I don't understand stock buybacks

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

Re: I don't understand stock buybacks

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

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

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

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

It’s literally worth $1B less.
HEDGEFUNDIE wrote:
Sun Mar 31, 2019 6:52 pm
Stock that is bought back is retired. It disappears. The shares outstanding are reduced. The remaining shareholders each own a slightly larger portion of the company than before.

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

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

Why on earth do almost all major companies do it then? Because they like throwing money out the window?

The company is not worth less according to the balance sheet. Cash goes down but shareholder equity also goes down... This is an Accounting 101 concept...

Buybacks increase EPS, CFPS, ROA, ROE, etc. The S&P500 buyback index usually doesn't do as well in down markets, but it has significantly outperformed the broader S&P500 over the past ten years, with a total return of 18.8% annually vice 15.9%.

HEDGEFUNDIE
Posts: 4772
Joined: Sun Oct 22, 2017 2:06 pm

Re: I don't understand stock buybacks

Post by HEDGEFUNDIE » Sun Mar 31, 2019 10:07 pm

Bastiat wrote:
Sun Mar 31, 2019 10:00 pm
HEDGEFUNDIE wrote:
Sun Mar 31, 2019 4:57 pm
unclescrooge wrote:
Sun Mar 31, 2019 4:45 pm
HEDGEFUNDIE wrote:
Sun Mar 31, 2019 3:07 pm
RAchip wrote:
Sun Mar 31, 2019 3:00 pm
“technically speaking, buy-backs don't affect the share price”

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

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

It’s literally worth $1B less.
Are you serious?

Why on earth do almost all major companies do it then? Because they like throwing money out the window?

The company is not worth less according to the balance sheet. Cash goes down but shareholder equity also goes down... This is an Accounting 101 concept...
So by your own explanation, the company is worth less after a buyback. Let me literally spell it out, Accounting 101 style.

Cash is an asset. Shareholder equity is on the liability side.

Assets = Shareholder Equity + Liabilities

If both sides of the equation go down, the company is literally worth less, on both sides.

If we start with both sides equal to $100, and then the company makes a $10 stock buyback or dividend payout, then both sides of the equation become $90.

The company was worth $100. Now it is worth $90. It has declined in value.

klaus14
Posts: 459
Joined: Sun Nov 25, 2018 7:43 pm

Re: I don't understand stock buybacks

Post by klaus14 » Sun Mar 31, 2019 10:09 pm

A simple thought experiment:
Assume company A is all cash. 1000 shares and has $1000 in bank, nothing else.
Uses $1 to buy 1 share. Now has $999 in bank and 999 shares. How much do you think remaining 999 share are worth?
Uses $999 to buy 999 shares. How much do you think remaining 1 share is worth?

-------

If we had a mechanism similar to stock reverse split such that:
Everyone's 100 AAPL becomes -> 99 AAPL + $190
(Assume 1% AAPL worth was coming from cash on bank which is to be distributed.)
Then stock price doesn't change, and everyone receives some money.

However, in practice, AAPL buys stock from open market:
Someones 100 AAPL becomes -> 98 AAPL + 2x $190
Other peoples 100 AAPL remains -> 100 AAPL

it's logically equivalent to first hypothetical mechanism so second group's each AAPL should be worth the same as before.
However the actual mechanism of buying through open market drives the price up. This should be temporary since market should recognize AAPL now has less cash in bank.

Buyback is just a way to move money from company to shareholders (ignoring tax consequences).

It's preferable to dividends because of taxes.
35% US, 20 ExUS Dev, 10% EM, 10% EM Bonds, 10% Gold, 10% EDV, 5% I/EE Bonds.

HEDGEFUNDIE
Posts: 4772
Joined: Sun Oct 22, 2017 2:06 pm

Re: I don't understand stock buybacks

Post by HEDGEFUNDIE » Sun Mar 31, 2019 10:20 pm

Bastiat wrote:
Sun Mar 31, 2019 10:00 pm
Buybacks increase EPS, CFPS, ROA, ROE, etc.
This is the source of the confusion. These are all operating metrics, and mechanically, they do go up after a stock buyback, but only because the denominator decreases. The numerator, i.e. the actual value the company is generating, does not change. The company, from an operating perspective, does not change in value due to a stock buyback.

But any company is more than just its operations; it is also its excess assets (generally speaking, cash) on its balance sheet that are not earmarked for operations (that's why it's called "excess" cash).

The value of a company is both its operating value and its excess cash. And the market share price is the sum of both elements. So when a company buys back stock or pays a dividend, its operating value does not change*, and its excess cash goes down to pay for the buyback / dividend, so the value of the company declines, and the share price should decline accordingly.

*with the caveat that willthrill posted above about market expectations, which I agree with.
Last edited by HEDGEFUNDIE on Sun Mar 31, 2019 10:26 pm, edited 1 time in total.

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

Re: I don't understand stock buybacks

Post by Bastiat » Sun Mar 31, 2019 10:24 pm

HEDGEFUNDIE wrote:
Sun Mar 31, 2019 10:07 pm
Bastiat wrote:
Sun Mar 31, 2019 10:00 pm
HEDGEFUNDIE wrote:
Sun Mar 31, 2019 4:57 pm
unclescrooge wrote:
Sun Mar 31, 2019 4:45 pm
HEDGEFUNDIE wrote:
Sun Mar 31, 2019 3:07 pm


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

It’s literally worth $1B less.
Are you serious?

Why on earth do almost all major companies do it then? Because they like throwing money out the window?

The company is not worth less according to the balance sheet. Cash goes down but shareholder equity also goes down... This is an Accounting 101 concept...
So by your own explanation, the company is worth less after a buyback. Let me literally spell it out, Accounting 101 style.

Cash is an asset. Shareholder equity is on the liability side.

Assets = Shareholder Equity + Liabilities

If both sides of the equation go down, the company is literally worth less, on both sides.

If we start with both sides equal to $100, and then the company makes a $10 stock buyback or dividend payout, then both sides of the equation become $90.

The company was worth $100. Now it is worth $90. It has declined in value.
Yes, like I said, cash (an asset) goes down. Shareholder Equity (liability side) also goes down. I said that. Dividends have the same effect on the balance sheet.

The whole point of a share buyback is to return value to shareholders. You can't return value while also retaining value. We're having this discussion in the context of dividends, which also return value. I thought all of this was self evident.

You are making it seem as though dividends return more value to shareholders whereas buybacks merely reduce the worth of the company. This is not the case; dividends return less when accounting for taxes.

HEDGEFUNDIE
Posts: 4772
Joined: Sun Oct 22, 2017 2:06 pm

Re: I don't understand stock buybacks

Post by HEDGEFUNDIE » Sun Mar 31, 2019 10:28 pm

Bastiat wrote:
Sun Mar 31, 2019 10:24 pm
Yes, like I said, cash (an asset) goes down. Shareholder Equity (liability side) also goes down. I said that. Dividends have the same effect on the balance sheet.

The whole point of a share buyback is to return value to shareholders. You can't return value while also retaining value. We're having this discussion in the context of dividends, which also return value. I thought all of this was self evident.

You are making it seem as though dividends return more value to shareholders whereas buybacks merely reduce the worth of the company. This is not the case; dividends return less when accounting for taxes.
Ignoring tax effects:

A company that spends $1B on stock buybacks is worth $1B less immediately after the buyback. The shareholders see no change in their net worth.

A company that spends $1B on dividends is worth $1B less immediately after the dividend. The shareholders see no change in their net worth.

Do we agree?

Bacchus01
Posts: 3182
Joined: Mon Dec 24, 2012 9:35 pm

Re: I don't understand stock buybacks

Post by Bacchus01 » Sun Mar 31, 2019 10:29 pm

HEDGEFUNDIE wrote:
Sun Mar 31, 2019 10:28 pm
Bastiat wrote:
Sun Mar 31, 2019 10:24 pm
Yes, like I said, cash (an asset) goes down. Shareholder Equity (liability side) also goes down. I said that. Dividends have the same effect on the balance sheet.

The whole point of a share buyback is to return value to shareholders. You can't return value while also retaining value. We're having this discussion in the context of dividends, which also return value. I thought all of this was self evident.

You are making it seem as though dividends return more value to shareholders whereas buybacks merely reduce the worth of the company. This is not the case; dividends return less when accounting for taxes.
Ignoring tax effects:

A company that spends $1B on stock buybacks is worth $1B less immediately after the buyback. The shareholders see no change in their net worth.

A company that spends $1B on dividends is worth $1B less immediately after the dividend. The shareholders see no change in their net worth.

Do we agree?
No, because that’s not how companies are valued.

HEDGEFUNDIE
Posts: 4772
Joined: Sun Oct 22, 2017 2:06 pm

Re: I don't understand stock buybacks

Post by HEDGEFUNDIE » Sun Mar 31, 2019 10:35 pm

Bacchus01 wrote:
Sun Mar 31, 2019 10:29 pm
HEDGEFUNDIE wrote:
Sun Mar 31, 2019 10:28 pm
Bastiat wrote:
Sun Mar 31, 2019 10:24 pm
Yes, like I said, cash (an asset) goes down. Shareholder Equity (liability side) also goes down. I said that. Dividends have the same effect on the balance sheet.

The whole point of a share buyback is to return value to shareholders. You can't return value while also retaining value. We're having this discussion in the context of dividends, which also return value. I thought all of this was self evident.

You are making it seem as though dividends return more value to shareholders whereas buybacks merely reduce the worth of the company. This is not the case; dividends return less when accounting for taxes.
Ignoring tax effects:

A company that spends $1B on stock buybacks is worth $1B less immediately after the buyback. The shareholders see no change in their net worth.

A company that spends $1B on dividends is worth $1B less immediately after the dividend. The shareholders see no change in their net worth.

Do we agree?
No, because that’s not how companies are valued.
It is absolutely how companies are valued.

Generally, companies are valued one of two ways:

1. Discounted cash flow analysis.

2. Multiples analysis.

Both methods account for excess cash in their calculations.

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

Re: I don't understand stock buybacks

Post by Bastiat » Sun Mar 31, 2019 10:36 pm

HEDGEFUNDIE wrote:
Sun Mar 31, 2019 10:28 pm
Bastiat wrote:
Sun Mar 31, 2019 10:24 pm
Yes, like I said, cash (an asset) goes down. Shareholder Equity (liability side) also goes down. I said that. Dividends have the same effect on the balance sheet.

The whole point of a share buyback is to return value to shareholders. You can't return value while also retaining value. We're having this discussion in the context of dividends, which also return value. I thought all of this was self evident.

You are making it seem as though dividends return more value to shareholders whereas buybacks merely reduce the worth of the company. This is not the case; dividends return less when accounting for taxes.
Ignoring tax effects:

A company that spends $1B on stock buybacks is worth $1B less immediately after the buyback. The shareholders see no change in their net worth.

A company that spends $1B on dividends is worth $1B less immediately after the dividend. The shareholders see no change in their net worth.

Do we agree?
Yes. That is how it works. The company that spent on buybacks also saw ROA and EPS go up as float went down.

klaus14
Posts: 459
Joined: Sun Nov 25, 2018 7:43 pm

Re: I don't understand stock buybacks

Post by klaus14 » Sun Mar 31, 2019 10:40 pm

Bastiat wrote:
Sun Mar 31, 2019 10:36 pm

Yes. That is how it works. The company that spent on buybacks also saw ROA and EPS go up as float went down.
You can represent profit generating part of the company with monetary value.

Let's say company worth = $900 worth of profit generating engine + $100 cash = $1000
company has 1000 shares.
company uses $1 cash to buy one share. Now company has 999 shares. EPS went up.
How much do you think each share is worth?
35% US, 20 ExUS Dev, 10% EM, 10% EM Bonds, 10% Gold, 10% EDV, 5% I/EE Bonds.

Bacchus01
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Re: I don't understand stock buybacks

Post by Bacchus01 » Sun Mar 31, 2019 10:44 pm

HEDGEFUNDIE wrote:
Sun Mar 31, 2019 10:35 pm
Bacchus01 wrote:
Sun Mar 31, 2019 10:29 pm
HEDGEFUNDIE wrote:
Sun Mar 31, 2019 10:28 pm
Bastiat wrote:
Sun Mar 31, 2019 10:24 pm
Yes, like I said, cash (an asset) goes down. Shareholder Equity (liability side) also goes down. I said that. Dividends have the same effect on the balance sheet.

The whole point of a share buyback is to return value to shareholders. You can't return value while also retaining value. We're having this discussion in the context of dividends, which also return value. I thought all of this was self evident.

You are making it seem as though dividends return more value to shareholders whereas buybacks merely reduce the worth of the company. This is not the case; dividends return less when accounting for taxes.
Ignoring tax effects:

A company that spends $1B on stock buybacks is worth $1B less immediately after the buyback. The shareholders see no change in their net worth.

A company that spends $1B on dividends is worth $1B less immediately after the dividend. The shareholders see no change in their net worth.

Do we agree?
No, because that’s not how companies are valued.
It is absolutely how companies are valued.

Generally, companies are valued one of two ways:

1. Discounted cash flow analysis.

2. Multiples analysis.

Both methods account for excess cash in their calculations.
Nope.

HEDGEFUNDIE
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Joined: Sun Oct 22, 2017 2:06 pm

Re: I don't understand stock buybacks

Post by HEDGEFUNDIE » Sun Mar 31, 2019 10:59 pm

Bacchus01 wrote:
Sun Mar 31, 2019 10:44 pm
Nope.
Such an illuminating reply, Bacchus.

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

Bacchus01
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Re: I don't understand stock buybacks

Post by Bacchus01 » Sun Mar 31, 2019 11:03 pm

EBITDA

Bacchus01
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Re: I don't understand stock buybacks

Post by Bacchus01 » Sun Mar 31, 2019 11:05 pm

HEDGEFUNDIE wrote:
Sun Mar 31, 2019 10:35 pm
Bacchus01 wrote:
Sun Mar 31, 2019 10:29 pm
HEDGEFUNDIE wrote:
Sun Mar 31, 2019 10:28 pm
Bastiat wrote:
Sun Mar 31, 2019 10:24 pm
Yes, like I said, cash (an asset) goes down. Shareholder Equity (liability side) also goes down. I said that. Dividends have the same effect on the balance sheet.

The whole point of a share buyback is to return value to shareholders. You can't return value while also retaining value. We're having this discussion in the context of dividends, which also return value. I thought all of this was self evident.

You are making it seem as though dividends return more value to shareholders whereas buybacks merely reduce the worth of the company. This is not the case; dividends return less when accounting for taxes.
Ignoring tax effects:

A company that spends $1B on stock buybacks is worth $1B less immediately after the buyback. The shareholders see no change in their net worth.

A company that spends $1B on dividends is worth $1B less immediately after the dividend. The shareholders see no change in their net worth.

Do we agree?
No, because that’s not how companies are valued.
It is absolutely how companies are valued.

Generally, companies are valued one of two ways:

1. Discounted cash flow analysis.

2. Multiples analysis.

Both methods account for excess cash in their calculations.
DCF does not include cash on the books, it is a measure of future cash flows. It does not include present cash balance.

What multiple analysis includes cash balance?

HEDGEFUNDIE
Posts: 4772
Joined: Sun Oct 22, 2017 2:06 pm

Re: I don't understand stock buybacks

Post by HEDGEFUNDIE » Sun Mar 31, 2019 11:17 pm

Bacchus01 wrote:
Sun Mar 31, 2019 11:05 pm
HEDGEFUNDIE wrote:
Sun Mar 31, 2019 10:35 pm
Bacchus01 wrote:
Sun Mar 31, 2019 10:29 pm
HEDGEFUNDIE wrote:
Sun Mar 31, 2019 10:28 pm
Bastiat wrote:
Sun Mar 31, 2019 10:24 pm
Yes, like I said, cash (an asset) goes down. Shareholder Equity (liability side) also goes down. I said that. Dividends have the same effect on the balance sheet.

The whole point of a share buyback is to return value to shareholders. You can't return value while also retaining value. We're having this discussion in the context of dividends, which also return value. I thought all of this was self evident.

You are making it seem as though dividends return more value to shareholders whereas buybacks merely reduce the worth of the company. This is not the case; dividends return less when accounting for taxes.
Ignoring tax effects:

A company that spends $1B on stock buybacks is worth $1B less immediately after the buyback. The shareholders see no change in their net worth.

A company that spends $1B on dividends is worth $1B less immediately after the dividend. The shareholders see no change in their net worth.

Do we agree?
No, because that’s not how companies are valued.
It is absolutely how companies are valued.

Generally, companies are valued one of two ways:

1. Discounted cash flow analysis.

2. Multiples analysis.

Both methods account for excess cash in their calculations.
DCF does not include cash on the books, it is a measure of future cash flows. It does not include present cash balance.

What multiple analysis includes cash balance?
Then you’ve been doing it wrong:

https://www.mckinsey.com/business-funct ... -valuation
4. Adjust the enterprise-value-to-EBITA multiple for nonoperating items

Although the one-time nonoperating items in net income make EBITA superior to earnings for calculating multiples, even enterprise-value-to-EBITA multiples must be adjusted for nonoperating items hidden within enterprise value and EBITA, both of which must be adjusted for these nonoperating items, such as excess cash and operating leases. Failing to do so can generate misleading results. (Despite the common perception that multiples are easy to calculate, calculating them correctly takes time and effort.) Here are the most common adjustments.

Excess cash and other nonoperating assets. Since EBITA excludes interest income from excess cash, the enterprise value shouldn’t include excess cash. Nonoperating assets must be evaluated separately.

Bacchus01
Posts: 3182
Joined: Mon Dec 24, 2012 9:35 pm

Re: I don't understand stock buybacks

Post by Bacchus01 » Sun Mar 31, 2019 11:20 pm

HEDGEFUNDIE wrote:
Sun Mar 31, 2019 11:17 pm
Bacchus01 wrote:
Sun Mar 31, 2019 11:05 pm
HEDGEFUNDIE wrote:
Sun Mar 31, 2019 10:35 pm
Bacchus01 wrote:
Sun Mar 31, 2019 10:29 pm
HEDGEFUNDIE wrote:
Sun Mar 31, 2019 10:28 pm


Ignoring tax effects:

A company that spends $1B on stock buybacks is worth $1B less immediately after the buyback. The shareholders see no change in their net worth.

A company that spends $1B on dividends is worth $1B less immediately after the dividend. The shareholders see no change in their net worth.

Do we agree?
No, because that’s not how companies are valued.
It is absolutely how companies are valued.

Generally, companies are valued one of two ways:

1. Discounted cash flow analysis.

2. Multiples analysis.

Both methods account for excess cash in their calculations.
DCF does not include cash on the books, it is a measure of future cash flows. It does not include present cash balance.

What multiple analysis includes cash balance?
Then you’ve been doing it wrong:

https://www.mckinsey.com/business-funct ... -valuation
4. Adjust the enterprise-value-to-EBITA multiple for nonoperating items

Although the one-time nonoperating items in net income make EBITA superior to earnings for calculating multiples, even enterprise-value-to-EBITA multiples must be adjusted for nonoperating items hidden within enterprise value and EBITA, both of which must be adjusted for these nonoperating items, such as excess cash and operating leases. Failing to do so can generate misleading results. (Despite the common perception that multiples are easy to calculate, calculating them correctly takes time and effort.) Here are the most common adjustments.

Excess cash and other nonoperating assets. Since EBITA excludes interest income from excess cash, the enterprise value shouldn’t include excess cash. Nonoperating assets must be evaluated separately.

Did you actually read what you posted?

HEDGEFUNDIE
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Re: I don't understand stock buybacks

Post by HEDGEFUNDIE » Sun Mar 31, 2019 11:24 pm

Bacchus01 wrote:
Sun Mar 31, 2019 11:20 pm
Did you actually read what you posted?
I read it just fine.

EBITDA does not include excess cash, but EBITDA does not by itself get you the value of the company.

EBITDA requires an industry multiple to do that.

EBITDA * multiple = Enterprise Value

Excess cash must be accounted for in both the multiple and the EV

HEDGEFUNDIE
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Re: I don't understand stock buybacks

Post by HEDGEFUNDIE » Sun Mar 31, 2019 11:34 pm

One more time, Accounting 101.

Assets (including cash) = Liabilities + Shareholder Equity

Shareholder equity = Assets (including cash) - Liabilities

So if you increase cash, you increase equity, dollar for dollar.

(This all applies to market values the same way as book values, the equity is valued by the market every trading minute, but that value includes the value of the cash)

Minty
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Location: NorCal

Re: I don't understand stock buybacks

Post by Minty » Mon Apr 01, 2019 2:05 am

refinedchain wrote:
Sun Mar 31, 2019 1:56 pm
If a company issues stock buybacks in lieu of declaring dividends, how does the average investor materially benefit from the buybacks?
I've wondered about this myself, and read this and other buyback threads with interest. It seems that if a company chooses to return earnings to shareholders, a buyback has the advantage of giving current shareholders a choice of whether to cash out or not. With a dividend, all shareholders get the payout even if they would prefer to stay fully invested. (Reinvesting dividends may have tax and other costs). Presumably, the buyback adds to the market demand for the shares, and therefore increases the price marginally. So buybacks are good for shareholders who want to sell at a little premium. And it appears that buybacks are a signal of management confidence, so for shareholders who want to stay in, there may be reason to hope that the share price will go up; in any event, the remaining shareholders are no worse off. But I find it hard to accept the idea that increased EPS, solely because the number of shares outstanding has been reduced, makes much of a difference to the stock price. Surely almost all active investors can and do distinguish between an EPS increase based on operational success, and one based on an accounting change. If increased EPS not based on increased earnings predictably improved stock prices, wouldn't we see a lot more reverse stock splits than we do?
Core Four with nominal bonds and TIPS.

Bacchus01
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Re: I don't understand stock buybacks

Post by Bacchus01 » Mon Apr 01, 2019 5:25 am

HEDGEFUNDIE wrote:
Sun Mar 31, 2019 11:24 pm
Bacchus01 wrote:
Sun Mar 31, 2019 11:20 pm
Did you actually read what you posted?
I read it just fine.

EBITDA does not include excess cash, but EBITDA does not by itself get you the value of the company.

EBITDA requires an industry multiple to do that.

EBITDA * multiple = Enterprise Value

Excess cash must be accounted for in both the multiple and the EV
It says right on your post “EV should NOT include excess cash”

Bacchus01
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Re: I don't understand stock buybacks

Post by Bacchus01 » Mon Apr 01, 2019 5:28 am

HEDGEFUNDIE wrote:
Sun Mar 31, 2019 11:34 pm
One more time, Accounting 101.

Assets (including cash) = Liabilities + Shareholder Equity

Shareholder equity = Assets (including cash) - Liabilities

So if you increase cash, you increase equity, dollar for dollar.

(This all applies to market values the same way as book values, the equity is valued by the market every trading minute, but that value includes the value of the cash)
I know you believe what you are writing, so I won’t argue with you any more. Having gone through many, many business transaction, I can tell you that cash has limited value. It does have value, but not on the direct 1:1 relationship you are stating. Peace.

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Dialectical Investor
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Re: I don't understand stock buybacks

Post by Dialectical Investor » Mon Apr 01, 2019 8:29 am

Minty wrote:
Mon Apr 01, 2019 2:05 am

Surely almost all active investors can and do distinguish between an EPS increase based on operational success, and one based on an accounting change. If increased EPS not based on increased earnings predictably improved stock prices, wouldn't we see a lot more reverse stock splits than we do?
A buyback increases the percent of equity owned by shareholders who did not sell their shares; likewise earnings. A stock split does not. A buyback is not just an accounting change. The company has shrunk. You own more of it, presuming you did not sell shares.

HEDGEFUNDIE
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Re: I don't understand stock buybacks

Post by HEDGEFUNDIE » Mon Apr 01, 2019 8:53 am

Bacchus01 wrote:
Mon Apr 01, 2019 5:28 am
HEDGEFUNDIE wrote:
Sun Mar 31, 2019 11:34 pm
One more time, Accounting 101.

Assets (including cash) = Liabilities + Shareholder Equity

Shareholder equity = Assets (including cash) - Liabilities

So if you increase cash, you increase equity, dollar for dollar.

(This all applies to market values the same way as book values, the equity is valued by the market every trading minute, but that value includes the value of the cash)
I know you believe what you are writing, so I won’t argue with you any more. Having gone through many, many business transaction, I can tell you that cash has limited value. It does have value, but not on the direct 1:1 relationship you are stating. Peace.
In a typical transaction you use the excess cash to pay off debt, that’s why it doesn’t often show up separately.

These two equations are equivalent:

1. EV + Excess Cash = Equity + Total Debt
2. EV = Equity + Net Debt

But in both cases you do account for the cash. To totally ignore the cash is just wrong.

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vineviz
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Re: I don't understand stock buybacks

Post by vineviz » Mon Apr 01, 2019 9:06 am

HEDGEFUNDIE wrote:
Mon Apr 01, 2019 8:53 am
I know you believe what you are writing, so I won’t argue with you any more. Having gone through many, many business transaction, I can tell you that cash has limited value. It does have value, but not on the direct 1:1 relationship you are stating. Peace.
In a typical transaction you use the excess cash to pay off debt, that’s why it doesn’t often show up separately.
One thing that might have you guys talking past each other is that we often use EV ratios to value the equity of companies, but EV and equity value have some mismatches.

http://youtube-breakingintowallstreet-c ... Impact.pdf

A marginal increase of $100 in cash will be generally worth $100 in marginal equity value, though it is likely that investors will adjust that valuation based on expected tax treatment and/or the probability that management will spend the cash in a value-destructive manner.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

smallpotato
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Re: I don't understand stock buybacks

Post by smallpotato » Mon Apr 01, 2019 9:17 am

I have a company, it has 10 shares outstanding and very reliable $1/yr earnings. In the bank, it has $1B (excess cash).

How would you value a share?

Actually, today, the company is buying back a share in a free and open market trade. How would that change your answer?

Minty
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Re: I don't understand stock buybacks

Post by Minty » Mon Apr 01, 2019 9:21 am

Dialectical Investor wrote:
Mon Apr 01, 2019 8:29 am
Minty wrote:
Mon Apr 01, 2019 2:05 am

Surely almost all active investors can and do distinguish between an EPS increase based on operational success, and one based on an accounting change. If increased EPS not based on increased earnings predictably improved stock prices, wouldn't we see a lot more reverse stock splits than we do?
A buyback increases the percent of equity owned by shareholders who did not sell their shares; likewise earnings. A stock split does not. A buyback is not just an accounting change. The company has shrunk. You own more of it, presuming you did not sell shares.
Hmmm. If we assume cash to be returned to the shareholders of .1 of the value of a company, isn't a buyback of .1 worth of the shares economically and formally identical (leaving aside taxes) to a dividend of .1 of the shares, coupled with a .9 for 1 reverse stock split, making each share represent a larger portion of the smaller company?
Core Four with nominal bonds and TIPS.

Valuethinker
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Re: I don't understand stock buybacks

Post by Valuethinker » Mon Apr 01, 2019 9:29 am

Minty wrote:
Mon Apr 01, 2019 2:05 am
refinedchain wrote:
Sun Mar 31, 2019 1:56 pm
If a company issues stock buybacks in lieu of declaring dividends, how does the average investor materially benefit from the buybacks?
I've wondered about this myself, and read this and other buyback threads with interest. It seems that if a company chooses to return earnings to shareholders, a buyback has the advantage of giving current shareholders a choice of whether to cash out or not. With a dividend, all shareholders get the payout even if they would prefer to stay fully invested. (Reinvesting dividends may have tax and other costs). Presumably, the buyback adds to the market demand for the shares, and therefore increases the price marginally. So buybacks are good for shareholders who want to sell at a little premium. And it appears that buybacks are a signal of management confidence, so for shareholders who want to stay in, there may be reason to hope that the share price will go up; in any event, the remaining shareholders are no worse off.
The point is you have a larger percentage of the same company if you do not sell. A larger share of the remaining profits, so that's a good thing.

Buybacks are so superior to dividends that it is interesting that companies do dividends at all - Warren Buffett takes you through the logic of why he does not.

However most company managements do not have shareholder trust in alignment of interests that BH & Buffett have. Thus it appears that dividends have a Signalling content (in asymmetric information economics speak) telling shareholders that the Board really believes in the profits that are reported, and in the sustainability of those profits. For the same reason, a cut in dividend has a disproportionate impact on share price, because it signals to shareholders that things really are bad.

But I find it hard to accept the idea that increased EPS, solely because the number of shares outstanding has been reduced, makes much of a difference to the stock price. Surely almost all active investors can and do distinguish between an EPS increase based on operational success, and one based on an accounting change. If increased EPS not based on increased earnings predictably improved stock prices, wouldn't we see a lot more reverse stock splits than we do?
A reverse stock split *will* benefit the share price, by the proportion of the split e.g. 1 for 4 will lead to a 4x increase in share price.

So yes the increase in EPS is reflected.

I think there is quite a bit of evidence that investors do distinguish between EPS growth arising from "financial engineering" and that arising from improvements in operational performance. The former has a smaller impact on share prices. In the end, though, if a Board thinks that the company has no more projects it can undertake that are above its cost-of-capital, the best thing the company can do is give the money back to shareholders.

oko
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Re: I don't understand stock buybacks

Post by oko » Mon Apr 01, 2019 9:37 am

I recently read an article about how Sears spent several billion dollars on stock buybacks in the last few years, and we all now how Sears is doing now. The article was asking this question: What if Sears spent all these billions on technology improvements, better inventory control or similar things. I don't know the answer. But I have a simple theory for stock buybacks:

1-A $1 increase in stock price might cause a few million dollars of extra income for most CEOs/CFOs and other upper management people.
2-The simplest way to increase a stock price for any CEO/CFO/others is stock buybacks because of simple economic reason: Increase demand. You can do a stock buyback even if you don't have any clue about your industry, no clue about innovation, no clue about how to increase sales. You can do a stock buyback to try to increase your stock price even if you don't know how to read/write.

And that's why lots of companies do stock buybacks.

Of course I might be wrong.

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Dialectical Investor
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Re: I don't understand stock buybacks

Post by Dialectical Investor » Mon Apr 01, 2019 9:42 am

Minty wrote:
Mon Apr 01, 2019 9:21 am
Dialectical Investor wrote:
Mon Apr 01, 2019 8:29 am
Minty wrote:
Mon Apr 01, 2019 2:05 am

Surely almost all active investors can and do distinguish between an EPS increase based on operational success, and one based on an accounting change. If increased EPS not based on increased earnings predictably improved stock prices, wouldn't we see a lot more reverse stock splits than we do?
A buyback increases the percent of equity owned by shareholders who did not sell their shares; likewise earnings. A stock split does not. A buyback is not just an accounting change. The company has shrunk. You own more of it, presuming you did not sell shares.
Hmmm. If we assume cash to be returned to the shareholders of .1 of the value of a company, isn't a buyback of .1 worth of the shares economically and formally identical (leaving aside taxes) to a dividend of .1 of the shares, coupled with a .9 for 1 reverse stock split, making each share represent a larger portion of the smaller company?
Yes, very similar, though not identical. From the company's perspective, for instance, they'd reduce retained earnings with the special cash dividend, but they'd reduce capital accounts with the buyback. The former could reduce future cash dividends the company is able to pay. In reality, I don't think a company would be eager to do a reverse split.

mak1277
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Re: I don't understand stock buybacks

Post by mak1277 » Mon Apr 01, 2019 9:50 am

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

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

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

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

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

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

This gives the shareholder better control of how to realize the dividend that was distributed, and usually is more tax-efficient, which is why a stock buyback is preferable to a cash dividend in most cases.
What you're missing though, is that the buyback process is not nearly as efficient as what you describe. If a company is buying back shares, they're doing so in the open market. As they buy, the price is going to rise because of the way the market works. If "someone" is in the market buying a billion dollars of a company's shares, the per share price is going to rise, period.

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Re: I don't understand stock buybacks

Post by marcopolo » Mon Apr 01, 2019 9:56 am

mak1277 wrote:
Mon Apr 01, 2019 9:50 am
marcopolo wrote:
Sun Mar 31, 2019 6:57 pm
I think perhaps some the confusio0n around buybacks is that there are effectively a number of things going on at once that may cloud how they are perceived.

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

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

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

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

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

This gives the shareholder better control of how to realize the dividend that was distributed, and usually is more tax-efficient, which is why a stock buyback is preferable to a cash dividend in most cases.
What you're missing though, is that the buyback process is not nearly as efficient as what you describe. If a company is buying back shares, they're doing so in the open market. As they buy, the price is going to rise because of the way the market works. If "someone" is in the market buying a billion dollars of a company's shares, the per share price is going to rise, period.
All the more reason to prefer them to cash dividends.
Once in a while you get shown the light, in the strangest of places if you look at it right.

HEDGEFUNDIE
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Re: I don't understand stock buybacks

Post by HEDGEFUNDIE » Mon Apr 01, 2019 10:16 am

A good summary of stock buybacks:

https://www.ft.com/content/86993f38-5f7 ... 00779e2340
There are three main benefits to share repurchases.
  • Corporate tax savings If a company borrows money to buy back stock, it lowers its corporate tax bill, as interest is a tax deductible expense. To the extent that interest earned on excess cash is subject to corporate income taxes, a similar argument can be made for repurchases financed with excess cash.
  • Agency costs reductions Share prices increase because the market expects excess cash to be wasted in value-destroying projects. Of course, this assumes that managers are unwilling or incapable of “parking” excess cash in investments that don’t destroy value.
  • Information signalling The repurchase is a signal that management believes that the stock is undervalued. Indeed, a repurchase is an investment in the company. To the extent that managers are also owners, buying back stock is, in some ways, a form of indirect insider buying, which should be a good sign.

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jeffyscott
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Re: I don't understand stock buybacks

Post by jeffyscott » Mon Apr 01, 2019 10:25 am

oko wrote:
Mon Apr 01, 2019 9:37 am
I recently read an article about how Sears spent several billion dollars on stock buybacks in the last few years, and we all now how Sears is doing now. The article was asking this question: What if Sears spent all these billions on technology improvements, better inventory control or similar things. I don't know the answer. But I have a simple theory for stock buybacks:

1-A $1 increase in stock price might cause a few million dollars of extra income for most CEOs/CFOs and other upper management people.
2-The simplest way to increase a stock price for any CEO/CFO/others is stock buybacks because of simple economic reason: Increase demand. You can do a stock buyback even if you don't have any clue about your industry, no clue about innovation, no clue about how to increase sales. You can do a stock buyback to try to increase your stock price even if you don't know how to read/write.

And that's why lots of companies do stock buybacks.

Of course I might be wrong.
And a dividend would reduce the share price, costing those corporate managers a few million. But apparently most here fully trust corporate mangers to only ever do what is in the best interest of all the regular shareholders.

It'd be nice if the tax code were fixed in some way so that, since they are supposedly equivalent actions, buybacks and dividends incurred the same tax cost.
Time is your friend; impulse is your enemy. - John C. Bogle

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munemaker
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Re: I don't understand stock buybacks

Post by munemaker » Mon Apr 01, 2019 10:45 am

willthrill81 wrote:
Sun Mar 31, 2019 9:44 pm
munemaker wrote:
Sun Mar 31, 2019 9:42 pm
willthrill81 wrote:
Sun Mar 31, 2019 9:24 pm
Both stock buybacks and dividends are, in the absence of taxes, neutral in their impact to investors. Neither creates or destroys value.
True, but we do not live in a world that where taxes are absent so why make such a statement?
The reason I said that is to illustrate the point made in the last sentence. It's already been stated in this thread repeatedly that in taxable accounts, dividends are less favorable, so I didn't feel the need to repeat it, but it's certainly true. In a tax-advantaged account, they truly are neutral.

And yes, some of us are blessed to have no need at all for taxable accounts. 8-)
After looking into this, I agree with your point. I was thinking most stock would be owned in taxable accounts and only small investors would have most or all of their stock ownership in tax free/tax deferred accounts. I did find that only about 25% of stock is owned in taxable accounts. So I agree, if you are in tax advantaged accounts, dividend or buy back doesn't really matter.

https://www.taxpolicycenter.org/taxvox/ ... areholders

mak1277
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Re: I don't understand stock buybacks

Post by mak1277 » Mon Apr 01, 2019 10:51 am

marcopolo wrote:
Mon Apr 01, 2019 9:56 am
mak1277 wrote:
Mon Apr 01, 2019 9:50 am
marcopolo wrote:
Sun Mar 31, 2019 6:57 pm
I think perhaps some the confusio0n around buybacks is that there are effectively a number of things going on at once that may cloud how they are perceived.

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

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

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

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

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

This gives the shareholder better control of how to realize the dividend that was distributed, and usually is more tax-efficient, which is why a stock buyback is preferable to a cash dividend in most cases.
What you're missing though, is that the buyback process is not nearly as efficient as what you describe. If a company is buying back shares, they're doing so in the open market. As they buy, the price is going to rise because of the way the market works. If "someone" is in the market buying a billion dollars of a company's shares, the per share price is going to rise, period.
All the more reason to prefer them to cash dividends.
Yes, completely agree.

One more benefit...capital gains rates vs. ordinary income you pay on dividends.

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Dialectical Investor
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Re: I don't understand stock buybacks

Post by Dialectical Investor » Mon Apr 01, 2019 10:56 am

jeffyscott wrote:
Mon Apr 01, 2019 10:25 am

It'd be nice if the tax code were fixed in some way so that, since they are supposedly equivalent actions, buybacks and dividends incurred the same tax cost.
Let's not take the indifference thing too far. A buyback and a dividend are not equivalent in all ways. I think that statement arose from too many people seeing dividends as free money. Retail investors with long-term portfolios spread across hundreds of large, public companies might not see the relevance of any distinctions as clearly as shareholders of a small, privately held C corp.

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willthrill81
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Re: I don't understand stock buybacks

Post by willthrill81 » Mon Apr 01, 2019 11:18 am

munemaker wrote:
Mon Apr 01, 2019 10:45 am
willthrill81 wrote:
Sun Mar 31, 2019 9:44 pm
munemaker wrote:
Sun Mar 31, 2019 9:42 pm
willthrill81 wrote:
Sun Mar 31, 2019 9:24 pm
Both stock buybacks and dividends are, in the absence of taxes, neutral in their impact to investors. Neither creates or destroys value.
True, but we do not live in a world that where taxes are absent so why make such a statement?
The reason I said that is to illustrate the point made in the last sentence. It's already been stated in this thread repeatedly that in taxable accounts, dividends are less favorable, so I didn't feel the need to repeat it, but it's certainly true. In a tax-advantaged account, they truly are neutral.

And yes, some of us are blessed to have no need at all for taxable accounts. 8-)
After looking into this, I agree with your point. I was thinking most stock would be owned in taxable accounts and only small investors would have most or all of their stock ownership in tax free/tax deferred accounts. I did find that only about 25% of stock is owned in taxable accounts. So I agree, if you are in tax advantaged accounts, dividend or buy back doesn't really matter.

https://www.taxpolicycenter.org/taxvox/ ... areholders
We have over $75k of tax-advantaged space available to us this year, which is more than enough for us. But most single-income households probably don't have more than half that much.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

not4me
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Re: I don't understand stock buybacks

Post by not4me » Tue Apr 02, 2019 8:33 am

refinedchain wrote:
Sun Mar 31, 2019 9:50 pm
MrJones wrote:
Sun Mar 31, 2019 3:32 pm
refinedchain wrote:
Sun Mar 31, 2019 2:28 pm
unclescrooge wrote:
Sun Mar 31, 2019 2:23 pm

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

If the sole remaining homeowner chooses to burn them down, that's his fault, not his accountant's for suggesting buying them in lieu of distributing a dividend.
I would concede I am not very creative and am not sure what I would do with 10 houses in a small rural neighborhood with a defunct oil rig next door.
Are you trolling us? If you bought Apple stocks, and went through 10 buybacks, does that somehow automatically make you the (uncreative) sole owner of the business?
Sorry, not my intent. I was slow to pick up that I would be left with something of value. I was stuck in the mindset that "value = operating earnings" and didn't see how a business could still have value after it closed its doors.
OP, I didn’t take you as a troll, but rather someone trying to understand & in that spirit would offer some suggestions. 1st I’ll say, I think you’d have general agreement on this board not to invest in an MLP. That conclusion was a bit of a jump & perhaps a distraction as MLPs introduce a lot of variables not found in the buyback/dividend discussion.

2nd, I understand why you’d have a relatively simple scenario as complexity makes it difficult to follow. However, it leaves the door open for folks to make their own (often unspoken) assumptions that will of course be favorable for their position. So, while I’m too lazy to do this myself, I’d recommend expanding your scenario to include real world factors with the goal not being to be exhaustive/conclusive. Rather to give a sense for how things would unfold overtime. I think you could do a chart that would be easier to follow than my upcoming explanation.

Most importantly, start with what a homeowner owns before oil is found. Does each owner have a $100k house AND a 1/10 share of the HOA (valued at $0?)? Then make the sales voluntary & open to outside buyers. Have the value of the houses go up AND down – including premiums & discounts. Have the value of the oil royalty do the same, but on a different cycle. Have a president of the HOA that makes independent decisions, including selling houses to (or buying from) a neighboring HOA. Randomly have owners sell based on their needs (ie, death forces a sale, job transfer, etc). The royalty would be paid into the HOA account until the president spends.
Then go back & reverse the direction of the change in house price & royalty to see how sequence of returns affects. Then, repeat with a cash dividend paid to owners instead of a buyback.

You may find that neither dividends nor buybacks ALWAYS max the cash EVERY owner has.

On a somewhat related note, I thought I’d take this opportunity to invoke the power of the BH community. I believe that there are cases in which some companies have spent more on buybacks over the last couple of decades than the current market cap. I do NOT have a source for that though. Boeing & HP are two that stick in my mind. This may be wrong, but there is someone out there that can likely confirm or refute that & I’d be curious to see.

inbox788
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Re: I don't understand stock buybacks

Post by inbox788 » Tue Apr 02, 2019 2:56 pm

not4me wrote:
Tue Apr 02, 2019 8:33 am
On a somewhat related note, I thought I’d take this opportunity to invoke the power of the BH community. I believe that there are cases in which some companies have spent more on buybacks over the last couple of decades than the current market cap. I do NOT have a source for that though. Boeing & HP are two that stick in my mind. This may be wrong, but there is someone out there that can likely confirm or refute that & I’d be curious to see.
I'm sure there are a few companies that have lost money on buybacks, but I doubt either Boeing or HP are it. Boeing is $200B market cap with $20B buyback announced (and these are usually multi year; they're buying back about 10% of the company). The $400 stock price is at all time high and under $100 during most of it's history. There's also the issue of new stock issuance, so if a company issues a bunch of new stocks only to buy it back, it's mostly a wash, plus or minus some difference in sales prices.

HP is now split into HPQ ($30B) and HPE ($22B). Accounting for all the mergers, acquisitions, spinoffs and buybacks is going to be challenging. There are articles about HP buying back $8B, $10B, and $4B in stock, but some may be over past years and some may be part of same program expanded or left over. You've got to go through actual purchase in the the reports to figure out actual amounts and add up the lifetime buybacks.

Anyway, with many stocks at all time highs, it's going to be difficult to find an example. You have to look for a stock that bough back a lot at high point and then lost a lot, like DELL when it was taken private or GM/Enron/Sears buybacks before bankruptcy.
The leveraged buyout would be a continuation of reducing shares outstanding, which has required massive stock buybacks. Norris calculates a cumulative stock buyback bill of $39.7 billion at Dell, more than its cumulative profits as a public company and more than its current market cap.
https://ycharts.com/analysis/story/mich ... lict_there

https://www.cnn.com/2018/10/30/business ... index.html

FeeMonster81
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Re: I don't understand stock buybacks

Post by FeeMonster81 » Wed Apr 03, 2019 8:29 pm

grunching...

generally, a large buyback will cause the earnings of a company with under-leverage to increase without increasing the risk of the stock much. basically earnings increase with a stock buyback........ the whole thing though is premised on interest rates being so low these days.

basically unless you need the dividend income to fund your life then it may not matter that much whether they pay a dividend or buy back the stock

of course, if you need the income you can just sell a small part of your holding, which the company was effectively doing for you through paying a dividend.

corpgator
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Re: I don't understand stock buybacks

Post by corpgator » Sat May 23, 2020 1:40 am

inbox788 wrote:
Tue Apr 02, 2019 2:56 pm
not4me wrote:
Tue Apr 02, 2019 8:33 am
On a somewhat related note, I thought I’d take this opportunity to invoke the power of the BH community. I believe that there are cases in which some companies have spent more on buybacks over the last couple of decades than the current market cap. I do NOT have a source for that though. Boeing & HP are two that stick in my mind. This may be wrong, but there is someone out there that can likely confirm or refute that & I’d be curious to see.
I'm sure there are a few companies that have lost money on buybacks, but I doubt either Boeing or HP are it. Boeing is $200B market cap with $20B buyback announced (and these are usually multi year; they're buying back about 10% of the company). The $400 stock price is at all time high and under $100 during most of it's history. There's also the issue of new stock issuance, so if a company issues a bunch of new stocks only to buy it back, it's mostly a wash, plus or minus some difference in sales prices.

HP is now split into HPQ ($30B) and HPE ($22B). Accounting for all the mergers, acquisitions, spinoffs and buybacks is going to be challenging. There are articles about HP buying back $8B, $10B, and $4B in stock, but some may be over past years and some may be part of same program expanded or left over. You've got to go through actual purchase in the the reports to figure out actual amounts and add up the lifetime buybacks.

Anyway, with many stocks at all time highs, it's going to be difficult to find an example. You have to look for a stock that bough back a lot at high point and then lost a lot, like DELL when it was taken private or GM/Enron/Sears buybacks before bankruptcy.
The leveraged buyout would be a continuation of reducing shares outstanding, which has required massive stock buybacks. Norris calculates a cumulative stock buyback bill of $39.7 billion at Dell, more than its cumulative profits as a public company and more than its current market cap.
https://ycharts.com/analysis/story/mich ... lict_there

https://www.cnn.com/2018/10/30/business ... index.html
Funny coming back to this thread over a year later. Boeing now has a market cap of only $77 billion. They spent nearly $45 billion on stock buybacks and then were bailed out to the tune of $60 billion.

inbox788
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Re: I don't understand stock buybacks

Post by inbox788 » Sat May 23, 2020 3:53 pm

corpgator wrote:
Sat May 23, 2020 1:40 am
inbox788 wrote:
Tue Apr 02, 2019 2:56 pm
not4me wrote:
Tue Apr 02, 2019 8:33 am
On a somewhat related note, I thought I’d take this opportunity to invoke the power of the BH community. I believe that there are cases in which some companies have spent more on buybacks over the last couple of decades than the current market cap. I do NOT have a source for that though. Boeing & HP are two that stick in my mind. This may be wrong, but there is someone out there that can likely confirm or refute that & I’d be curious to see.
I'm sure there are a few companies that have lost money on buybacks, but I doubt either Boeing or HP are it. Boeing is $200B market cap with $20B buyback announced (and these are usually multi year; they're buying back about 10% of the company). The $400 stock price is at all time high and under $100 during most of it's history. There's also the issue of new stock issuance, so if a company issues a bunch of new stocks only to buy it back, it's mostly a wash, plus or minus some difference in sales prices.

HP is now split into HPQ ($30B) and HPE ($22B). Accounting for all the mergers, acquisitions, spinoffs and buybacks is going to be challenging. There are articles about HP buying back $8B, $10B, and $4B in stock, but some may be over past years and some may be part of same program expanded or left over. You've got to go through actual purchase in the the reports to figure out actual amounts and add up the lifetime buybacks.

Anyway, with many stocks at all time highs, it's going to be difficult to find an example. You have to look for a stock that bough back a lot at high point and then lost a lot, like DELL when it was taken private or GM/Enron/Sears buybacks before bankruptcy.
The leveraged buyout would be a continuation of reducing shares outstanding, which has required massive stock buybacks. Norris calculates a cumulative stock buyback bill of $39.7 billion at Dell, more than its cumulative profits as a public company and more than its current market cap.
https://ycharts.com/analysis/story/mich ... lict_there

https://www.cnn.com/2018/10/30/business ... index.html
Funny coming back to this thread over a year later. Boeing now has a market cap of only $77 billion. They spent nearly $45 billion on stock buybacks and then were bailed out to the tune of $60 billion.
Yes, we're almost there if $45B is the full extent of the buybacks or stock price/market cap falls. Current 137.50 price vs low of 95 on 3/20 means market cap was as low as $53B.

However, I was unable to find all the buyback figures and prices for Boeing. I found reference to $45B for airlines, and the $60B ask was to rescue airlines and suppliers. I don't think they got the full ask, and Boeing isn't getting any new direct government aid at this time AFAIK. And if they did have the cash on hand, it wouldn't change the challenges ahead, and they'd be even less likely to receive a handout. People criticize folks and companies that game the system, while others call it good aid financial. There is a line that can be crossed when maximizing profits or opportunity, but it's not always visible or clearly delineated.
Boeing Quarterly Shares Outstanding
(Millions of Shares)
2005-03-31 807
2020-03-31 565
https://www.macrotrends.net/stocks/char ... utstanding

Boeing took out 30% of their shares (reverse of stock dilution), which based on today's prices are likely underwater, but hopefully will recover sooner than later. And when things stabilize somewhat, they may show that as a program, the buyback was worth it.

They could have used some of that cash to pay for the Embraer takeover instead. That also remains to be seen if it was a good idea to get in or get out.

On the issue of stock dilution, TSLA has been issuing stock based compensation and diluting, while the share price keeps skyrocketing. I think something isn't sustainable, and I would be worried if I was being paid with more diluted stock.
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reln
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Re: I don't understand stock buybacks

Post by reln » Sat May 23, 2020 4:00 pm

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

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

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

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

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

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

Lesson learned: do not invest in an oil MLP that issues stock buybacks.
In a tax deferred or tax free account, dividends and buybacks have the same effect for an investor.

In a taxable account, buybacks are more tax efficient than dividends for an investor.

inbox788
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Re: I don't understand stock buybacks

Post by inbox788 » Sat May 23, 2020 4:14 pm

If this is correct, it does look like Boeing buybacks since 2012 match the $45B airlines did recently for a total of $90B.

https://wolfstreet.com/2020/03/17/after ... reholders/

“A billion here, a billion there, and pretty soon you're talking real money."

NoRegret
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Re: I don't understand stock buybacks

Post by NoRegret » Sat May 23, 2020 5:13 pm

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

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

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

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

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

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

This gives the shareholder better control of how to realize the dividend that was distributed, and usually is more tax-efficient, which is why a stock buyback is preferable to a cash dividend in most cases.
Agree with you of course. This is not the first time this topic has come up, and the confusion amazes me every time.

Buybacks mean share holders get a bigger slice of the future growth, but do nothing to the current stock price.

Now try to get people to understand this: index funds are forced to sell after a buyback, all else being equal.
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mak1277
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Re: I don't understand stock buybacks

Post by mak1277 » Tue May 26, 2020 10:16 am

NoRegret wrote:
Sat May 23, 2020 5:13 pm
Buybacks mean share holders get a bigger slice of the future growth, but do nothing to the current stock price.
Please show data to back this up. I don't believe you're correct at all. If a company announces a buyback plan, the share price goes up. Full stop. And it makes perfect sense, because the earnings of the company aren't changing, and those earnings are going to be distributed over a smaller pool of shares. So each remaining share SHOULD be worth more. Don't get trapped into looking at book value.

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Re: I don't understand stock buybacks

Post by willthrill81 » Tue May 26, 2020 10:37 am

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Last edited by willthrill81 on Tue May 26, 2020 11:14 pm, edited 1 time in total.
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alex_686
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Re: I don't understand stock buybacks

Post by alex_686 » Tue May 26, 2020 10:42 am

mak1277 wrote:
Tue May 26, 2020 10:16 am
NoRegret wrote:
Sat May 23, 2020 5:13 pm
Buybacks mean share holders get a bigger slice of the future growth, but do nothing to the current stock price.
Please show data to back this up. I don't believe you're correct at all. If a company announces a buyback plan, the share price goes up. Full stop. And it makes perfect sense, because the earnings of the company aren't changing, and those earnings are going to be distributed over a smaller pool of shares. So each remaining share SHOULD be worth more. Don't get trapped into looking at book value.

A company's stock price also increases when a dividend increased is announced. So that particular argument does not hold much water. Stock buybacks don't have any impact, it is the change in expected Free Cash Flow to Equity that matters.

As for stock buy backs not increasing value - well, it can't. It is math - just like paying out a dividend.

Assume that a company has a market cap of 100b, and 100m outstanding shares trading at $1,000.

Scenario #1: Companies issues a 1b dividend, or $10 per share. New price of the share is $990. Market cap is now 99b. i.e., 100b old market cap. = 99b new market cap + 1b dividend.

Scenario #2: Companies does a buyback for 1b, and buys back 1,000 shares for $1,000. Market cap now must be 99b. 100b old market cap - 1b cash = 99b. 99b / 99m shares = $1,000 per share.

This is hard accounting truth and classical investment theory. If this was not true, a CFO could magically increase the value of their shares by issuing debt and doing a stock buy back.

One has to look at second order impacts on the effect of share price. Investor preference for risk. Tax policies on debt shields, dividend income, and treatment of capital gains.
Last edited by alex_686 on Tue May 26, 2020 10:45 am, edited 1 time in total.

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Stinky
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Re: I don't understand stock buybacks

Post by Stinky » Tue May 26, 2020 10:44 am

mak1277 wrote:
Tue May 26, 2020 10:16 am
NoRegret wrote:
Sat May 23, 2020 5:13 pm
Buybacks mean share holders get a bigger slice of the future growth, but do nothing to the current stock price.
Please show data to back this up. I don't believe you're correct at all. If a company announces a buyback plan, the share price goes up. Full stop. And it makes perfect sense, because the earnings of the company aren't changing, and those earnings are going to be distributed over a smaller pool of shares. So each remaining share SHOULD be worth more. Don't get trapped into looking at book value.
One teensy comment.

The company buying back its stock should see some small decline in earnings. It has paid out cash to buy back shares. If the cash came from borrowings, the new interest expense will reduce earnings. If the cash from the company coffers, the company’s interest earnings will be reduced.

In this time of exceptionally low interest rates, there may be little increase in borrowing costs/decrease in interest earnings. But there will be a change in company earnings.
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mak1277
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Re: I don't understand stock buybacks

Post by mak1277 » Tue May 26, 2020 10:47 am

alex_686 wrote:
Tue May 26, 2020 10:42 am
mak1277 wrote:
Tue May 26, 2020 10:16 am
NoRegret wrote:
Sat May 23, 2020 5:13 pm
Buybacks mean share holders get a bigger slice of the future growth, but do nothing to the current stock price.
Please show data to back this up. I don't believe you're correct at all. If a company announces a buyback plan, the share price goes up. Full stop. And it makes perfect sense, because the earnings of the company aren't changing, and those earnings are going to be distributed over a smaller pool of shares. So each remaining share SHOULD be worth more. Don't get trapped into looking at book value.
It is math - just like paying out a dividend.

Assume that a company has a market cap of 100b, and 100m outstanding shares trading at $1,000.

Scenario #1: Companies issues a 1b dividend, or $10 per share. New price of the share is $990. Market cap is now 99b. i.e., 100b old market cap. = 99b new market cap + 1b dividend.

Scenario #2: Companies does a buyback for 1b, and buys back 1,000 shares for $1,000. Market cap now must be 99b. 100b old market cap - 1b cash = 99b. 99b / 99m shares = $1,000 per share.

This is hard accounting truth and classical investment theory. If this was not true, a CFO could magically increase the value of their shares by issuing debt and doing a stock buy back.

One has to look at second order impacts on the effect of share price. Investor preference for risk. Tax policies on debt shields, dividend income, and treatment of capital gains.
What causes share prices to go up in general? Demand for the shares. If a company is in the market for a huge dollar amount, the price of the shares HAS to rise. Why would market cap stay the same? Market cap and book value don't fluctuate perfectly in tandem and aren't synonyms.

Also, most of the criticisms of buybacks are EXACTLY what you described...company execs buying back shares to juice the stock price. They do it because it works.

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