, therev are fewer shares but the company is worth the same.
If you got a pizza into 8 slices vs 6, do you get more pizza?
The benefit is future earnings are higher on a per share basis and thus each share would be worth more.
A company that spent $1B on stock buybacks is worth the same after the buyback?

It’s literally worth $1B less.
If book value or balance sheet is your measure of a company’s worth, then maybe you’re right.

But that is not how most businesses are valued.
This is a Finance 101 concept.

The market (not book) equity value of a company is equal to the excess cash on the balance sheet plus the discounted cash flows expected to be generated by the operating assets of the company.
I would break out the "FINC 101" lingo just yet. My illustration above demonstrates that neither buybacks nor dividends increase or decrease shareholder value directly. The value is created when the business used its resources to create profit and/or holds the promise of creating that profit in the future in the minds of market participants. Whether that value is then distributed through dividends or via a reduction of shares outstanding leading to a higher share price is irrelevant until taxes enter the picture, in which case buybacks are preferred.
Last edited by willthrill81 on Sun Mar 31, 2019 9:50 pm, edited 1 time in total.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

Topic Author
refinedchain
Posts: 7
Joined: Tue Feb 17, 2015 10:32 am

Re: I don't understand stock buybacks

Post by refinedchain » Sun Mar 31, 2019 9:50 pm

MrJones wrote:
Sun Mar 31, 2019 3:32 pm
refinedchain wrote:
Sun Mar 31, 2019 2:28 pm
unclescrooge wrote:
Sun Mar 31, 2019 2:23 pm

I'm also confused by what happened to these 10 extra houses worth $1m.

If the sole remaining homeowner chooses to burn them down, that's his fault, not his accountant's for suggesting buying them in lieu of distributing a dividend.
I would concede I am not very creative and am not sure what I would do with 10 houses in a small rural neighborhood with a defunct oil rig next door.
Are you trolling us? If you bought Apple stocks, and went through 10 buybacks, does that somehow automatically make you the (uncreative) sole owner of the business?
Sorry, not my intent. I was slow to pick up that I would be left with something of value. I was stuck in the mindset that "value = operating earnings" and didn't see how a business could still have value after it closed its doors.

Bastiat
Posts: 187
Joined: Thu May 26, 2016 11:07 am

Re: I don't understand stock buybacks

Post by Bastiat » Sun Mar 31, 2019 10:00 pm

Double post.
Last edited by Bastiat on Sun Mar 31, 2019 10:10 pm, edited 1 time in total.

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