I imagine it's kind of a newbie question, but it puzzles me a bit. Why would a company decide to repurchase shares rather than increase dividens? It's more expensive and would decrease the amount of its shareholders. And the more I think about it, why would I sell my shares anyway if I know the company is running a buyback, which in most cases increases the price of shares left on the market?
Rhody Trader
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You sort of answered your own question there at the end. A buyback reduces the number of shares outstanding. Strictly from a supply/demand perspective that increases their value. At the same time it also increase per share earnings.
Yeah, but doesn't the company spends more money on buybacks than it gets due to increased demand and decreased supply? I don't get where's the profit here?
Rhody Trader
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Buybacks aren't about profit for the company. The company can pay a divided or it can buyback shares. Buying back shares has a longer-term positive impact for shareholders because of the improvement in EPS than does a dividend payment of comparable size.
Yeah, but it's an improvement in EPS that's not based on some real improvements, isn't it? It's like when Netional Bank conducts additional cash emission, which is usually considered harmful and leading to inflation, no?
Rhody Trader
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Very true. If EPS growth comes mainly as a result of share buybacks then it's illusory.
I wouldn't equate it to central bank injecting money into the system, though. That would be more like when a company issues shares, which increases the supply of shares like the CB increasing the supply of money. Buybacks reduce supply.
Keeping to that theme, though, when a CB drains money from the system it increases interest rates just like a buyback increases ROE because there's less E.
I wouldn't equate it to central bank injecting money into the system, though. That would be more like when a company issues shares, which increases the supply of shares like the CB increasing the supply of money. Buybacks reduce supply.
Keeping to that theme, though, when a CB drains money from the system it increases interest rates just like a buyback increases ROE because there's less E.
The main reason for buybacks vs dividends (being cynical - but correct) is that many boards are paid bonuses based on EPS growth metrics. Reduce the 'S' and as you've already observed, EPS will go up despite absolutely no change in underlying earnings. Which is why fundamental analysis should always look at net income growth (or even better, free cash flow) rather than EPS. There is a corporate finance argument that below a certain share price, investing in one's own stock through a buyback generates a higher return than investing in additional growth in the existing business through opex, capex or M&A spend, but really.... it's about manipulating EPS to earn big bonuses...
Well, at last I got an answer that seems legit not only from figures, but from life logic
So far it looks more true than some shadowy benefits in term of reducing supply to increase demand, which makes little sense to (I know how it works, but if I'm not interested in the company, I won't become if it's supply lowers).Similar threads
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