Buying back stock and then keeping that stock makes perfect sense to me. You profit as a company from any further share-price increases, plus you control a larger percentage of outstanding shares..
But buying back stock and then retiring that stock is what I don't understand.. If you retire the shares then isn't that like just destroying money, right? Who gains from that? Plus, with less outstanding shares, you have less percentage left, so less control, not more..
Can somebody explain like I'm five? thx
Outstanding shares x the share price is the perceived value of the company. If you reduce shares outstanding, the price rationally goes up even if the market perceived valuation does not.
Buying back shares concentrates the value of remaining shares, making them more attractive. And if the company continues to make money, its earnings per share goes up as the share count drops.
So it’s effectively distributing the company’s cash to its shareholders, without making them pay an immediate tax as they would if you were paying out direct dividends.
I think that argument only holds true if the total valuation of the company does not change. I'm not sure how many investors analyse their pricing decision on that basis.
In mathematical terms, if x * y = z and z does not change then x and y must change in tandem or not at all. So by modifying x (the number of shares available), the value of y (the price per share) MUST also change.
But we know that z (the market capitalisation) changes all the time, because most people focus on the price per share rather than making a holistic determination of what the company is worth in total.
Over the long term, the total value of a company, the market cap, is generally accurate. There's this strange thing in the mathematics of probability where if you have a large enough sample size of people guessing the value of something, the average of the guesses is surprisingly close to the accurate measurement. But with market cap, it's not a real thing, it's an assigned value, so it's only ever an aggregate of people's guesses that we assume is close enough to reality because of that quirky behaviour.
Frankly, it does seem to me as if it would be much more efficient to pay out the excess cash in dividends rather than trying to work out a convoluted method to try and minimise the tax being paid.
Buying back stock and then keeping that stock makes perfect sense to me. You profit as a company from any further share-price increases, plus you control a larger percentage of outstanding shares..
But buying back stock and then retiring that stock is what I don't understand.. If you retire the shares then isn't that like just destroying money, right? Who gains from that? Plus, with less outstanding shares, you have less percentage left, so less control, not more..
Can somebody explain like I'm five? thx
Outstanding shares x the share price is the perceived value of the company. If you reduce shares outstanding, the price rationally goes up even if the market perceived valuation does not.
....
But if it does anything to the actual value of the company, it is to, in the long term, degrade it by squandering precious resources.
What assumptions are being made for this to be true, or for it to be false?
Apple, as of right now, is bringing in an astounding amount of profit each and every quarter - yes, even those where it brings in less than it expected to. If we assume that it will continue to do so for the foreseeable future, then it will at some point reach a situation where it cannot spend all of the profits it is gaining - the effort required to do so will take resources that it doesn't currently possess. Has Apple reached that point already?
If it has, then the precious resources aren't actually scarce from the company's perspective and the long-term effect is not debilitative. If it hasn't, then I don't think we're far away.
The way I see it, the personal values of the high-level executives are used to make the decisions about how those resources get allocated. From my observations, this means that they will prioritise (a) making more profits, (b) minimising the tax paid, (c) investing in strategically-important initiatives and (d) making token gestures that satisfy some of Wall Street's demands (and not necessarily in that order). Steve Jobs never used to care about (d) but Tim Cook does.
By making individual shares more valuable, they get to attract (for the sake of argument) better talent without having to spend cash on each individual - they can use their current mechanism of share price manipulation with lower administrative overhead and minimal tax burden for every entity involved.
So, with the assumption that Apple will remain as profitable as it is now, there's no long-term harm. But while I think that assumption will hold true for a reasonable period of time, what happens if it is not true?
If Apple starts suffering a reduction in profitability, the allocation of resources will have to change or there will indeed be harm to the company's overall value. At that point, the retirement of shares is probably the first action to be discontinued, but there is such a wide range of options available to management that I don't care to speculate.
What factors affect the assumption about Apple's profitability? That's too large a question for me to answer here - insert your own theories. But again, break it down: what else has to be true for profitability to continue? What would have to change for Apple's profitability to change?
Thanks for reading, and thanks in advance for thinking.
Buying back stock and then keeping that stock makes perfect sense to me. You profit as a company from any further share-price increases, plus you control a larger percentage of outstanding shares..
But buying back stock and then retiring that stock is what I don't understand.. If you retire the shares then isn't that like just destroying money, right? Who gains from that? Plus, with less outstanding shares, you have less percentage left, so less control, not more..
Can somebody explain like I'm five? thx
Outstanding shares x the share price is the perceived value of the company. If you reduce shares outstanding, the price rationally goes up even if the market perceived valuation does not.
Buying back shares concentrates the value of remaining shares, making them more attractive. And if the company continues to make money, its earnings per share goes up as the share count drops.
So it’s effectively distributing the company’s cash to its shareholders, without making them pay an immediate tax as they would if you were paying out direct dividends.
I think that argument only holds true if the total valuation of the company does not change. I'm not sure how many investors analyse their pricing decision on that basis.
In mathematical terms, if x * y = z and z does not change then x and y must change in tandem or not at all. So by modifying x (the number of shares available), the value of y (the price per share) MUST also change.
But we know that z (the market capitalisation) changes all the time, because most people focus on the price per share rather than making a holistic determination of what the company is worth in total.
Over the long term, the total value of a company, the market cap, is generally accurate. There's this strange thing in the mathematics of probability where if you have a large enough sample size of people guessing the value of something, the average of the guesses is surprisingly close to the accurate measurement. But with market cap, it's not a real thing, it's an assigned value, so it's only ever an aggregate of people's guesses that we assume is close enough to reality because of that quirky behaviour.
Frankly, it does seem to me as if it would be much more efficient to pay out the excess cash in dividends rather than trying to work out a convoluted method to try and minimise the tax being paid.
Buying back stock and then keeping that stock makes perfect sense to me. You profit as a company from any further share-price increases, plus you control a larger percentage of outstanding shares..
But buying back stock and then retiring that stock is what I don't understand.. If you retire the shares then isn't that like just destroying money, right? Who gains from that? Plus, with less outstanding shares, you have less percentage left, so less control, not more..
Can somebody explain like I'm five? thx
Outstanding shares x the share price is the perceived value of the company. If you reduce shares outstanding, the price rationally goes up even if the market perceived valuation does not.
....
But if it does anything to the actual value of the company, it is to, in the long term, degrade it by squandering precious resources.
What assumptions are being made for this to be true, or for it to be false?
Apple, as of right now, is bringing in an astounding amount of profit each and every quarter - yes, even those where it brings in less than it expected to. If we assume that it will continue to do so for the foreseeable future, then it will at some point reach a situation where it cannot spend all of the profits it is gaining - the effort required to do so will take resources that it doesn't currently possess. Has Apple reached that point already?
If it has, then the precious resources aren't actually scarce from the company's perspective and the long-term effect is not debilitative. If it hasn't, then I don't think we're far away.
The way I see it, the personal values of the high-level executives are used to make the decisions about how those resources get allocated. From my observations, this means that they will prioritise (a) making more profits, (b) minimising the tax paid, (c) investing in strategically-important initiatives and (d) making token gestures that satisfy some of Wall Street's demands (and not necessarily in that order). Steve Jobs never used to care about (d) but Tim Cook does.
By making individual shares more valuable, they get to attract (for the sake of argument) better talent without having to spend cash on each individual - they can use their current mechanism of share price manipulation with lower administrative overhead and minimal tax burden for every entity involved.
So, with the assumption that Apple will remain as profitable as it is now, there's no long-term harm. But while I think that assumption will hold true for a reasonable period of time, what happens if it is not true?
If Apple starts suffering a reduction in profitability, the allocation of resources will have to change or there will indeed be harm to the company's overall value. At that point, the retirement of shares is probably the first action to be discontinued, but there is such a wide range of options available to management that I don't care to speculate.
What factors affect the assumption about Apple's profitability? That's too large a question for me to answer here - insert your own theories. But again, break it down: what else has to be true for profitability to continue? What would have to change for Apple's profitability to change?
Thanks for reading, and thanks in advance for thinking.
Comments
I think that argument only holds true if the total valuation of the company does not change. I'm not sure how many investors analyse their pricing decision on that basis.
In mathematical terms, if x * y = z and z does not change then x and y must change in tandem or not at all. So by modifying x (the number of shares available), the value of y (the price per share) MUST also change.
But we know that z (the market capitalisation) changes all the time, because most people focus on the price per share rather than making a holistic determination of what the company is worth in total.
Over the long term, the total value of a company, the market cap, is generally accurate. There's this strange thing in the mathematics of probability where if you have a large enough sample size of people guessing the value of something, the average of the guesses is surprisingly close to the accurate measurement. But with market cap, it's not a real thing, it's an assigned value, so it's only ever an aggregate of people's guesses that we assume is close enough to reality because of that quirky behaviour.
Frankly, it does seem to me as if it would be much more efficient to pay out the excess cash in dividends rather than trying to work out a convoluted method to try and minimise the tax being paid.
What assumptions are being made for this to be true, or for it to be false?
Apple, as of right now, is bringing in an astounding amount of profit each and every quarter - yes, even those where it brings in less than it expected to. If we assume that it will continue to do so for the foreseeable future, then it will at some point reach a situation where it cannot spend all of the profits it is gaining - the effort required to do so will take resources that it doesn't currently possess. Has Apple reached that point already?
If it has, then the precious resources aren't actually scarce from the company's perspective and the long-term effect is not debilitative. If it hasn't, then I don't think we're far away.
The way I see it, the personal values of the high-level executives are used to make the decisions about how those resources get allocated. From my observations, this means that they will prioritise (a) making more profits, (b) minimising the tax paid, (c) investing in strategically-important initiatives and (d) making token gestures that satisfy some of Wall Street's demands (and not necessarily in that order). Steve Jobs never used to care about (d) but Tim Cook does.
By making individual shares more valuable, they get to attract (for the sake of argument) better talent without having to spend cash on each individual - they can use their current mechanism of share price manipulation with lower administrative overhead and minimal tax burden for every entity involved.
So, with the assumption that Apple will remain as profitable as it is now, there's no long-term harm. But while I think that assumption will hold true for a reasonable period of time, what happens if it is not true?
If Apple starts suffering a reduction in profitability, the allocation of resources will have to change or there will indeed be harm to the company's overall value. At that point, the retirement of shares is probably the first action to be discontinued, but there is such a wide range of options available to management that I don't care to speculate.
What factors affect the assumption about Apple's profitability? That's too large a question for me to answer here - insert your own theories. But again, break it down: what else has to be true for profitability to continue? What would have to change for Apple's profitability to change?
Thanks for reading, and thanks in advance for thinking.
I think that argument only holds true if the total valuation of the company does not change. I'm not sure how many investors analyse their pricing decision on that basis.
In mathematical terms, if x * y = z and z does not change then x and y must change in tandem or not at all. So by modifying x (the number of shares available), the value of y (the price per share) MUST also change.
But we know that z (the market capitalisation) changes all the time, because most people focus on the price per share rather than making a holistic determination of what the company is worth in total.
Over the long term, the total value of a company, the market cap, is generally accurate. There's this strange thing in the mathematics of probability where if you have a large enough sample size of people guessing the value of something, the average of the guesses is surprisingly close to the accurate measurement. But with market cap, it's not a real thing, it's an assigned value, so it's only ever an aggregate of people's guesses that we assume is close enough to reality because of that quirky behaviour.
Frankly, it does seem to me as if it would be much more efficient to pay out the excess cash in dividends rather than trying to work out a convoluted method to try and minimise the tax being paid.
What assumptions are being made for this to be true, or for it to be false?
Apple, as of right now, is bringing in an astounding amount of profit each and every quarter - yes, even those where it brings in less than it expected to. If we assume that it will continue to do so for the foreseeable future, then it will at some point reach a situation where it cannot spend all of the profits it is gaining - the effort required to do so will take resources that it doesn't currently possess. Has Apple reached that point already?
If it has, then the precious resources aren't actually scarce from the company's perspective and the long-term effect is not debilitative. If it hasn't, then I don't think we're far away.
The way I see it, the personal values of the high-level executives are used to make the decisions about how those resources get allocated. From my observations, this means that they will prioritise (a) making more profits, (b) minimising the tax paid, (c) investing in strategically-important initiatives and (d) making token gestures that satisfy some of Wall Street's demands (and not necessarily in that order). Steve Jobs never used to care about (d) but Tim Cook does.
By making individual shares more valuable, they get to attract (for the sake of argument) better talent without having to spend cash on each individual - they can use their current mechanism of share price manipulation with lower administrative overhead and minimal tax burden for every entity involved.
So, with the assumption that Apple will remain as profitable as it is now, there's no long-term harm. But while I think that assumption will hold true for a reasonable period of time, what happens if it is not true?
If Apple starts suffering a reduction in profitability, the allocation of resources will have to change or there will indeed be harm to the company's overall value. At that point, the retirement of shares is probably the first action to be discontinued, but there is such a wide range of options available to management that I don't care to speculate.
What factors affect the assumption about Apple's profitability? That's too large a question for me to answer here - insert your own theories. But again, break it down: what else has to be true for profitability to continue? What would have to change for Apple's profitability to change?
Thanks for reading, and thanks in advance for thinking.