In the "Apple Shares Outstanding Chart", it appears Apple was continually issuing more shares prior to the buyback. I cannot remember if this has been discussed, and if it has I apologize, but could someone remind me of what was happening in those years (2010-2013) and probably prior years? And when the stock buyback program is over, will the company still continue to issue new shares? (does this have something to do with the stock bonuses issued to the executive and management teams?)
I read a good explanation about that. As options expire, there's a lot of pressure, buying and selling, around the "max pain" point, often leading to an equilibrium right at "max pain". I didn't entirely understand the article and I still don't understand options, but that was the general point. If I'm wrong, let me know.
Please explain why the P/E ratio should increase with fewer shares in the float.
Not mathematically, if that's what you are asking. PE is a measure of investor sentiment about future earnings growth. If investors believe EPS growth will increase going forward, they will pay a higher multiple for that stock. Shares being taken off the market means higher EPS (aka, earnings growth). So, all other things being equal, investors will to pay a higher premium for a stock with the float being reduced through buybacks.
Really? I thought that the stock had to be owned the whole time until the day the dividend was paid.
Nope.
You can buy the stock moments before close of extended trading on the day before ex-div (in this case, Wednesday May 6) and sell it immediately on the open on ex-div day (Thursday May 7).
P/E ratio is a meaningless measure in regards to stock price. In and of itself.
It only means what it means. A stock with an growing PE is being rated as a growth story by investors; a stock with a compressing PE is being treated as slow or a non-growth story. Where people go wrong in interpreting PE is when they use it to determine whether a stock is "overvalued" or "undervalued." You can draw some useful conclusions from PE, but that isn't one of them.
You can buy the stock moments before close of extended trading on the day before ex-div (in this case, Wednesday May 6) and sell it immediately on the open on ex-div day (Thursday May 7).
Please explain why the P/E ratio should increase with fewer shares in the float.
Not mathematically, if that's what you are asking. PE is a measure of investor sentiment about future earnings growth. If investors believe EPS growth will increase going forward, they will pay a higher multiple for that stock. Shares being taken off the market means higher EPS (aka, earnings growth). So, all other things being equal, investors will to pay a higher premium for a stock with the float being reduced through buybacks.
You're conflating earnings and EPS. The PE is dependent on sentiment about the former, not the latter. (Note that the ratio is is price per share divided by earnings per share, so it is independent of the share count.)
More generally, if it was so simple to increase the PE through such financial engineering, everyone would do it all the time, and would be repurchasing everything in sight, no?
You're conflating earnings and EPS. The PE is dependent on sentiment about the former, not the latter. (Note that the ratio is is price per share divided by earnings per share, so it is independent of the share count.)
More generally, if it was so simple to increase the PE through such financial engineering, everyone would do it all the time, and would be repurchasing everything in sight, no?
I'm not "conflating" anything that should not be conflated. Buybacks do not increase earnings, they increase EPS. (PE is calculated by dividing the current share price by EPS over the last four quarters, so it is not really "independent" of share count.)
Companies have no real interest in increasing PE. What they do have is an interest in reporting EPS growth. So yes, taking shares off the market is a "financial engineering" method of doing so, and yes, more and more companies are doing more of it. That's been one of the main market storylines over the past couple of years, which btw, has lead some economists to question how much of the current stock market valuation is based on earnings and how much on companies repurchasing their own shares.
I'm not "conflating" anything that should not be conflated. Buybacks do not increase earnings, they increase EPS. (PE is calculated by dividing the current share price by EPS over the last four quarters, so it is not really "independent" of share count.)
Companies have no real interest in increasing PE. What they do have is an interest in reporting EPS growth. So yes, taking shares off the market is a "financial engineering" method of doing so, and yes, more and more companies are doing more of it. That's been one of the main market storylines over the past couple of years, which btw, has lead some economists to question how much of the current stock market valuation is based on earnings and how much on companies repurchasing their own shares.
One, you're the one that said that doing a repurchase increases PE. I simply pointed out that is not the case.
Two, yes, buybacks do not necessarily have a meaningful impact on earnings (although there can be some impact from the after-tax interest paid on debt used to finance a repurchase relative to the dividends saved), which, in turn, is why they will have little or no impact on PE. The PE is affected only by expectations of future earnings growth relative to the perceived risk in the business. Incidentally, if buybacks are seen by the markets as a credible signal of future earnings growth, it can have a positive valuation impact. That has nothing to do with financial engineering. Rather, the market's assessment that a company putting its money where its mouth (i.e., using its cash to do a repurchase) is signaling that managers (whom markets might assume know more about the immediate future prospects of the business than outsiders and analysts do) think their company is undervalued.
Three, you're never worked in or with senior management of a publicly traded company if you think they have no interest in increasing PE. Nothing could be further from the truth.
Four, there are all kinds of silly storylines on the CNBCs and other financial news outlets of the world. I have not seen a single credible 'economist' claim that current valuations are based on repurchases. I've heard plenty of uninformed analysts and equity 'strategists', and silly financial news anchors do so.
One, you're the one that said that doing a repurchase increases PE. I simply pointed out that is not the case.
Two, yes, buybacks do not necessarily have a meaningful impact on earnings (although there can be some impact from the after-tax interest paid on debt used to finance a repurchase relative to the dividends saved), which, in turn, is why they will have little or no impact on PE. The PE is affected only by expectations of future earnings growth relative to the perceived risk in the business. Incidentally, if buybacks are seen by the markets as a credible signal of future earnings growth, it can have a positive valuation impact. That has nothing to do with financial engineering. Rather, the market's assessment that a company putting its money where its mouth (i.e., using its cash to do a repurchase) is signaling that managers (whom markets might assume know more about the immediate future prospects of the business than outsiders and analysts do) think their company is undervalued.
Three, you're never worked in or with senior management of a publicly traded company if you think they have no interest in increasing PE. Nothing could be further from the truth.
Four, there are all kinds of silly storylines on the CNBCs and other financial news outlets of the world. I have not seen a single credible 'economist' claim that current valuations are based on repurchases. I've heard plenty of uninformed analysts and equity 'strategists', and silly financial news anchors do so.
Buybacks have an impact on EPS, as I said. From an investor's standpoint, they have precisely the same impact as the company earning more profit, at least in the immediate term. Meaning, if the company is signaling its intentions to continue removing shares from trading, that this reality will be factored into valuation in exactly the same way as if they were growing earnings. Stocks multiples take anticipated future EPS into account. This is ultimately the only thing PE actually represents. I think the problem here is you are treating the terms earnings and EPS as interchangeable. They are not.
What I have or have not done is not an argument. I am also not interested in silly storylines, no matter where you heard them.
I just look at it as supply vs. demand. Take away some of the supply(shares) and the demand(price, P/E) goes up. Assuming earnings and EPS continue to improve.
As a long I'm ok with the pps remaining static right now. That is more of the supply they can take for cheap.
You're conflating earnings and EPS. The PE is dependent on sentiment about the former, not the latter. (Note that the ratio is is price per share divided by earnings per share, so it is independent of the share count.)
More generally, if it was so simple to increase the PE through such financial engineering, everyone would do it all the time, and would be repurchasing everything in sight, no?
The poster boy for financial engineering has been IBM, which for years was increasing EPS due to massive buybacks while revenues were decreasing quarter after quarter. It attracted Warren Buffet, and as I understand it, his rationale has been that the more they buy back, the fewer shares are outstanding, and the more of the company he thus owns. Moreover, his preference is to own a stock forever. However, IBM recently abandoned their $20 per share goal due to the insufficiency of their revenue to support the buybacks indefinitely. They have to grow their profitable businesses now. If Buffet weren't in IBM and actually buying more, their stock price would be a lot lower IMO. At the current price around $170, he may be about even.
I think where buybacks make sense is when revenue is growing and the company can't invest the money any better than buying back its own shares. This decreases the float and helps support the stock price. The EPS would be growing anyway, and the buyback gives it an additional boost.
The poster boy for financial engineering has been IBM, which for years was increasing EPS due to massive buybacks while revenues were decreasing quarter after quarter. It attracted Warren Buffet, and as I understand it, his rationale has been that the more they buy back, the fewer shares are outstanding, and the more of the company he thus owns. Moreover, his preference is to own a stock forever. However, IBM recently abandoned their $20 per share goal due to the insufficiency of their revenue to support the buybacks indefinitely. They have to grow their profitable businesses now. If Buffet weren't in IBM and actually buying more, their stock price would be a lot lower IMO. At the current price around $170, he may be about even.
I think where buybacks make sense is when revenue is growing and the company can't invest the money any better than buying back its own shares. This decreases the float and helps support the stock price. The EPS would be growing anyway, and the buyback gives it an additional boost.
Yes, exactly. The big picture issue is that corporations are sitting on record stashes of cash (and Apple is the poster boy for that situation). The most efficient use of free cash is reinvestment into the plant and equipment required to grow the company's business. A characteristic of all recent recession recoveries (and this one in particular) is that corporations are increasingly reluctant to make those investments. This is one of the reasons why so much cash piles up in corporate bank accounts. It is also a primary cause of stagnation in economic growth, employment, and wages.
Buybacks are good for investors, but ultimately are not as useful as plowing as much of that money into growing the business as possible -- and growing earnings. And as you point out, a company can drive EPS by buying back shares for only so long. If they aren't also growing earnings, investors will eventually catch on.
That's only good advice when the company has scope to grow. Investing in plant when producing more will just lead to excess supply and waste is equally foolish. Returning money to shareholders so that they might invest in something with more growth opportunity might be a better idea for all involved.
That's only good advice when the company has scope to grow. Investing in plant when producing more will just lead to excess supply and waste is equally foolish. Returning money to shareholders so that they might invest in something with more growth opportunity might be a better idea for all involved.
I'm not sure what part of what I said you consider to be "advice." I made statements of fact. As much as possible, companies should continually reinvest their profits into doing more of what they do best. This is more economically efficient than buying back stock or distributing profits to shareholders. It produces growth, more jobs, higher wages. Reinvesting is not "waste," it is the most fundamental principle of capitalism at work.
I'm not sure what part of what I said you consider to be "advice." I made statements of fact. As much as possible, companies should continually reinvest their profits into doing more of what they do best. This is more economically efficient than buying back stock or distributing profits to shareholders. It produces growth, more jobs, higher wages. Reinvesting is not "waste," it is the most fundamental principle of capitalism at work.
This is massively debatable and at the very least contextually dependent. The company in question may not be efficient at producing growth, jobs, and higher wages. Returning money to shareholders to reinvest in whatever they see fit may well be more "economically efficient", especially since greater jobs and economic opportunity tend to be driven by start ups. There is no categorical evidence either way, and certainly in cases where companies have over-invested and seen little reward from that over investment (a decent example here would be NeXT's automated factory, which never operated at capacity and was a black hole for capital investment) it would be highly unlikely to be true.
If you're offering an instructive opinion (and it is an opinion, certainly not a statement of fact) on what companies should do with their money then I'd label that as advice.
Comments
Really? I thought that the stock had to be owned the whole time until the day the dividend was paid.
P/E ratio is a meaningless measure in regards to stock price. In and of itself.
Please explain why the P/E ratio should increase with fewer shares in the float.
Not mathematically, if that's what you are asking. PE is a measure of investor sentiment about future earnings growth. If investors believe EPS growth will increase going forward, they will pay a higher multiple for that stock. Shares being taken off the market means higher EPS (aka, earnings growth). So, all other things being equal, investors will to pay a higher premium for a stock with the float being reduced through buybacks.
Nope.
You can buy the stock moments before close of extended trading on the day before ex-div (in this case, Wednesday May 6) and sell it immediately on the open on ex-div day (Thursday May 7).
P/E ratio is a meaningless measure in regards to stock price. In and of itself.
It only means what it means. A stock with an growing PE is being rated as a growth story by investors; a stock with a compressing PE is being treated as slow or a non-growth story. Where people go wrong in interpreting PE is when they use it to determine whether a stock is "overvalued" or "undervalued." You can draw some useful conclusions from PE, but that isn't one of them.
Nope.
You can buy the stock moments before close of extended trading on the day before ex-div (in this case, Wednesday May 6) and sell it immediately on the open on ex-div day (Thursday May 7).
At the ex-dividend discount.
You are correct. The article is wrong about many things, including arithmetic.
5.761bn shares X $0.52 = 3.00 billion
Apple is about to distribute 3bn to investors.
You're conflating earnings and EPS. The PE is dependent on sentiment about the former, not the latter. (Note that the ratio is is price per share divided by earnings per share, so it is independent of the share count.)
More generally, if it was so simple to increase the PE through such financial engineering, everyone would do it all the time, and would be repurchasing everything in sight, no?
You're conflating earnings and EPS. The PE is dependent on sentiment about the former, not the latter. (Note that the ratio is is price per share divided by earnings per share, so it is independent of the share count.)
More generally, if it was so simple to increase the PE through such financial engineering, everyone would do it all the time, and would be repurchasing everything in sight, no?
I'm not "conflating" anything that should not be conflated. Buybacks do not increase earnings, they increase EPS. (PE is calculated by dividing the current share price by EPS over the last four quarters, so it is not really "independent" of share count.)
Companies have no real interest in increasing PE. What they do have is an interest in reporting EPS growth. So yes, taking shares off the market is a "financial engineering" method of doing so, and yes, more and more companies are doing more of it. That's been one of the main market storylines over the past couple of years, which btw, has lead some economists to question how much of the current stock market valuation is based on earnings and how much on companies repurchasing their own shares.
I'm not "conflating" anything that should not be conflated. Buybacks do not increase earnings, they increase EPS. (PE is calculated by dividing the current share price by EPS over the last four quarters, so it is not really "independent" of share count.)
Companies have no real interest in increasing PE. What they do have is an interest in reporting EPS growth. So yes, taking shares off the market is a "financial engineering" method of doing so, and yes, more and more companies are doing more of it. That's been one of the main market storylines over the past couple of years, which btw, has lead some economists to question how much of the current stock market valuation is based on earnings and how much on companies repurchasing their own shares.
One, you're the one that said that doing a repurchase increases PE. I simply pointed out that is not the case.
Two, yes, buybacks do not necessarily have a meaningful impact on earnings (although there can be some impact from the after-tax interest paid on debt used to finance a repurchase relative to the dividends saved), which, in turn, is why they will have little or no impact on PE. The PE is affected only by expectations of future earnings growth relative to the perceived risk in the business. Incidentally, if buybacks are seen by the markets as a credible signal of future earnings growth, it can have a positive valuation impact. That has nothing to do with financial engineering. Rather, the market's assessment that a company putting its money where its mouth (i.e., using its cash to do a repurchase) is signaling that managers (whom markets might assume know more about the immediate future prospects of the business than outsiders and analysts do) think their company is undervalued.
Three, you're never worked in or with senior management of a publicly traded company if you think they have no interest in increasing PE. Nothing could be further from the truth.
Four, there are all kinds of silly storylines on the CNBCs and other financial news outlets of the world. I have not seen a single credible 'economist' claim that current valuations are based on repurchases. I've heard plenty of uninformed analysts and equity 'strategists', and silly financial news anchors do so.
One, you're the one that said that doing a repurchase increases PE. I simply pointed out that is not the case.
Two, yes, buybacks do not necessarily have a meaningful impact on earnings (although there can be some impact from the after-tax interest paid on debt used to finance a repurchase relative to the dividends saved), which, in turn, is why they will have little or no impact on PE. The PE is affected only by expectations of future earnings growth relative to the perceived risk in the business. Incidentally, if buybacks are seen by the markets as a credible signal of future earnings growth, it can have a positive valuation impact. That has nothing to do with financial engineering. Rather, the market's assessment that a company putting its money where its mouth (i.e., using its cash to do a repurchase) is signaling that managers (whom markets might assume know more about the immediate future prospects of the business than outsiders and analysts do) think their company is undervalued.
Three, you're never worked in or with senior management of a publicly traded company if you think they have no interest in increasing PE. Nothing could be further from the truth.
Four, there are all kinds of silly storylines on the CNBCs and other financial news outlets of the world. I have not seen a single credible 'economist' claim that current valuations are based on repurchases. I've heard plenty of uninformed analysts and equity 'strategists', and silly financial news anchors do so.
Buybacks have an impact on EPS, as I said. From an investor's standpoint, they have precisely the same impact as the company earning more profit, at least in the immediate term. Meaning, if the company is signaling its intentions to continue removing shares from trading, that this reality will be factored into valuation in exactly the same way as if they were growing earnings. Stocks multiples take anticipated future EPS into account. This is ultimately the only thing PE actually represents. I think the problem here is you are treating the terms earnings and EPS as interchangeable. They are not.
What I have or have not done is not an argument. I am also not interested in silly storylines, no matter where you heard them.
As a long I'm ok with the pps remaining static right now. That is more of the supply they can take for cheap.
You're conflating earnings and EPS. The PE is dependent on sentiment about the former, not the latter. (Note that the ratio is is price per share divided by earnings per share, so it is independent of the share count.)
More generally, if it was so simple to increase the PE through such financial engineering, everyone would do it all the time, and would be repurchasing everything in sight, no?
The poster boy for financial engineering has been IBM, which for years was increasing EPS due to massive buybacks while revenues were decreasing quarter after quarter. It attracted Warren Buffet, and as I understand it, his rationale has been that the more they buy back, the fewer shares are outstanding, and the more of the company he thus owns. Moreover, his preference is to own a stock forever. However, IBM recently abandoned their $20 per share goal due to the insufficiency of their revenue to support the buybacks indefinitely. They have to grow their profitable businesses now. If Buffet weren't in IBM and actually buying more, their stock price would be a lot lower IMO. At the current price around $170, he may be about even.
I think where buybacks make sense is when revenue is growing and the company can't invest the money any better than buying back its own shares. This decreases the float and helps support the stock price. The EPS would be growing anyway, and the buyback gives it an additional boost.
The poster boy for financial engineering has been IBM, which for years was increasing EPS due to massive buybacks while revenues were decreasing quarter after quarter. It attracted Warren Buffet, and as I understand it, his rationale has been that the more they buy back, the fewer shares are outstanding, and the more of the company he thus owns. Moreover, his preference is to own a stock forever. However, IBM recently abandoned their $20 per share goal due to the insufficiency of their revenue to support the buybacks indefinitely. They have to grow their profitable businesses now. If Buffet weren't in IBM and actually buying more, their stock price would be a lot lower IMO. At the current price around $170, he may be about even.
I think where buybacks make sense is when revenue is growing and the company can't invest the money any better than buying back its own shares. This decreases the float and helps support the stock price. The EPS would be growing anyway, and the buyback gives it an additional boost.
Yes, exactly. The big picture issue is that corporations are sitting on record stashes of cash (and Apple is the poster boy for that situation). The most efficient use of free cash is reinvestment into the plant and equipment required to grow the company's business. A characteristic of all recent recession recoveries (and this one in particular) is that corporations are increasingly reluctant to make those investments. This is one of the reasons why so much cash piles up in corporate bank accounts. It is also a primary cause of stagnation in economic growth, employment, and wages.
Buybacks are good for investors, but ultimately are not as useful as plowing as much of that money into growing the business as possible -- and growing earnings. And as you point out, a company can drive EPS by buying back shares for only so long. If they aren't also growing earnings, investors will eventually catch on.
^
That's only good advice when the company has scope to grow. Investing in plant when producing more will just lead to excess supply and waste is equally foolish. Returning money to shareholders so that they might invest in something with more growth opportunity might be a better idea for all involved.
^
That's only good advice when the company has scope to grow. Investing in plant when producing more will just lead to excess supply and waste is equally foolish. Returning money to shareholders so that they might invest in something with more growth opportunity might be a better idea for all involved.
I'm not sure what part of what I said you consider to be "advice." I made statements of fact. As much as possible, companies should continually reinvest their profits into doing more of what they do best. This is more economically efficient than buying back stock or distributing profits to shareholders. It produces growth, more jobs, higher wages. Reinvesting is not "waste," it is the most fundamental principle of capitalism at work.
Agree with @Dr Millmoss. Reinvesting is the only way to achieve meaningful growth. It also shows confidence in the company.
I'm not sure what part of what I said you consider to be "advice." I made statements of fact. As much as possible, companies should continually reinvest their profits into doing more of what they do best. This is more economically efficient than buying back stock or distributing profits to shareholders. It produces growth, more jobs, higher wages. Reinvesting is not "waste," it is the most fundamental principle of capitalism at work.
This is massively debatable and at the very least contextually dependent. The company in question may not be efficient at producing growth, jobs, and higher wages. Returning money to shareholders to reinvest in whatever they see fit may well be more "economically efficient", especially since greater jobs and economic opportunity tend to be driven by start ups. There is no categorical evidence either way, and certainly in cases where companies have over-invested and seen little reward from that over investment (a decent example here would be NeXT's automated factory, which never operated at capacity and was a black hole for capital investment) it would be highly unlikely to be true.
If you're offering an instructive opinion (and it is an opinion, certainly not a statement of fact) on what companies should do with their money then I'd label that as advice.