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.
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.
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.