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

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

Post by typical.investor » Tue Dec 03, 2019 4:17 am

traderlmd wrote:
Tue Dec 03, 2019 4:08 am
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.
Because those are two totally different purchases.

When Microsoft buys Apple stocks, they have voting rights, collect dividends, etc.

When Microsoft buyback it's own shares, the shares are either canceled or held (as treasury shares) but not as normal outstanding shares. They don't get dividends, don't have voting rights, and are not an asset.
When shares are repurchased, they may either be canceled or held for reissue. If not canceled, such shares are referred to as treasury shares. Technically, a repurchased share is a company's own share that has been bought back after having been issued and fully paid.

A company cannot own itself. The possession of treasury shares does not give the company the right to vote, to exercise preemptive rights as a shareholder, to receive cash dividends, or to receive assets on company liquidation. Treasury shares are essentially the same as unissued capital and no one advocates classifying unissued share capital as an asset on the balance sheet, as an asset should have probable future economic benefits. Treasury shares simply reduce ordinary share capital.

Topic Author
traderlmd
Posts: 30
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 4:20 am

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.
Yes it is.

Topic Author
traderlmd
Posts: 30
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 4:30 am

typical.investor wrote:
Tue Dec 03, 2019 4:17 am
traderlmd wrote:
Tue Dec 03, 2019 4:08 am
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.
Because those are two totally different purchases.

When Microsoft buys Apple stocks, they have voting rights, collect dividends, etc.

When Microsoft buyback it's own shares, the shares are either canceled or held (as treasury shares) but not as normal outstanding shares. They don't get dividends, don't have voting rights, and are not an asset.
When shares are repurchased, they may either be canceled or held for reissue. If not canceled, such shares are referred to as treasury shares. Technically, a repurchased share is a company's own share that has been bought back after having been issued and fully paid.

A company cannot own itself. The possession of treasury shares does not give the company the right to vote, to exercise preemptive rights as a shareholder, to receive cash dividends, or to receive assets on company liquidation. Treasury shares are essentially the same as unissued capital and no one advocates classifying unissued share capital as an asset on the balance sheet, as an asset should have probable future economic benefits. Treasury shares simply reduce ordinary share capital.
I know. I was trying to make a point to Uncorrelated. He seemed to be trying to make the point that if a company repurchased its own shares, those shares would show up as an asset on the company's balance sheet (because that is what happens when one company buys another company's shares). I was just trying to make the point to him that if a company buying its own shares was exactly the same as a company buying another company's shares, then buying another company's shares would make the purchasing company's equity decrease (because that is what happens when a company repurchases its own shares) which is not the case.

Uncorrelated
Posts: 147
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Re: When a company repurchases its shares, does the company become less valuable?

Post by Uncorrelated » Tue Dec 03, 2019 4:53 am

traderlmd wrote:
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

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.
That is what Klaus14' logic implies. I certainly don't think that he's right. There is no fundamental difference between Microsoft buying apple shares and Microsoft buying Microsoft shares except that they show up in a difference place on the balance sheet.

traderlmd wrote:
Tue Dec 03, 2019 4:20 am
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.
Yes it is.
You're thinking about float adjusted market cap. It is possible for a company to have value, yet no shares. It is also possible for a company to have issued shares that equate to less than 100% ownership.

ThrustVectoring
Posts: 769
Joined: Wed Jul 12, 2017 2:51 pm

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

Post by ThrustVectoring » Tue Dec 03, 2019 4:55 am

traderlmd wrote:
Tue Dec 03, 2019 4:08 am
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.
Shareholder equity is a liability to external shareholders. Microsoft is obligated to share any cash dividends or M&A cash-out on a proportional basis to shareholders, and the market values this obligation at Microsoft's current market capitalization. When Microsoft buys back shares, it extinguishes this liability to external shareholders, dropping their market capitalization by the amount of cash expended on share buybacks.

When Microsoft buys Apple shares, it still has the same obligation to external shareholders, so their equity remains unchanged.
Uncorrelated wrote:
Tue Dec 03, 2019 4:53 am
That is what Klaus14' logic implies. I certainly don't think that he's right. There is no fundamental difference between Microsoft buying apple shares and Microsoft buying Microsoft shares except that they show up in a difference place on the balance sheet.
There is a fundamental difference between a company buying their own shares and that of a separate company: buying your own shares extinguishes a liability toward external shareholders. This is what a stock buyback fundamentally is - buying back the right to share the proceeds of your business.
Last edited by ThrustVectoring on Tue Dec 03, 2019 4:58 am, edited 1 time in total.
Current portfolio: 60% VTI / 40% VXUS

typical.investor
Posts: 1258
Joined: Mon Jun 11, 2018 3:17 am

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

Post by typical.investor » Tue Dec 03, 2019 4:56 am

Uncorrelated wrote:
Tue Dec 03, 2019 4:53 am

There is no fundamental difference between Microsoft buying apple shares and Microsoft buying Microsoft shares except that they show up in a difference place on the balance sheet.
Wrong.

Treasury shares are essentially the same as unissued capital and no one advocates classifying unissued share capital as an asset on the balance sheet, as an asset should have probable future economic benefits.

So no, share buybacks do not increase assets on the balance sheet, and thus Microsoft buybacks are distinct in nature from any Apple shares on Microsoft's balance sheet.

Uncorrelated
Posts: 147
Joined: Sun Oct 13, 2019 3:16 pm

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

Post by Uncorrelated » Tue Dec 03, 2019 8:26 am

ThrustVectoring wrote:
Tue Dec 03, 2019 4:55 am
traderlmd wrote:
Tue Dec 03, 2019 4:08 am
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.
Shareholder equity is a liability to external shareholders. Microsoft is obligated to share any cash dividends or M&A cash-out on a proportional basis to shareholders, and the market values this obligation at Microsoft's current market capitalization. When Microsoft buys back shares, it extinguishes this liability to external shareholders, dropping their market capitalization by the amount of cash expended on share buybacks.
That's semantics. A shareholder that owns 1% of Microsoft also owns 1% of the shares held in treasury, and is therefore entitled to a portion of the dividend that the treasury shares would have received. Whether the treasury shares do or do not receive a dividend doesn't matter for the final amount of dividend received by the underlying shareholders. Here is an image that shows my mental model of Microsoft after a 20% share buyback.

Image
You could say the shareholders own 100% of Microsoft. You could also say that if you held 1% of Microsoft shares prior to the buyback, you now own a 1.25% share in Microsoft.

The float-adjusted market cap of the company will indeed drop after a buyback, but this doesn't appear to be very useful. Intuitively, one would not have a preference for a company with $10m in cash, $10m in apple stock or $10m in unissued shares. Liquidity issues aside, those three positions are mostly equal. Float-adjusted Market cap doesn't seem to be an useful metric of value, since buybacks can artificially inflate of deflate the numbers.

It appears that a significant portion of the discussion stranded in semantics. It seems obvious that a share buyback should not affect the value of the underlying company since the action can be reversed at any given time by selling the treasury shares on the open market. It also seems obvious that retiring shares has no effect on the company value, since shares can be un-retired at any given time. How accounting practices display those things on the balance sheet, and how 'value' is defined, appears to be both confusing and irrelevant to the end user that is just seeking total return.
typical.investor wrote:
Tue Dec 03, 2019 4:56 am
Uncorrelated wrote:
Tue Dec 03, 2019 4:53 am

There is no fundamental difference between Microsoft buying apple shares and Microsoft buying Microsoft shares except that they show up in a difference place on the balance sheet.
Wrong.

Treasury shares are essentially the same as unissued capital and no one advocates classifying unissued share capital as an asset on the balance sheet, as an asset should have probable future economic benefits.

So no, share buybacks do not increase assets on the balance sheet, and thus Microsoft buybacks are distinct in nature from any Apple shares on Microsoft's balance sheet.
It appears that you're right. That doesn't make any sense.

Seasonal
Posts: 544
Joined: Sun May 21, 2017 1:49 pm

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

Post by Seasonal » Tue Dec 03, 2019 8:30 am

Uncorrelated wrote:
Tue Dec 03, 2019 8:26 am
It appears that a significant portion of the discussion stranded in semantics. It seems obvious that a share buyback should not affect the value of the underlying company since the action can be reversed at any given time by selling the treasury shares on the open market.
A buyback can only be "reversed" if the shares can be sold at the same price that they were bought. Share prices have a tendency to fluctuate.

acegolfer
Posts: 1486
Joined: Tue Aug 25, 2009 9:40 am

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

Post by acegolfer » Tue Dec 03, 2019 9:11 am

Surprised no one yet mentioned the "signaling" effect of stock repurchase. The seminal paper is Vermaelen (1981). Simply speaking, firms repurchase their shares to signal the shares are undervalued.

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

Post by grok87 » Tue Dec 03, 2019 8:01 pm

acegolfer wrote:
Tue Dec 03, 2019 9:11 am
Surprised no one yet mentioned the "signaling" effect of stock repurchase. The seminal paper is Vermaelen (1981). Simply speaking, firms repurchase their shares to signal the shares are undervalued.
here's a link to the abstract
https://www.sciencedirect.com/science/a ... 5X81900118
RIP Mr. Bogle.

ThrustVectoring
Posts: 769
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Re: When a company repurchases its shares, does the company become less valuable?

Post by ThrustVectoring » Tue Dec 03, 2019 11:21 pm

Uncorrelated wrote:
Tue Dec 03, 2019 8:26 am
It seems obvious that a share buyback should not affect the value of the underlying company since the action can be reversed at any given time by selling the treasury shares on the open market.
Do you mean the value per-share or the total value of the company, here? You have to get different answers here, and in any case these actions shouldn't affect the per-share value of the company as long as it's a sale or purchase at market value. It does change the number of shares outstanding, which would make the company either more or less capitalized. Like, this is fundamentally the same process as how ETFs will create or redeem shares in exchange for the underlying assets, either expanding or contracting the balance sheet of the fund without making a dent in the overall per-share prices.
Current portfolio: 60% VTI / 40% VXUS

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

Post by wfrobinette » Wed Dec 04, 2019 4:51 pm

totallystudly wrote:
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
I'd rather have whatever gives me the highest total return.

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