When a company repurchases its shares, does the company become less valuable?

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traderlmd
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When a company repurchases its shares, does the company become less valuable?

Post by traderlmd » Fri Nov 29, 2019 4:53 am

If there was a $100 million company with 100 shares (each share worth $1 million) and it repurchased 1 share, would the company now be worth $99 million (with each share still worth $1 million) or would the company still be worth $100 million (with each share now worth $1.01 million)?

The former would imply that a company could raise its P/E just by buying back shares. The latter does not imply that because EPS would increase proportionally with share price.

If the answer is the former then my question is why does value get added to company when it issues shares but not taken away when it buys back shares (it is my understanding that, if a $99 million company with 99 shares issued 1 share valued at $1 million, then the company would now be worth $100 million)?

Thanks

awval999
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Re: When a company repurchases its shares, does the company become less valuable?

Post by awval999 » Fri Nov 29, 2019 6:32 am

The thought is that the market would correct upon share buyback or dilution.

In your example, the company is still valued at $100M. Each share would increase from $1M to $1.01M.

In a secondary offering, when the company dilutes the shares, the stock price goes down. The company is still worth $100M, but lets say the company dilutes by 100% and doubles its outstanding shares, the market would correct and each share would only be worth $0.5M each.

Of course the day to day fluctuations of the stock market will out weigh a small 1% share buyback. Many investors would prefer that the additional funds are used to invest and grow the business. Typically share buybacks occur when the company has lots of additional cash but don't have a good place to invest. They can also pay out dividends as well of course.

Uncorrelated
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Re: When a company repurchases its shares, does the company become less valuable?

Post by Uncorrelated » Fri Nov 29, 2019 7:32 am

Neither option is correct.

Suppose a company is worth $100m: $90m in inventory and brand value, $10m in cash. The company uses the cash to buy AAPL stocks. The company is still worth $100m.

When a company buys back shares, the value of a single share doesn't change. 1 share still represents the same 0.001% of the company. However, the total number of outstanding shares may change as a result of buybacks.

Topic Author
traderlmd
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Re: When a company repurchases its shares, does the company become less valuable?

Post by traderlmd » Fri Nov 29, 2019 8:10 am

Uncorrelated wrote:
Fri Nov 29, 2019 7:32 am
Neither option is correct.

Suppose a company is worth $100m: $90m in inventory and brand value, $10m in cash. The company uses the cash to buy AAPL stocks. The company is still worth $100m.

When a company buys back shares, the value of a single share doesn't change. 1 share still represents the same 0.001% of the company. However, the total number of outstanding shares may change as a result of buybacks.

So the number of issued shares would remain the same but the number of outstanding shares would decrease. So, is EPS earnings per issued share or earnings per outstanding share?

MathIsMyWayr
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Re: When a company repurchases its shares, does the company become less valuable?

Post by MathIsMyWayr » Fri Nov 29, 2019 8:11 am

traderlmd wrote:
Fri Nov 29, 2019 4:53 am
If there was a $100 million company with 100 shares (each share worth $1 million) and it repurchased 1 share, would the company now be worth $99 million (with each share still worth $1 million) or would the company still be worth $100 million (with each share now worth $1.01 million)?
awval999 wrote:
Fri Nov 29, 2019 6:32 am
The thought is that the market would correct upon share buyback or dilution.

In your example, the company is still valued at $100M. Each share would increase from $1M to $1.01M.
There is a critical missing piece of explanation regarding dividends vs. share buybacks here.

Everybody is busy preaching that dividends are not free money and the stock price dips by the amount the company pays out as dividends because the net value of the company decreases by the cash outflow. However, in the case of a share buyback, they claim that share holders benefit from a buyback because each share holder is entitled to a large percentage of the value of the company among a smaller number of share holders. The total number of remaining shares decreases by the exact percentage as that of the change of the company's net value through the cash payout for a stock buyback. Again, there is no free lunch.

However, dividends and share buybacks do not have the same financial effect on the share holders under certain conditions.
I will give an example of a share holder who wants to keep investing in the company.
  • Assumption
    $100: share price before dividends
    100,000: total outstanding shares before buyback
    2%: dividend payout ratio or share buyback percentage
    98: number of my shares
  • Dividends:
    $98=$100-2%*$100: price after dividends
    100=98+98*$2/$98: number of my shares by purchasing 2 shares with the dividends if I do not pay tax on dividends
    0.1%=100/100,000: % of my shares
  • Buyback:
    98,000: number of the total outstanding shares
    0.1% =98/98,000: % of my shares
In the above example, the share holder end up with the same result if he does not pay tax on dividends. If he pays tax on dividends, buybacks appear better than dividends, but some of the tax benefits of buybacks is tax deferral. Please note that the net value of the company is identical after paying dividends or spending the same amount of money on a share buyback.
Last edited by MathIsMyWayr on Fri Nov 29, 2019 8:21 am, edited 2 times in total.

Topic Author
traderlmd
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Re: When a company repurchases its shares, does the company become less valuable?

Post by traderlmd » Fri Nov 29, 2019 8:13 am

awval999 wrote:
Fri Nov 29, 2019 6:32 am

In a secondary offering, when the company dilutes the shares, the stock price goes down. The company is still worth $100M, but lets say the company dilutes by 100% and doubles its outstanding shares, the market would correct and each share would only be worth $0.5M each.

So the company's book value would increase but their market cap would stay the same. So their price to book would decrease?

grok87
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Re: When a company repurchases its shares, does the company become less valuable?

Post by grok87 » Fri Nov 29, 2019 8:19 am

this is a complicated question.

it's interesting to look at how Warren Buffet looks at it vis a vis buybacks of Berkshire hathaway shares
https://www.cnbc.com/2018/08/31/warren- ... backs.html

basically he used to buy back if BRK's share price was below 1.1 x book value, then loosened to 1.2x book value, and now if below his estimate of "intrinsic value"

so clearly he is suggesting if he were to buy back shares when the company is trading at a sky-high valuation, then that would have a negative impact on the company's value.
RIP Mr. Bogle.

totallystudly
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Re: When a company repurchases its shares, does the company become less valuable?

Post by totallystudly » Fri Nov 29, 2019 8:21 am

It is a way of juicing your EPS when you can't grow much organically. IBM did this for years to increase their EPS (same earnings divided by shrinking number of shares) and it hasn't done much to actually increase shareholder wealth.

I'd rather have the cash dividends


Topic Author
traderlmd
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Re: When a company repurchases its shares, does the company become less valuable?

Post by traderlmd » Fri Nov 29, 2019 8:38 am

MathIsMyWayr wrote:
Fri Nov 29, 2019 8:11 am
traderlmd wrote:
Fri Nov 29, 2019 4:53 am
If there was a $100 million company with 100 shares (each share worth $1 million) and it repurchased 1 share, would the company now be worth $99 million (with each share still worth $1 million) or would the company still be worth $100 million (with each share now worth $1.01 million)?
awval999 wrote:
Fri Nov 29, 2019 6:32 am
The thought is that the market would correct upon share buyback or dilution.

In your example, the company is still valued at $100M. Each share would increase from $1M to $1.01M.
There is a critical missing piece of explanation regarding dividends vs. share buybacks here.

Everybody is busy preaching that dividends are not free money and the stock price dips by the amount the company pays out as dividends because the net value of the company decreases by the cash outflow. However, in the case of a share buyback, they claim that share holders benefit from a buyback because each share holder is entitled to a large percentage of the value of the company among a smaller number of share holders. The total number of remaining shares decreases by the exact percentage as that of the change of the company's net value through the cash payout for a stock buyback. Again, there is no free lunch.
So a company's market cap would, in fact, decrease in the case of a share buyback?

MathIsMyWayr
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Re: When a company repurchases its shares, does the company become less valuable?

Post by MathIsMyWayr » Fri Nov 29, 2019 8:47 am

traderlmd wrote:
Fri Nov 29, 2019 8:38 am
MathIsMyWayr wrote:
Fri Nov 29, 2019 8:11 am
traderlmd wrote:
Fri Nov 29, 2019 4:53 am
If there was a $100 million company with 100 shares (each share worth $1 million) and it repurchased 1 share, would the company now be worth $99 million (with each share still worth $1 million) or would the company still be worth $100 million (with each share now worth $1.01 million)?
awval999 wrote:
Fri Nov 29, 2019 6:32 am
The thought is that the market would correct upon share buyback or dilution.

In your example, the company is still valued at $100M. Each share would increase from $1M to $1.01M.
There is a critical missing piece of explanation regarding dividends vs. share buybacks here.

Everybody is busy preaching that dividends are not free money and the stock price dips by the amount the company pays out as dividends because the net value of the company decreases by the cash outflow. However, in the case of a share buyback, they claim that share holders benefit from a buyback because each share holder is entitled to a large percentage of the value of the company among a smaller number of share holders. The total number of remaining shares decreases by the exact percentage as that of the change of the company's net value through the cash payout for a stock buyback. Again, there is no free lunch.
So a company's market cap would, in fact, decrease in the case of a share buyback?
The company spent money on the share buyback. If you want to buy the whole company, would you pay the same amount after its cash reserve is depleted? If AAPL has $300B in cash with a market cap of $1,000B. After it spent the entire $300B for special dividends or share buyback, would you still pay $1,000B to buy the whole company?

There is no difference to the company between paying dividends and stock buybacks. It has less cash by the same amount. The only possible difference is to the share holders. Why does the number of share holders matter to the company?

Topic Author
traderlmd
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Re: When a company repurchases its shares, does the company become less valuable?

Post by traderlmd » Fri Nov 29, 2019 9:04 am

MathIsMyWayr wrote:
Fri Nov 29, 2019 8:47 am
traderlmd wrote:
Fri Nov 29, 2019 8:38 am
MathIsMyWayr wrote:
Fri Nov 29, 2019 8:11 am
traderlmd wrote:
Fri Nov 29, 2019 4:53 am
If there was a $100 million company with 100 shares (each share worth $1 million) and it repurchased 1 share, would the company now be worth $99 million (with each share still worth $1 million) or would the company still be worth $100 million (with each share now worth $1.01 million)?
awval999 wrote:
Fri Nov 29, 2019 6:32 am
The thought is that the market would correct upon share buyback or dilution.

In your example, the company is still valued at $100M. Each share would increase from $1M to $1.01M.
There is a critical missing piece of explanation regarding dividends vs. share buybacks here.

Everybody is busy preaching that dividends are not free money and the stock price dips by the amount the company pays out as dividends because the net value of the company decreases by the cash outflow. However, in the case of a share buyback, they claim that share holders benefit from a buyback because each share holder is entitled to a large percentage of the value of the company among a smaller number of share holders. The total number of remaining shares decreases by the exact percentage as that of the change of the company's net value through the cash payout for a stock buyback. Again, there is no free lunch.
So a company's market cap would, in fact, decrease in the case of a share buyback?
The company spent money on the share buyback. If you want to buy the whole company, would you pay the same amount after its cash reserve is depleted? If AAPL has $300B in cash with a market cap of $1,000B. After it spent the entire $300B for special dividends or share buyback, would you still pay $1,000B to buy the whole company?

There is no difference to the company between paying dividends and stock buybacks. It has less cash by the same amount. The only possible difference is to the share holders. Why does the number of share holders matter to the company?
I see. that makes sense. Thanks for the answer. So, just to clarify: If a company had a $100 share price with 2 million shares outstanding and bought back 1 million shares, the share price would stay the same and the market cap of the company would instantly fall from $200 million to $100 million (in theory)?

MathIsMyWayr wrote:
Fri Nov 29, 2019 8:47 am
If you want to buy the whole company, would you pay the same amount after its cash reserve is depleted? If AAPL has $300B in cash with a market cap of $1,000B. After it spent the entire $300B for special dividends or share buyback, would you still pay $1,000B to buy the whole company?
And I guess the opposite would hold true for issuing additional shares? The company's cash reserve would increase basically making the company more valuable and thereby raising its market cap?

HoosierJim
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Re: When a company repurchases its shares, does the company become less valuable?

Post by HoosierJim » Fri Nov 29, 2019 9:17 am

Assume a company has 100 shares outstanding and I own 1 of them, and the company decides to buy back 99 shares. Assuming an efficient market, the price should go up as each share is bought up, finally when I am the only one left, I own the whole company at a share price that the market is willing to pay.

MathIsMyWayr
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Re: When a company repurchases its shares, does the company become less valuable?

Post by MathIsMyWayr » Fri Nov 29, 2019 9:19 am

traderlmd wrote:
Fri Nov 29, 2019 9:04 am
MathIsMyWayr wrote:
Fri Nov 29, 2019 8:47 am
traderlmd wrote:
Fri Nov 29, 2019 8:38 am
MathIsMyWayr wrote:
Fri Nov 29, 2019 8:11 am
traderlmd wrote:
Fri Nov 29, 2019 4:53 am
If there was a $100 million company with 100 shares (each share worth $1 million) and it repurchased 1 share, would the company now be worth $99 million (with each share still worth $1 million) or would the company still be worth $100 million (with each share now worth $1.01 million)?
awval999 wrote:
Fri Nov 29, 2019 6:32 am
The thought is that the market would correct upon share buyback or dilution.

In your example, the company is still valued at $100M. Each share would increase from $1M to $1.01M.
There is a critical missing piece of explanation regarding dividends vs. share buybacks here.

Everybody is busy preaching that dividends are not free money and the stock price dips by the amount the company pays out as dividends because the net value of the company decreases by the cash outflow. However, in the case of a share buyback, they claim that share holders benefit from a buyback because each share holder is entitled to a large percentage of the value of the company among a smaller number of share holders. The total number of remaining shares decreases by the exact percentage as that of the change of the company's net value through the cash payout for a stock buyback. Again, there is no free lunch.
So a company's market cap would, in fact, decrease in the case of a share buyback?
The company spent money on the share buyback. If you want to buy the whole company, would you pay the same amount after its cash reserve is depleted? If AAPL has $300B in cash with a market cap of $1,000B. After it spent the entire $300B for special dividends or share buyback, would you still pay $1,000B to buy the whole company?

There is no difference to the company between paying dividends and stock buybacks. It has less cash by the same amount. The only possible difference is to the share holders. Why does the number of share holders matter to the company?
I see. that makes sense. Thanks for the answer. So, just to clarify: If a company had a $100 share price with 2 million shares outstanding and bought back 1 million shares, the share price would stay the same and the market cap of the company would instantly fall from $200 million to $100 million (in theory)?

MathIsMyWayr wrote:
Fri Nov 29, 2019 8:47 am
If you want to buy the whole company, would you pay the same amount after its cash reserve is depleted? If AAPL has $300B in cash with a market cap of $1,000B. After it spent the entire $300B for special dividends or share buyback, would you still pay $1,000B to buy the whole company?
And I guess the opposite would hold true for issuing additional shares? The company's cash reserve would increase basically making the company more valuable and thereby raising its market cap?
Financial engineering does not create value. Only being creative and working hard does. It only tries to modify the perception. Ideally, share buybacks should be considered as an investment in itself by the company. Warren Buffett does buyback only when he thinks Berkshire Hathaway is under-valued just like an ordinary investor.

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bertilak
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Re: When a company repurchases its shares, does the company become less valuable?

Post by bertilak » Fri Nov 29, 2019 9:37 am

I believe shares that a company buys back may or may not be "retired."

If not retired, there are still the same number of shares with some being owned (at market value) by the company. The company may choose to re-issue them in the future (sell them on the open market?) or it may (for example) hand them out to employees (as an incentive).

Only when the bought-back shares are retired (which doesn't always happen) does much of the above discussion (with all that division of company value by number of shares) apply.

I may be wrong, but I think that's how it works. Perhaps someone who really knows will elucidate.
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker (aka S.O.B.), the Cowboy Poet

GrowthSeeker
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Re: When a company repurchases its shares, does the company become less valuable?

Post by GrowthSeeker » Fri Nov 29, 2019 10:16 am

bertilak wrote:
Fri Nov 29, 2019 9:37 am
I believe shares that a company buys back may or may not be "retired."

If not retired, there are still the same number of shares with some being owned (at market value) by the company. The company may choose to re-issue them in the future (sell them on the open market?) or it may (for example) hand them out to employees (as an incentive).

Only when the bought-back shares are retired (which doesn't always happen) does much of the above discussion (with all that division of company value by number of shares) apply.

I may be wrong, but I think that's how it works. Perhaps someone who really knows will elucidate.
+1
I'm sure I know less about it than you do, but that's what I was thinking: that it all depends on whether the 1 share of stock that the company just repurchased continues to exist and the company's books show "one share of repurchased stock" vs that "share of stock no longer exists".
Just because you're paranoid doesn't mean they're NOT out to get you.

Topic Author
traderlmd
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Re: When a company repurchases its shares, does the company become less valuable?

Post by traderlmd » Fri Nov 29, 2019 10:22 am

MathIsMyWayr wrote:
Fri Nov 29, 2019 9:19 am
traderlmd wrote:
Fri Nov 29, 2019 9:04 am
MathIsMyWayr wrote:
Fri Nov 29, 2019 8:47 am
traderlmd wrote:
Fri Nov 29, 2019 8:38 am
MathIsMyWayr wrote:
Fri Nov 29, 2019 8:11 am


There is a critical missing piece of explanation regarding dividends vs. share buybacks here.

Everybody is busy preaching that dividends are not free money and the stock price dips by the amount the company pays out as dividends because the net value of the company decreases by the cash outflow. However, in the case of a share buyback, they claim that share holders benefit from a buyback because each share holder is entitled to a large percentage of the value of the company among a smaller number of share holders. The total number of remaining shares decreases by the exact percentage as that of the change of the company's net value through the cash payout for a stock buyback. Again, there is no free lunch.
So a company's market cap would, in fact, decrease in the case of a share buyback?
The company spent money on the share buyback. If you want to buy the whole company, would you pay the same amount after its cash reserve is depleted? If AAPL has $300B in cash with a market cap of $1,000B. After it spent the entire $300B for special dividends or share buyback, would you still pay $1,000B to buy the whole company?

There is no difference to the company between paying dividends and stock buybacks. It has less cash by the same amount. The only possible difference is to the share holders. Why does the number of share holders matter to the company?
I see. that makes sense. Thanks for the answer. So, just to clarify: If a company had a $100 share price with 2 million shares outstanding and bought back 1 million shares, the share price would stay the same and the market cap of the company would instantly fall from $200 million to $100 million (in theory)?

MathIsMyWayr wrote:
Fri Nov 29, 2019 8:47 am
If you want to buy the whole company, would you pay the same amount after its cash reserve is depleted? If AAPL has $300B in cash with a market cap of $1,000B. After it spent the entire $300B for special dividends or share buyback, would you still pay $1,000B to buy the whole company?
And I guess the opposite would hold true for issuing additional shares? The company's cash reserve would increase basically making the company more valuable and thereby raising its market cap?
Financial engineering does not create value. Only being creative and working hard does. It only tries to modify the perception. Ideally, share buybacks should be considered as an investment in itself by the company. Warren Buffett does buyback only when he thinks Berkshire Hathaway is under-valued just like an ordinary investor.
You're just going round in circles here. By saying "financial engineering does not create value", I assume you're referring to issuing additional shares. So, if a company buys back its own shares, the market cap of that company will decrease (as a result of its cash reserves decreasing) but, if a company issues shares, the opposite would not be true?

Uncorrelated
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Re: When a company repurchases its shares, does the company become less valuable?

Post by Uncorrelated » Fri Nov 29, 2019 11:29 am

traderlmd wrote:
Fri Nov 29, 2019 10:22 am
MathIsMyWayr wrote:
Fri Nov 29, 2019 9:19 am
traderlmd wrote:
Fri Nov 29, 2019 9:04 am
MathIsMyWayr wrote:
Fri Nov 29, 2019 8:47 am
traderlmd wrote:
Fri Nov 29, 2019 8:38 am


So a company's market cap would, in fact, decrease in the case of a share buyback?
The company spent money on the share buyback. If you want to buy the whole company, would you pay the same amount after its cash reserve is depleted? If AAPL has $300B in cash with a market cap of $1,000B. After it spent the entire $300B for special dividends or share buyback, would you still pay $1,000B to buy the whole company?

There is no difference to the company between paying dividends and stock buybacks. It has less cash by the same amount. The only possible difference is to the share holders. Why does the number of share holders matter to the company?
I see. that makes sense. Thanks for the answer. So, just to clarify: If a company had a $100 share price with 2 million shares outstanding and bought back 1 million shares, the share price would stay the same and the market cap of the company would instantly fall from $200 million to $100 million (in theory)?

MathIsMyWayr wrote:
Fri Nov 29, 2019 8:47 am
If you want to buy the whole company, would you pay the same amount after its cash reserve is depleted? If AAPL has $300B in cash with a market cap of $1,000B. After it spent the entire $300B for special dividends or share buyback, would you still pay $1,000B to buy the whole company?
And I guess the opposite would hold true for issuing additional shares? The company's cash reserve would increase basically making the company more valuable and thereby raising its market cap?
Financial engineering does not create value. Only being creative and working hard does. It only tries to modify the perception. Ideally, share buybacks should be considered as an investment in itself by the company. Warren Buffett does buyback only when he thinks Berkshire Hathaway is under-valued just like an ordinary investor.
You're just going round in circles here. By saying "financial engineering does not create value", I assume you're referring to issuing additional shares. So, if a company buys back its own shares, the market cap of that company will decrease (as a result of its cash reserves decreasing) but, if a company issues shares, the opposite would not be true?
A company doing share buybacks does not impact the market cap of a company or the value of a single share. Neither when new shares are issued.

Only when existing shares are diluted or split, the value of a single share changes. But the market cap of the company does not.

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Re: When a company repurchases its shares, does the company become less valuable?

Post by Seasonal » Fri Nov 29, 2019 11:39 am

Uncorrelated wrote:
Fri Nov 29, 2019 11:29 am
A company doing share buybacks does not impact the market cap of a company or the value of a single share. Neither when new shares are issued.

Only when existing shares are diluted or split, the value of a single share changes. But the market cap of the company does not.
Assume two identical companies, except that one has $1 billion in cash and the other doesn't. Otherwise, assets, earning power, shares outstanding, etc. are the same. The one without the billion in cash has a market cap of $5 billion.

Will they have the same market cap and value per share?

Uncorrelated
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Re: When a company repurchases its shares, does the company become less valuable?

Post by Uncorrelated » Fri Nov 29, 2019 12:01 pm

Seasonal wrote:
Fri Nov 29, 2019 11:39 am
Uncorrelated wrote:
Fri Nov 29, 2019 11:29 am
A company doing share buybacks does not impact the market cap of a company or the value of a single share. Neither when new shares are issued.

Only when existing shares are diluted or split, the value of a single share changes. But the market cap of the company does not.
Assume two identical companies, except that one has $1 billion in cash and the other doesn't. Otherwise, assets, earning power, shares outstanding, etc. are the same. The one without the billion in cash has a market cap of $5 billion.

Will they have the same market cap and value per share?
That do not have the same market cap and value per share. But I don't see what that proves.

Imagine a company worth $5 billion, 80% of the company ownership is in the hands of individual shareholders. The company now buybacks some of the shares to reduce the ownership of individual shareholders to 75%. As a result of this action, will the share value or market cap change or not?

Imagine the same company, now with 75% of company ownership in the hands of individual shareholders. The company issues new shares worth 5% of the market cap of the company. will the share value or market cap change or not?

The correct answer to all of these questions is No.

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Re: When a company repurchases its shares, does the company become less valuable?

Post by MathIsMyWayr » Fri Nov 29, 2019 12:12 pm

bertilak wrote:
Fri Nov 29, 2019 9:37 am
I believe shares that a company buys back may or may not be "retired."

If not retired, there are still the same number of shares with some being owned (at market value) by the company. The company may choose to re-issue them in the future (sell them on the open market?) or it may (for example) hand them out to employees (as an incentive).

Only when the bought-back shares are retired (which doesn't always happen) does much of the above discussion (with all that division of company value by number of shares) apply.

I may be wrong, but I think that's how it works. Perhaps someone who really knows will elucidate.
Why does it matter, retiring shares or not, as long as the company receives a compensation of the market value when it releases shares to the market? A share has a market (cash) value at the time of transaction. It does not matter which direction it flows. One possible problem with stock compensation to employees is that it is often quite generous when companies are doing well, much more than what companies are typically willing to pay as a regular salary. I am not complaining because the sum of my equity compensation is close to the sum of my regular pay over the years. :D It is difficult to expect to have a compensation doubled, but a fat equity compensation may be justified because an employee also shares the risk of the company's success and failure.

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Re: When a company repurchases its shares, does the company become less valuable?

Post by Seasonal » Fri Nov 29, 2019 12:26 pm

Uncorrelated wrote:
Fri Nov 29, 2019 12:01 pm
Seasonal wrote:
Fri Nov 29, 2019 11:39 am
Uncorrelated wrote:
Fri Nov 29, 2019 11:29 am
A company doing share buybacks does not impact the market cap of a company or the value of a single share. Neither when new shares are issued.

Only when existing shares are diluted or split, the value of a single share changes. But the market cap of the company does not.
Assume two identical companies, except that one has $1 billion in cash and the other doesn't. Otherwise, assets, earning power, shares outstanding, etc. are the same. The one without the billion in cash has a market cap of $5 billion.

Will they have the same market cap and value per share?
That do not have the same market cap and value per share. But I don't see what that proves.

Imagine a company worth $5 billion, 80% of the company ownership is in the hands of individual shareholders. The company now buybacks some of the shares to reduce the ownership of individual shareholders to 75%. As a result of this action, will the share value or market cap change or not?

Imagine the same company, now with 75% of company ownership in the hands of individual shareholders. The company issues new shares worth 5% of the market cap of the company. will the share value or market cap change or not?

The correct answer to all of these questions is No.
The correct answer is it depends on what they pay for the shares and how much they sell the shares for.

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Re: When a company repurchases its shares, does the company become less valuable?

Post by av8r316 » Fri Nov 29, 2019 12:33 pm

GrowthSeeker wrote:
Fri Nov 29, 2019 10:16 am
bertilak wrote:
Fri Nov 29, 2019 9:37 am
I believe shares that a company buys back may or may not be "retired."

If not retired, there are still the same number of shares with some being owned (at market value) by the company. The company may choose to re-issue them in the future (sell them on the open market?) or it may (for example) hand them out to employees (as an incentive).

Only when the bought-back shares are retired (which doesn't always happen) does much of the above discussion (with all that division of company value by number of shares) apply.

I may be wrong, but I think that's how it works. Perhaps someone who really knows will elucidate.
+1
I'm sure I know less about it than you do, but that's what I was thinking: that it all depends on whether the 1 share of stock that the company just repurchased continues to exist and the company's books show "one share of repurchased stock" vs that "share of stock no longer exists".
There is no economic impact of retiring shares vs. holding them as treasury shares.

Share counts are (i) Authorized, (ii) Issued, and (iii) Outstanding. When a share is repurchased, the Outstanding share count is reduced, but the Issued is only reduced if the share is retired; if it is not retired, it is held in Treasury, which is effectively a contra-account of Issued.

Some companies record all “regular” activity (i.e. repurchases and stock compensation) through Treasury, some companies record repurchases in Treasury but issue new shares for stock compensation, and some companies retire immediately upon repurchase. Some companies periodically retire some of their Treasury shares, which can have a multi-billion dollar accounting impact without any economic impact whatsoever.

The Board of each company determines how it will record these transactions, which have legal and accounting implications, but no direct economic impact.

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Re: When a company repurchases its shares, does the company become less valuable?

Post by MathWizard » Fri Nov 29, 2019 12:56 pm

Not everyone buys into EMH.

If the company was actually worth exactly 100 million, nothing changed. The company just owns the one share, worth 1 million just as if you owned the share.

However, the value of a company is not always equal to the number of shares times the current price.

A company should only buy back it's own shares if it thinks that it has no other productive way to use the cash. It could use cash to expand, but maybe its market is saturated. It could buy shares in another company. It still should only buy back stock if it thinks the stock is undervalued.

That is the logic. However, the system of paying executives with stock options provides one other reason for stock buybacks. Buybacks should raise the share price. If the new share price is the basis for payouts for stock options, then even if the stock is overvalued, company executives have an incentive to buyback that is in their own interest, not the company's.

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Re: When a company repurchases its shares, does the company become less valuable?

Post by traderlmd » Sat Nov 30, 2019 8:58 pm

Uncorrelated wrote:
Fri Nov 29, 2019 12:01 pm
Seasonal wrote:
Fri Nov 29, 2019 11:39 am
Uncorrelated wrote:
Fri Nov 29, 2019 11:29 am
A company doing share buybacks does not impact the market cap of a company or the value of a single share. Neither when new shares are issued.

Only when existing shares are diluted or split, the value of a single share changes. But the market cap of the company does not.
Assume two identical companies, except that one has $1 billion in cash and the other doesn't. Otherwise, assets, earning power, shares outstanding, etc. are the same. The one without the billion in cash has a market cap of $5 billion.

Will they have the same market cap and value per share?
That do not have the same market cap and value per share. But I don't see what that proves.

Imagine a company worth $5 billion, 80% of the company ownership is in the hands of individual shareholders. The company now buybacks some of the shares to reduce the ownership of individual shareholders to 75%. As a result of this action, will the share value or market cap change or not?
It should. The company now has more cash and more equity. Obviously, accounting value is not the book value but this increase in cash and equity should lead to an increase in market cap as investors should now be willing to pay more for the company. Just like when a company pays dividends, it leads to a decrease in market cap.

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Re: When a company repurchases its shares, does the company become less valuable?

Post by traderlmd » Sat Nov 30, 2019 10:34 pm

Uncorrelated wrote:
Fri Nov 29, 2019 7:32 am
Neither option is correct.

Suppose a company is worth $100m: $90m in inventory and brand value, $10m in cash. The company uses the cash to buy AAPL stocks. The company is still worth $100m.

When a company buys back shares, the value of a single share doesn't change. 1 share still represents the same 0.001% of the company. However, the total number of outstanding shares may change as a result of buybacks.
If the total number of outstanding shares changes, how is it possible that the market cap of the company wouldn’t change AND every share would represent the same percentage of the company. It seems like the only way for the value of the company not to change AND for each share to represent the same amount of the company is for the number of outstanding shares not to change.

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Re: When a company repurchases its shares, does the company become less valuable?

Post by JoMoney » Sat Nov 30, 2019 10:47 pm

Imagine the companies balance sheet as your personal brokerage account worth $10,000; $9,000 in equities, and $1,000 in cash.
You take your $1,000 of cash and perform a "share re purchase" buying $1,000 dollars worth of the stock that was previously on the public market.
Is your brokerage account more or less valuable after the purchase?
"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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Re: When a company repurchases its shares, does the company become less valuable?

Post by shess » Sat Nov 30, 2019 11:24 pm

traderlmd wrote:
Sat Nov 30, 2019 10:34 pm
Uncorrelated wrote:
Fri Nov 29, 2019 7:32 am
Neither option is correct.

Suppose a company is worth $100m: $90m in inventory and brand value, $10m in cash. The company uses the cash to buy AAPL stocks. The company is still worth $100m.

When a company buys back shares, the value of a single share doesn't change. 1 share still represents the same 0.001% of the company. However, the total number of outstanding shares may change as a result of buybacks.
If the total number of outstanding shares changes, how is it possible that the market cap of the company wouldn’t change AND every share would represent the same percentage of the company. It seems like the only way for the value of the company not to change AND for each share to represent the same amount of the company is for the number of outstanding shares not to change.
I feel like this was phrased wrong. If the company buys $10M in AAPL, now the company has $90M in inventory and brand value, plus $10M in AAPL, for a total of $100M. That's not really the same as a buyback, though.

Say a company is worth $100M, $90M in inventory and brand value, plus $10M in cash, and that there are exactly 100M shares. In theory, you could buy 10M of those shares with the $10M in cash, resulting in the shares maintaining the exact same value. BUT! Insofar as the company is not a money-market fund, that cash was a drag on the company's ability to earn money. So, before, the company many have generated $9M in profits per year, plus $200k in interest on the cash, so $9.2M of profits per year, so P/E would be $100M/$9.2M==10.87. After the buyback, the company will STILL generate $9M in profits per year, but no interest in the cash, so P/E would be $90M/$9M==10 - if the price stays the same after the buyback. But if the P/E stays the same, then the valuation would have to rise to $97.8M. Presumably the buyback would drive the per-share price towards $1.08 in order to convince people to part with their shares.

I think. I kinda feel like I'm in the weeds on the specifics, here. The intuition is that the "raw" earning potential of the company is greater than the earning potential of the cash, so having so much idle cash is a drain on the company's earning power relative to price. It's like you have a $90M company earning 10% plus a $10M company earning 2% forced into one unit, and breaking it up into two pieces is more valuable, because different people have compelling reasons to buy the individual pieces.

The flip side of this is for dividend-paying stocks. If you consider the same case, distributing a $10M dividend would be expected to reduce the price by nearly $10M, but not quite $10M because the resulting company's earning power per share should be higher than it was when 10% of that earning power was earning cash returns.

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Re: When a company repurchases its shares, does the company become less valuable?

Post by typical.investor » Sun Dec 01, 2019 1:04 am

MathIsMyWayr wrote:
Fri Nov 29, 2019 8:47 am
There is no difference to the company between paying dividends and stock buybacks. It has less cash by the same amount. The only possible difference is to the share holders. Why does the number of share holders matter to the company?
This is simply not true. There are significant repercussions that you as an investor need to know.

Buybacks may increase executive compensation levels, regardless of the success of the company. Buybacks directly influence many of the financial ratios used as performance metrics in executive LTI plans. Buybacks can boost EPS, ROE, ROA, ROIC, or stock price.

A key connection between buybacks and executive pay is EPS. Buybacks will reduce the number of shares outstanding, thereby increasing earnings per share. EPS is a key benchmark for an executive’s performance-based pay – particularly in LTI programs.

Buybacks may benefit you as an investor as you won't have to pay taxes on dividends. Buybacks can also greatly benefit executives who borrow money for buybacks and get compensated due to higher EPS and other measures.

So in cases where earnings have not increased, but buybacks boost executive compensation levels, then I think yes the company is less valuable.

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Re: When a company repurchases its shares, does the company become less valuable?

Post by skeptic42 » Sun Dec 01, 2019 9:25 am

In an efficient market, the company should become less valuable after a buyback.

https://en.wikipedia.org/wiki/Treasury_stock

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Re: When a company repurchases its shares, does the company become less valuable?

Post by JoMoney » Sun Dec 01, 2019 10:09 am

skeptic42 wrote:
Sun Dec 01, 2019 9:25 am
In an efficient market, the company should become less valuable after a buyback.

https://en.wikipedia.org/wiki/Treasury_stock
Your link contradicts your statement
In an efficient market, a company buying back its stock should have no effect on its price per share valuation. If the market fairly prices a company's shares at $50/share, and the company buys back 100 shares for $5,000, it now has $5,000 less cash but there are 100 fewer shares outstanding; the net effect should be that the underlying value of each share is unchanged. Additionally, buying back shares will improve price/earnings ratios due to the reduced number of shares (and unchanged earnings) and improve earnings per share ratios due to fewer shares outstanding (and unchanged earnings).

If the market is not efficient, the company's shares may be underpriced. In that case a company can benefit its other shareholders by buying back shares. If a company's shares are overpriced, then a company is actually hurting its remaining shareholders by buying back stock.
Left unsaid, is that the portfolio is now in a potentially riskier situation as the balance sheet has moved cash (or taken on debt) to a heavier equity weighting.
"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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JoMoney
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Re: When a company repurchases its shares, does the company become less valuable?

Post by JoMoney » Sun Dec 01, 2019 10:20 am

A GS report below presents some various views and data on the buyback discussion. Of note, is they found no relationship between executive compensation and buybacks... in fact, companies that did link compensation to EPS or stock performance performed fewer buybacks:
https://www.goldmansachs.com/insights/p ... report.pdf
...
David Kostin and Cole Hunter address myths coloring the debate on stock buybacks today
...
Myth #4: Management teams only repurchase stock in an attempt to inflate EPS and meet incentive compensation targets.

Reality: Executives whose compensation depends on EPS did not allocate a greater proportion of total cash spending to buybacks in 2018 than companies where management pay was not linked to EPS. The 247 companies in the S&P 500 with incentive compensation programs linked to earnings per share—a metric that would benefit from accretive share buybacks—actually spent a smaller share (28%) of their total cash outlays on repurchasing stock compared with the 253 firms without a performance metric linked to EPS (31%). Moreover, the 49% of S&P 500 firms with EPS-linked compensation accounted for just 45% of total 2018 buybacks ($362 billion). We also found no relationship between how management teams with compensation incentives tied to total shareholder return (TSR) spent cash relative to those firms with no shareholder return incentive.
Image
...
"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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Re: When a company repurchases its shares, does the company become less valuable?

Post by Seasonal » Sun Dec 01, 2019 11:21 am

JoMoney wrote:
Sun Dec 01, 2019 10:09 am
skeptic42 wrote:
Sun Dec 01, 2019 9:25 am
In an efficient market, the company should become less valuable after a buyback.

https://en.wikipedia.org/wiki/Treasury_stock
Your link contradicts your statement
In an efficient market, a company buying back its stock should have no effect on its price per share valuation. If the market fairly prices a company's shares at $50/share, and the company buys back 100 shares for $5,000, it now has $5,000 less cash but there are 100 fewer shares outstanding; the net effect should be that the underlying value of each share is unchanged. Additionally, buying back shares will improve price/earnings ratios due to the reduced number of shares (and unchanged earnings) and improve earnings per share ratios due to fewer shares outstanding (and unchanged earnings).

If the market is not efficient, the company's shares may be underpriced. In that case a company can benefit its other shareholders by buying back shares. If a company's shares are overpriced, then a company is actually hurting its remaining shareholders by buying back stock.
Left unsaid, is that the portfolio is now in a potentially riskier situation as the balance sheet has moved cash (or taken on debt) to a heavier equity weighting.
It's not a contradiction. The company is less valuable, while each share has the same value. The company is less valuable because there are fewer shares. For the company to have the same value with fewer shares, per share value would have to increase.

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Re: When a company repurchases its shares, does the company become less valuable?

Post by JoMoney » Sun Dec 01, 2019 11:30 am

Seasonal wrote:
Sun Dec 01, 2019 11:21 am
...
It's not a contradiction. The company is less valuable, while each share has the same value. The company is less valuable because there are fewer shares. For the company to have the same value with fewer shares, per share value would have to increase.
Ahh... I think I see your point.
Same as if a company paid the money as a dividend. The company's balance sheet (and company's value) is now a smaller amount, but from the shareholders perspective the value is the same, it just shifted money from the companies balance sheet to the owner's.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

Uncorrelated
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Re: When a company repurchases its shares, does the company become less valuable?

Post by Uncorrelated » Sun Dec 01, 2019 3:14 pm

Seasonal wrote:
Sun Dec 01, 2019 11:21 am
JoMoney wrote:
Sun Dec 01, 2019 10:09 am
skeptic42 wrote:
Sun Dec 01, 2019 9:25 am
In an efficient market, the company should become less valuable after a buyback.

https://en.wikipedia.org/wiki/Treasury_stock
Your link contradicts your statement
In an efficient market, a company buying back its stock should have no effect on its price per share valuation. If the market fairly prices a company's shares at $50/share, and the company buys back 100 shares for $5,000, it now has $5,000 less cash but there are 100 fewer shares outstanding; the net effect should be that the underlying value of each share is unchanged. Additionally, buying back shares will improve price/earnings ratios due to the reduced number of shares (and unchanged earnings) and improve earnings per share ratios due to fewer shares outstanding (and unchanged earnings).

If the market is not efficient, the company's shares may be underpriced. In that case a company can benefit its other shareholders by buying back shares. If a company's shares are overpriced, then a company is actually hurting its remaining shareholders by buying back stock.
Left unsaid, is that the portfolio is now in a potentially riskier situation as the balance sheet has moved cash (or taken on debt) to a heavier equity weighting.
It's not a contradiction. The company is less valuable, while each share has the same value. The company is less valuable because there are fewer shares. For the company to have the same value with fewer shares, per share value would have to increase.
The company value is not equal to the value per share multiplied by the number of outstanding shares. You're talking about the float adjusted market cap.

typical.investor
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Re: When a company repurchases its shares, does the company become less valuable?

Post by typical.investor » Sun Dec 01, 2019 6:48 pm

JoMoney wrote:
Sun Dec 01, 2019 10:20 am
A GS report below presents some various views and data on the buyback discussion. Of note, is they found no relationship between executive compensation and buybacks... in fact, companies that did link compensation to EPS or stock performance performed fewer buybacks:
I don't find the GS report compelling. In fact, it seems extremely weak. Why look at only 2018? How many executives do you think were selling their stocks in 2018 when the market overall was down? Why wouldn't they wait? Anyway, there is a clear picture of executives timing repurchases to push themselves above performance targets, and a clear picture of executives selling after buybacks when the price is high.
(1) Journal of Financial and Quantitative Analysis wrote:Using a large hand-collected database of chief executive officer (CEO) bonus structures, we find that when a CEO’s bonus is directly tied to earnings per share (EPS), his company is more likely to conduct a buyback. This effect is especially pronounced when a company’s EPS is right below the threshold for a bonus award.
(2) Palladino wrote:This paper investigates the hypothesis of whether corporate insiders sell their own personal
shareholdings more frequently when they are executing stock buybacks using corporate funds. I
examine transactions for nonfinancial corporations with publicly traded stock from 2005 to 2017, and
find that net insider sales of over $100,000 are nearly twice as common in quarters when stock
buybacks are also occurring than in non-buyback quarters. I conduct an empirical analysis of the
relationship between insider sales and stock buybacks and find that a ten percent change in stock
buybacks is associated with a five percent change in corporate insiders selling their personal
shareholdings, holding the other factors constant. The results suggest that executives may be taking
advantage of the regulatory loophole left in the regulation of stock buybacks
, and that policymakers
should reform the regulations governing stock buybacks and corporate insider share-selling.
The SEC commissioner(3) tells a similar tale https://www.sec.gov/news/speech/speech-jackson-061118

And then:
(4) Olson wrote:Prior literature has shown that managers use accretive repurchases to meet or beat analyst forecasts of earnings per share (EPS). However, whether such planned and aggressive repurchasing of common shares outstanding is used as a complement or substitute for traditional tools of earnings management remains unexplored. I find a complementary relationship between accretive repurchases and income-increasing discretionary accruals, a complementary relationship between accretive repurchases and abnormal discretionary expense cuts, and a substitutional relationship between accretive repurchases and abnormal operating cash flow reductions. In addition, I find that the likelihood to use income-increasing discretionary accruals in conjunction with accretive repurchases is significantly driven by the number and dollar amount of stock and stock options awarded to the firm’s CEO in the previous year.
FYI, the definition of "accretive" is:
Stock repurchases are defined as accretive when the numerator and denominator effects of a repurchase jointly increase reported EPS by at least $0.01. are to meet or beat earnings per share (EPS) targets rather than to execute normal financing activities.
And finally:
(5) Dittmann, Keusch, and Obernberger wrote:This paper shows evidence for the hypothesis that the CEO opportunistically times share repurchases around her grants of at-the-money stock options. We find that firms decrease their repurchase activity in the quarter before the stock option grant to the CEO. When the option grant constitutes a larger fraction of the CEO's salary, firms more strongly change their repurchase activity.
So given the overwhelming empirical evidence is that a) CEO's time buybacks for their own personal benefit b) buybacks are more likely when they are needed to push the CEO over the compensation threshold and 3c) executives are selling after buybacks which is counter to the narrative that buybacks are the correct long term strategy and in effect they are "using buybacks as a chance to cash out their compensation at investor expense" (3).

The fact is that increased CEO compensation for performance that doesn't merit it will come out of long term investor's pockets, so in many cases buybacks will leave the company less valuable (even when accounting for the cash in the long term investors accounts).

(1) Journal of Financial and Quantitative Analysis
Volume 50, Issue 3
June 2015 , pp. 447-475

(2) Do Corporate Insiders use
Stock Buybacks for Personal Gain?
Roosevelt Institute Working Paper
Lenore M. Palladino
October 2019

(3) Stock Buybacks and Corporate Cashouts
SEC Commissioner Robert J. Jackson Jr.
https://www.sec.gov/biography/commissio ... -j-jackson

(4) Accretive Share Repurchases versus Accrual/Real Earnings Management: Complements or Substitutes?
13 Nov 2019
Erik Olson
Yale University, School of Management
Available at SSRN: https://ssrn.com/abstract=3480133 or http://dx.doi.org/10.2139/ssrn.3480133

(5) Share Repurchases and Stock Option Grants
Ingolf Dittmann, Thomas Keusch, and Stefan Obernberger
January 16, 2019
Available at SSRN: https://ssrn.com/abstract=3316793 or http://dx.doi.org/10.2139/ssrn.3316793

Seasonal
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Re: When a company repurchases its shares, does the company become less valuable?

Post by Seasonal » Sun Dec 01, 2019 8:28 pm

Uncorrelated wrote:
Sun Dec 01, 2019 3:14 pm
Seasonal wrote:
Sun Dec 01, 2019 11:21 am
JoMoney wrote:
Sun Dec 01, 2019 10:09 am
skeptic42 wrote:
Sun Dec 01, 2019 9:25 am
In an efficient market, the company should become less valuable after a buyback.

https://en.wikipedia.org/wiki/Treasury_stock
Your link contradicts your statement
In an efficient market, a company buying back its stock should have no effect on its price per share valuation. If the market fairly prices a company's shares at $50/share, and the company buys back 100 shares for $5,000, it now has $5,000 less cash but there are 100 fewer shares outstanding; the net effect should be that the underlying value of each share is unchanged. Additionally, buying back shares will improve price/earnings ratios due to the reduced number of shares (and unchanged earnings) and improve earnings per share ratios due to fewer shares outstanding (and unchanged earnings).

If the market is not efficient, the company's shares may be underpriced. In that case a company can benefit its other shareholders by buying back shares. If a company's shares are overpriced, then a company is actually hurting its remaining shareholders by buying back stock.
Left unsaid, is that the portfolio is now in a potentially riskier situation as the balance sheet has moved cash (or taken on debt) to a heavier equity weighting.
It's not a contradiction. The company is less valuable, while each share has the same value. The company is less valuable because there are fewer shares. For the company to have the same value with fewer shares, per share value would have to increase.
The company value is not equal to the value per share multiplied by the number of outstanding shares. You're talking about the float adjusted market cap.
Would you be happier with: the company is less valuable because it has less cash (but no fewer liabilities and no more assets)?

In any event, the linked and quoted text does not contradict the original statement.

klaus14
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Re: When a company repurchases its shares, does the company become less valuable?

Post by klaus14 » Mon Dec 02, 2019 12:43 am

Yes.

Example:
Company has 100 shares and $100 dollars and nothing else.
Company uses $10 to buy back 10 shares.
Now company has 90 shares and $90 dollars.

Buybacks are same as dividends, they return the capital to shareholders.

Uncorrelated
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Re: When a company repurchases its shares, does the company become less valuable?

Post by Uncorrelated » Mon Dec 02, 2019 3:33 am

Seasonal wrote:
Sun Dec 01, 2019 8:28 pm
Uncorrelated wrote:
Sun Dec 01, 2019 3:14 pm
Seasonal wrote:
Sun Dec 01, 2019 11:21 am
JoMoney wrote:
Sun Dec 01, 2019 10:09 am
skeptic42 wrote:
Sun Dec 01, 2019 9:25 am
In an efficient market, the company should become less valuable after a buyback.

https://en.wikipedia.org/wiki/Treasury_stock
Your link contradicts your statement
In an efficient market, a company buying back its stock should have no effect on its price per share valuation. If the market fairly prices a company's shares at $50/share, and the company buys back 100 shares for $5,000, it now has $5,000 less cash but there are 100 fewer shares outstanding; the net effect should be that the underlying value of each share is unchanged. Additionally, buying back shares will improve price/earnings ratios due to the reduced number of shares (and unchanged earnings) and improve earnings per share ratios due to fewer shares outstanding (and unchanged earnings).

If the market is not efficient, the company's shares may be underpriced. In that case a company can benefit its other shareholders by buying back shares. If a company's shares are overpriced, then a company is actually hurting its remaining shareholders by buying back stock.
Left unsaid, is that the portfolio is now in a potentially riskier situation as the balance sheet has moved cash (or taken on debt) to a heavier equity weighting.
It's not a contradiction. The company is less valuable, while each share has the same value. The company is less valuable because there are fewer shares. For the company to have the same value with fewer shares, per share value would have to increase.
The company value is not equal to the value per share multiplied by the number of outstanding shares. You're talking about the float adjusted market cap.
Would you be happier with: the company is less valuable because it has less cash (but no fewer liabilities and no more assets)?

That is still wrong. The company is not less valuable. After a buyback, the company has less cash but more assets.

klaus14
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Re: When a company repurchases its shares, does the company become less valuable?

Post by klaus14 » Mon Dec 02, 2019 3:39 am

Uncorrelated wrote:
Mon Dec 02, 2019 3:33 am
Seasonal wrote:
Sun Dec 01, 2019 8:28 pm
Uncorrelated wrote:
Sun Dec 01, 2019 3:14 pm
Seasonal wrote:
Sun Dec 01, 2019 11:21 am
JoMoney wrote:
Sun Dec 01, 2019 10:09 am


Your link contradicts your statement

Left unsaid, is that the portfolio is now in a potentially riskier situation as the balance sheet has moved cash (or taken on debt) to a heavier equity weighting.
It's not a contradiction. The company is less valuable, while each share has the same value. The company is less valuable because there are fewer shares. For the company to have the same value with fewer shares, per share value would have to increase.
The company value is not equal to the value per share multiplied by the number of outstanding shares. You're talking about the float adjusted market cap.
Would you be happier with: the company is less valuable because it has less cash (but no fewer liabilities and no more assets)?

That is still wrong. The company is not less valuable. After a buyback, the company has less cash but more assets.
what more assets? it has the same assets and less cash, acquired stock is not an asset.

in fact, company can print as many new stocks as it likes. your logic means that if a company issues new stock and sells those (opposite of buyback) (like in an IPO) now it has less assets? really?

Uncorrelated
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Re: When a company repurchases its shares, does the company become less valuable?

Post by Uncorrelated » Mon Dec 02, 2019 4:03 am

klaus14 wrote:
Mon Dec 02, 2019 3:39 am
Uncorrelated wrote:
Mon Dec 02, 2019 3:33 am
Seasonal wrote:
Sun Dec 01, 2019 8:28 pm
Uncorrelated wrote:
Sun Dec 01, 2019 3:14 pm
Seasonal wrote:
Sun Dec 01, 2019 11:21 am

It's not a contradiction. The company is less valuable, while each share has the same value. The company is less valuable because there are fewer shares. For the company to have the same value with fewer shares, per share value would have to increase.
The company value is not equal to the value per share multiplied by the number of outstanding shares. You're talking about the float adjusted market cap.
Would you be happier with: the company is less valuable because it has less cash (but no fewer liabilities and no more assets)?

That is still wrong. The company is not less valuable. After a buyback, the company has less cash but more assets.
what more assets? it has the same assets and less cash, acquired stock is not an asset.

in fact, company can print as many new stocks as it likes. your logic means that if a company issues new stock and sells those (opposite of buyback) (like in an IPO) now it has less assets? really?
Acquired stock is an asset that sits on the balance sheet. If Microsoft uses excess cash to buy Apple shares, then the value of Microsoft does not change. They merely exchange cash into assets with equal value.
Your logic implies that if Microsoft buys Microsoft shares (buyback), the value of Microsoft drops. That is not right. Why would the value of Microsoft drop when the buy Microsoft shares, but not when they buy apple shares?

An IPO is generally not the reverse of a buyback.

A company can not print as many stocks as they like. If a company is 80% owned by individual shareholders, they can only print shares for the 20% of the company that is not yet owned by individual shareholders unless existing shares are diluted.

typical.investor
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Re: When a company repurchases its shares, does the company become less valuable?

Post by typical.investor » Mon Dec 02, 2019 4:12 am

Uncorrelated wrote:
Mon Dec 02, 2019 4:03 am

Acquired stock is an asset that sits on the balance sheet. If Microsoft uses excess cash to buy Apple shares, then the value of Microsoft does not change. They merely exchange cash into assets with equal value.
True, but that has nothing to do with a "buyback". Totally different case there.
Uncorrelated wrote:
Mon Dec 02, 2019 4:03 am
Your logic implies that if Microsoft buys Microsoft shares (buyback), the value of Microsoft drops. That is not right. Why would the value of Microsoft drop when the buy Microsoft shares, but not when they buy apple shares?
Because in a Microsoft buyback, the Microsoft shares are retired. So no Microsoft does not have the purchased shares on their balance sheet.

Cash has left Microsoft and there is nothing on their balance sheet for the outflow.

klaus14
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Re: When a company repurchases its shares, does the company become less valuable?

Post by klaus14 » Mon Dec 02, 2019 4:13 am

Uncorrelated wrote:
Mon Dec 02, 2019 4:03 am

Acquired stock is an asset that sits on the balance sheet. If Microsoft uses excess cash to buy Apple shares, then the value of Microsoft does not change. They merely exchange cash into assets with equal value.
Your logic implies that if Microsoft buys Microsoft shares (buyback), the value of Microsoft drops. That is not right. Why would the value of Microsoft drop when the buy Microsoft shares, but not when they buy apple shares?

An IPO is generally not the reverse of a buyback.

A company can not print as many stocks as they like. If a company is 80% owned by individual shareholders, they can only print shares for the 20% of the company that is not yet owned by individual shareholders unless existing shares are diluted.
You are confusing the value of shares vs value of the enterprise. Consider Microsoft buying ALL of its stock. out of existence. They can first liquidate all of their assets (all the divisions, patents, buildings) and then buy each outstanding MSFT share with the cash. After the operation, there is no Microsoft. Now old shareholders hold a bunch of cash (equal to old market cap of MSFT)

In your example the AAPL stocks MSFT holds are part of outstanding stock (designates ownership and voting power). Versus, MSFT owning MSFT shares doesn't mean anything, they are not part of the outstanding, they don't translate to ownership or voting power. They don't receive any dividends. They are just an accounting artifact.

An IPO almost always increases the number of outstanding stock. So it's dilution.

A company CAN print as many stocks as they like. As long as bond approves. See
Last edited by klaus14 on Mon Dec 02, 2019 4:33 am, edited 3 times in total.

klaus14
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Re: When a company repurchases its shares, does the company become less valuable?

Post by klaus14 » Mon Dec 02, 2019 4:17 am

typical.investor wrote:
Mon Dec 02, 2019 4:12 am
Because in a Microsoft buyback, the Microsoft shares are retired. So no Microsoft does not have the purchased shares on their balance sheet.
Even if they don't retire and hold the shares, it doesn't matter. A company can always issue new shares. That's how they do IPOs or follow-on offerings.
Selling previously bought-back shares from balance sheet vs selling newly issued shares have no difference in practice. It's just how you choose to do accounting.

typical.investor
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Re: When a company repurchases its shares, does the company become less valuable?

Post by typical.investor » Mon Dec 02, 2019 4:25 am

klaus14 wrote:
Mon Dec 02, 2019 4:17 am
typical.investor wrote:
Mon Dec 02, 2019 4:12 am
Because in a Microsoft buyback, the Microsoft shares are retired. So no Microsoft does not have the purchased shares on their balance sheet.
Even if they don't retire and hold the shares, it doesn't matter. A company can always issue new shares. That's how they do IPOs or follow-on offerings.
Selling bought-back shares from balance sheet vs selling newly issued shares have no difference in practice. It's just how you choose to account.
It does matter though.

If they buyback and hold the shares, what will be the impact on EPS as opposed to if they retired them? EPS would be less if the shares were held instead of retired right?

So most likely the shares are retired, EPS is calculated, the executives (as is often the case) get compensated based in part in EPS.

There is a difference in practice but I see you are failing to realize it.

klaus14
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Re: When a company repurchases its shares, does the company become less valuable?

Post by klaus14 » Mon Dec 02, 2019 4:27 am

typical.investor wrote:
Mon Dec 02, 2019 4:25 am
klaus14 wrote:
Mon Dec 02, 2019 4:17 am
typical.investor wrote:
Mon Dec 02, 2019 4:12 am
Because in a Microsoft buyback, the Microsoft shares are retired. So no Microsoft does not have the purchased shares on their balance sheet.
Even if they don't retire and hold the shares, it doesn't matter. A company can always issue new shares. That's how they do IPOs or follow-on offerings.
Selling bought-back shares from balance sheet vs selling newly issued shares have no difference in practice. It's just how you choose to account.
It does matter though.

If they buyback and hold the shares, what will be the impact on EPS as opposed to if they retired them? EPS would be less if the shares were held instead of retired right?

So most likely the shares are retired, EPS is calculated, the executives (as is often the case) get compensated based in part in EPS.

There is a difference in practice but I see you are failing to realize it.
EPS are calculated based on outstanding shares. Treasury stocks are not counted. See.

typical.investor
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Re: When a company repurchases its shares, does the company become less valuable?

Post by typical.investor » Mon Dec 02, 2019 4:47 am

klaus14 wrote:
Mon Dec 02, 2019 4:27 am
typical.investor wrote:
Mon Dec 02, 2019 4:25 am
klaus14 wrote:
Mon Dec 02, 2019 4:17 am
typical.investor wrote:
Mon Dec 02, 2019 4:12 am
Because in a Microsoft buyback, the Microsoft shares are retired. So no Microsoft does not have the purchased shares on their balance sheet.
Even if they don't retire and hold the shares, it doesn't matter. A company can always issue new shares. That's how they do IPOs or follow-on offerings.
Selling bought-back shares from balance sheet vs selling newly issued shares have no difference in practice. It's just how you choose to account.
It does matter though.

If they buyback and hold the shares, what will be the impact on EPS as opposed to if they retired them? EPS would be less if the shares were held instead of retired right?

So most likely the shares are retired, EPS is calculated, the executives (as is often the case) get compensated based in part in EPS.

There is a difference in practice but I see you are failing to realize it.
EPS are calculated based on outstanding shares. Treasury stocks are not counted. See.
Did you have a point to that?

Treasury shares reduce shareholder equity and are often labeled "equity reduction". Yeah. Call it "equity reduction", "treasury shares" or retired but they have the same effect. The cash account is credited to record the expenditure of company cash, and the treasury stock account is debited to decrease shareholder's equity.

So there is an equal amount in reduction of shareholder's equity as there is cash returned to shareholders and moving stocks from outstanding to treasury lets you increase the EPS and possibly reward the CEO more than otherwise given the same profitability.

RAchip
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Re: When a company repurchases its shares, does the company become less valuable?

Post by RAchip » Mon Dec 02, 2019 7:52 am

The price of stocks in the public market is set by basic supply and demand. That is an undeniable fact. The price is not set based on any form of academic valuation, although those valuations may impact demand. Buybacks reduce supply and increase demand.

These basic facts are why I always laugh when people here repeat over and over that “dividends reduce share price.” That is false. The price of stock OVER TIME is based ONLY on supply and demand. Over time, dividends tend to increase demand and increase stock price. Over time, buybacks decrease supply and increase demand temporarily while the buybacks are occurring so they should in theory increase stock price but it is probably only temporary. Buybacks are “financial engineering” because
they mostly just temporarily artificially inflate demand beyond what would otherwise be the actual demand in the market.

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firebirdparts
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Re: When a company repurchases its shares, does the company become less valuable?

Post by firebirdparts » Mon Dec 02, 2019 8:36 am

RAchip wrote:
Mon Dec 02, 2019 7:52 am
The price of stocks in the public market is set by basic supply and demand. That is an undeniable fact. The price is not set based on any form of academic valuation, although those valuations may impact demand. Buybacks reduce supply and increase demand.

These basic facts are why I always laugh when people here repeat over and over that “dividends reduce share price.” That is false. The price of stock OVER TIME is based ONLY on supply and demand. Over time, dividends tend to increase demand and increase stock price. Over time, buybacks decrease supply and increase demand temporarily while the buybacks are occurring so they should in theory increase stock price but it is probably only temporary. Buybacks are “financial engineering” because
they mostly just temporarily artificially inflate demand beyond what would otherwise be the actual demand in the market.
I know! Human beings set the price of stocks. We're lucky that it's such a simple system.
A fool and your money are soon partners

Topic Author
traderlmd
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Joined: Mon Jul 23, 2018 8:33 pm

Re: When a company repurchases its shares, does the company become less valuable?

Post by traderlmd » Tue Dec 03, 2019 4:08 am

Uncorrelated wrote:
Mon Dec 02, 2019 4:03 am
klaus14 wrote:
Mon Dec 02, 2019 3:39 am
Uncorrelated wrote:
Mon Dec 02, 2019 3:33 am
Seasonal wrote:
Sun Dec 01, 2019 8:28 pm
Uncorrelated wrote:
Sun Dec 01, 2019 3:14 pm


The company value is not equal to the value per share multiplied by the number of outstanding shares. You're talking about the float adjusted market cap.
Would you be happier with: the company is less valuable because it has less cash (but no fewer liabilities and no more assets)?

That is still wrong. The company is not less valuable. After a buyback, the company has less cash but more assets.
what more assets? it has the same assets and less cash, acquired stock is not an asset.

in fact, company can print as many new stocks as it likes. your logic means that if a company issues new stock and sells those (opposite of buyback) (like in an IPO) now it has less assets? really?
Acquired stock is an asset that sits on the balance sheet. If Microsoft uses excess cash to buy Apple shares, then the value of Microsoft does not change. They merely exchange cash into assets with equal value.
Your logic implies that if Microsoft buys Microsoft shares (buyback), the value of Microsoft drops. That is not right. Why would the value of Microsoft drop when the buy Microsoft shares, but not when they buy apple shares?

An IPO is generally not the reverse of a buyback.

A company can not print as many stocks as they like. If a company is 80% owned by individual shareholders, they can only print shares for the 20% of the company that is not yet owned by individual shareholders unless existing shares are diluted.
Why would the equity of Microsoft drop when it buys Microsoft shares, but not when it buys Apple shares? I'm beginning to think you don't know what you're talking about.

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