IMO actually distributing it to the stockholders in a special dividend would be more direct, assurance of truly getting something tangible instead of simply having faith it made your investment more valuable, but I guess they don't want to get hopes up of an ongoing thing.
Buying back the stock is a clear indicator that Apple thinks the stock price is low and/or that they expect something to move the stock higher in the future to make the buyback a lucrative endeavor.
How would it be a "lucrative endeavor"? That would imply Apple could profit from a higher price later, which they won't.
No one understands the health of the company better than its senior managers. No one is in a better position to judge what will happen to the future performance of the company. So if a company decides to buy back stock (i.e., decides to invest in its own stock), these managers must believe that the stock price is undervalued and will rise (or so most observers would believe).
Apple is not investing in its own stock tho. There is no retained value, the stock gets burned in effect.
As far as these repurchases driving up the value of the remaining stock I perfectly understand the theory. The proof is lacking, therefore it's somewhat a leap of faith that you will benefit more from an increased share price later on directly due to a buyback this quarter compared to an identifiable and tangible check distributing those funds directly to you.
Sure they are. Retiring outstanding shares increases the value per share and increases EPS. Although, they never retire all the shares since they use some of these shares to issue to employees.
The real question for you and George is: Why do you think that the world's most valuable company and inarguably an incredibly successful, profitable, and savvy company does this if the net effect ranges from having no positive effect to harming the company? Could it be that those many thousands of brilliant people working in finance understand something you don't?
And yes @Xed you are also correct that AAPL does not retire all of the repurchased shares, saving some for issuance to employees. Those that do not believe this can review the quarterly SEC filings and/or listen to the conference calls.
Here's a better idea. Show us the link and statements that say the shares are not 100% retired after the Apple buyback. Hint: You won't find one. Xed is not correct and neither are you.
My suggestion is the same I gave @Xed : Before chastising someone else claiming they "don't get it" make sure you actually DO get it. In this case I don't think you do, so here's a helpful link to an informative article authored by a very reliable and trusted source explaining why it's NOT meant to increase Apple's stock price despite you being convinced otherwise. To some degree it might... or might not... but that's not the reason for the buybacks anyway if the source is to be believed.
Great article! I’ve always loved Neil’s work. I don’t think you read it, because it proves my point. “In the process, a wealth transfer event is possible as ownership is shifted from shareholders willing to sell shares back to the company to those shareholders not selling shares.”
Like I said in my last post, I am done having lengthy educational sessions with people who either just want to bash my wildly successful investment in AAPL or who don’t understand terms like EPS, outstanding share count, RSUs, etc.
Have a wonderful week!
You should read it twice since you may have missed a couple points that would have cleared up some misunderstandings of yours. But if you want to go away making believe you were right all along, Apple keeps buyback shares to give to the execs, and the program is intended to increase future stock prices then feel to do so. Life's too short not to live happy and content.
You too have a great week, sincerely.
Here's a thought experiment.
So far Apple has repurchased over 5B shares of AAPL (split adjusted) with their buy back program, over the last 8 years. Apple now has about 16.5B shares outstanding.
If Apple had not repurchased those over 5B shares, there would be 22B shares of AAPL outstanding today.
Following me so far?
So if you want to think that Apple buy backs program had not help increase the share price of AAPL, then AAPL would still be at $145 a share today.
Would that be your thinking?
One could reasonability argue that buying back shares every once in awhile, might not benefit future share price, even over the long term. But when a company buy back as much as Apple has bought back, over the last 8 years (and will continue to do so at the same or greater pace), no reasonable argument can be made that AAPL future share price did not and will not, benefit from buy backs.
I've never believed, much less opined, that the buybacks had no positive effect at all. That final paragraph is more my thinking. That indicates we're more in agreement than you might have thought.
I believe there has been some undefinable effect on the stock price, but not a single person here can put a dollar number to it. It could be $100, $25, $5 even possible if unlikely it could be none at all and the price today would be just as high without them. That's also more along the lines of Neil Cybart's thinking as far as I can tell. Raising the future stock price is not the goal, tho I would agree with anyone claiming it is a likely side-effect in the case of Apple. I might also agree there may be an identifiable cause and effect immediately surrounding each Apple buyback event, so temporarily bumping the price for those selling today is more likely, and I think you'll see Neil saying pretty much the same thing.
So here's a thought for you. An investor or manager controlling a huge number of Apple shares might benefit from selling when Apple is buying, then repurchasing at the price drop which inevitably happens. Maybe that's why the big guys like the buybacks. Truly I have no idea. I personally invest in tangible equipment, plant, and people rather than stocks. When those things go south I can usually understand why and if there was anything I could have done to prevent it. When they work it becomes a repeatable and dependable business plan within my control (for the most part) rather than at the whim of "the market" who may not have the same interests as me.
What I do not agree with is anyone claiming they know for a fact what the buyback effect on current and future stock price has been and will be and would challenge them to specifically define it if they find fault in that statement. It is entirely within the realm of possibility that you may get no more for your stock when you decide to sell than you would have had the buybacks never happened. Your faith that it will is what you have, and having faith is a wonderful and positive human trait, but that is not tangible proof you got your cut of the Apple cash.
I have heard analysts claim that the increases in the stock market (of which Apple is just one) over the past dozen years are almost entirely due to:
1) Low interest rates combined with a flood of liquidity from QE -- all courtesy of the Fed
2) Stock buybacks.
But all of that has become normalized and investors simply assume that stock values are based on fundamentals rather than artificial stimuli.
But, what happens when those stimuli are withdrawn? Can they be?
-- In 2013 Bernanke used the "T word" and we found out. In 2016-18 Yellen tried the same and Trump's hair turned grey before he replaced her.
-- In 2017 Trump transferred $1T+ from government coffers to corporate -- which mostly got passed to the rich through stock buybacks in a very slick (but legal) money laundering scheme. But, as a result some are proposing rules to limit stock buybacks.
In any event: stock prices and PE ratios are 50-100% higher than they would otherwise be.
As to your question whether buybacks increase stock prices, they do so in two ways: 1) If a corporation is worth $100 and has 10 shares issued each share is worth $10. If they retire 1 share the corporation is still worth #100 but each share is then worth $11.11. It's just math (assuming that the stock market passed grade school arithmetic)
2) Buying shares increases demand which increases prices.
So, there is increased pressure to drive up stock prices. But, as you point out, it's anybody's guess as to precisely how much -- if, for no other reason, than the stock market has multiple factors going into prices -- investor emotion, optimism/pessimism among others.
But I think it's reasonable to say that buybacks increase stock prices.
It's also reasonable to say they make stock holders richer at the expense of the company that has fewer assets to invest in productive ways.
Crowley, that would be fine if the stock price were directly tied to the company's equity. It is not. The stock price is more of an imagined number without any direct collelation to Apple's cash or property or product inventory. That's why people are so confused when a stock price goes down when they thing it should be going up and vice-versa., or a company that has never made a profit and owns few resources can be worth $Billions. When you sell your stock you won't be getting a piece of Apple's actual equity if everything were to be liquidated which is a somewhat clear number, but rather what some other investor is willing to sell their share for which may having nothing to do with anything going on at Apple. Hopefully that won't become eminently clear later this year as many of the investment hourse are now warning. It may just be another game they're playing and only the very largest biggest investors and management companies might know.
TBH, there's nothing that says Apple current stock price would not be the same today, maybe even higher, if the buybacks never occured as far as I can tell. There is no definable measuring stick as there's no direct correlation between the two. According to Neil Cybart there have been times a stock's price has dropped following a buyback, which based on your admittedly over-simpllified example would not make mathematic sense.
IMO actually distributing it to the stockholders in a special dividend would be more direct, assurance of truly getting something tangible instead of simply having faith it made your investment more valuable, but I guess they don't want to get hopes up of an ongoing thing.
Buying back the stock is a clear indicator that Apple thinks the stock price is low and/or that they expect something to move the stock higher in the future to make the buyback a lucrative endeavor.
How would it be a "lucrative endeavor"? That would imply Apple could profit from a higher price later, which they won't.
No one understands the health of the company better than its senior managers. No one is in a better position to judge what will happen to the future performance of the company. So if a company decides to buy back stock (i.e., decides to invest in its own stock), these managers must believe that the stock price is undervalued and will rise (or so most observers would believe).
Apple is not investing in its own stock tho. There is no retained value, the stock gets burned in effect.
As far as these repurchases driving up the value of the remaining stock I perfectly understand the theory. The proof is lacking, therefore it's somewhat a leap of faith that you will benefit more from an increased share price later on directly due to a buyback this quarter compared to an identifiable and tangible check distributing those funds directly to you.
Sure they are. Retiring outstanding shares increases the value per share and increases EPS. Although, they never retire all the shares since they use some of these shares to issue to employees.
The real question for you and George is: Why do you think that the world's most valuable company and inarguably an incredibly successful, profitable, and savvy company does this if the net effect ranges from having no positive effect to harming the company? Could it be that those many thousands of brilliant people working in finance understand something you don't?
And yes @Xed you are also correct that AAPL does not retire all of the repurchased shares, saving some for issuance to employees. Those that do not believe this can review the quarterly SEC filings and/or listen to the conference calls.
Here's a better idea. Show us the link and statements that say the shares are not 100% retired after the Apple buyback. Hint: You won't find one. Xed is not correct and neither are you.
My suggestion is the same I gave @Xed : Before chastising someone else claiming they "don't get it" make sure you actually DO get it. In this case I don't think you do, so here's a helpful link to an informative article authored by a very reliable and trusted source explaining why it's NOT meant to increase Apple's stock price despite you being convinced otherwise. To some degree it might... or might not... but that's not the reason for the buybacks anyway if the source is to be believed.
Great article! I’ve always loved Neil’s work. I don’t think you read it, because it proves my point. “In the process, a wealth transfer event is possible as ownership is shifted from shareholders willing to sell shares back to the company to those shareholders not selling shares.”
Like I said in my last post, I am done having lengthy educational sessions with people who either just want to bash my wildly successful investment in AAPL or who don’t understand terms like EPS, outstanding share count, RSUs, etc.
Have a wonderful week!
You should read it twice since you may have missed a couple points that would have cleared up some misunderstandings of yours. But if you want to go away making believe you were right all along, Apple keeps buyback shares to give to the execs, and the program is intended to increase future stock prices then feel to do so. Life's too short not to live happy and content.
You too have a great week, sincerely.
Here's a thought experiment.
So far Apple has repurchased over 5B shares of AAPL (split adjusted) with their buy back program, over the last 8 years. Apple now has about 16.5B shares outstanding.
If Apple had not repurchased those over 5B shares, there would be 22B shares of AAPL outstanding today.
Following me so far?
So if you want to think that Apple buy backs program had not help increase the share price of AAPL, then AAPL would still be at $145 a share today.
Would that be your thinking?
One could reasonability argue that buying back shares every once in awhile, might not benefit future share price, even over the long term. But when a company buy back as much as Apple has bought back, over the last 8 years (and will continue to do so at the same or greater pace), no reasonable argument can be made that AAPL future share price did not and will not, benefit from buy backs.
I've never believed, much less opined, that the buybacks had no positive effect at all. That final paragraph is more my thinking. That indicates we're more in agreement than you might have thought.
I believe there has been some undefinable effect on the stock price, but not a single person here can put a dollar number to it. It could be $100, $25, $5 even possible if unlikely it could be none at all and the price today would be just as high without them. That's also more along the lines of Neil Cybart's thinking as far as I can tell. Raising the future stock price is not the goal, tho I would agree with anyone claiming it is a likely side-effect in the case of Apple. I might also agree there may be an identifiable cause and effect immediately surrounding each Apple buyback event, so temporarily bumping the price for those selling today is more likely, and I think you'll see Neil saying pretty much the same thing.
So here's a thought for you. An investor or manager controlling a huge number of Apple shares might benefit from selling when Apple is buying, then repurchasing at the price drop which inevitably happens. Maybe that's why the big guys like the buybacks. Truly I have no idea. I personally invest in tangible equipment, plant, and people rather than stocks. When those things go south I can usually understand why and if there was anything I could have done to prevent it. When they work it becomes a repeatable and dependable business plan within my control (for the most part) rather than at the whim of "the market" who may not have the same interests as me.
What I do not agree with is anyone claiming they know for a fact what the buyback effect on current and future stock price has been and will be and would challenge them to specifically define it if they find fault in that statement. It is entirely within the realm of possibility that you may get no more for your stock when you decide to sell than you would have had the buybacks never happened. Your faith that it will is what you have, and having faith is a wonderful and positive human trait, but that is not tangible proof you got your cut of the Apple cash.
I have heard analysts claim that the increases in the stock market (of which Apple is just one) over the past dozen years are almost entirely due to:
1) Low interest rates combined with a flood of liquidity from QE -- all courtesy of the Fed
2) Stock buybacks.
But all of that has become normalized and investors simply assume that stock values are based on fundamentals rather than artificial stimuli.
But, what happens when those stimuli are withdrawn? Can they be?
-- In 2013 Bernanke used the "T word" and we found out. In 2016-18 Yellen tried the same and Trump's hair turned grey before he replaced her.
-- In 2017 Trump transferred $1T+ from government coffers to corporate -- which mostly got passed to the rich through stock buybacks in a very slick (but legal) money laundering scheme. But, as a result some are proposing rules to limit stock buybacks.
In any event: stock prices and PE ratios are 50-100% higher than they would otherwise be.
As to your question whether buybacks increase stock prices, they do so in two ways: 1) If a corporation is worth $100 and has 10 shares issued each share is worth $10. If they retire 1 share the corporation is still worth #100 but each share is then worth $11.11. It's just math (assuming that the stock market passed grade school arithmetic)
2) Buying shares increases demand which increases prices.
So, there is increased pressure to drive up stock prices. But, as you point out, it's anybody's guess as to precisely how much -- if, for no other reason, than the stock market has multiple factors going into prices -- investor emotion, optimism/pessimism among others.
But I think it's reasonable to say that buybacks increase stock prices.
It's also reasonable to say they make stock holders richer at the expense of the company that has fewer assets to invest in productive ways.
Crowley, that would be fine if the stock price were directly tied to the company's equity. It is not. The stock price is more of an imagined number without any direct collelation to Apple's cash or property or product inventory. That's why people are so confused when a stock price goes down when they thing it should be going up and vice-versa., or a company that has never made a profit and owns few resources can be worth $Billions. When you sell your stock you won't be getting a piece of Apple's actual equity if everything were to be liquidated which is a somewhat clear number, but rather what some other investor is willing to sell their share for which may having nothing to do with anything going on at Apple. Hopefully that won't become eminently clear later this year as many of the investment hourse are now warning. It may just be another game they're playing and only the very largest biggest investors and management companies might know.
TBH, there's nothing that says Apple current stock price would not be the same today, maybe even higher, if the buybacks never occured as far as I can tell. There is no definable measuring stick as there's no direct correlation between the two. According to Neil Cybart there have been times a stock's price has dropped following a buyback, which based on your admittedly over-simpllified example would not make mathematic sense.
Quite true.
Apples price to book ratio is 35
Apple's price to earnings ratio is 28
The average PE of the S&P500 through its history is about 16.
When you buy Apple's stock you aren't betting on Apple. You're betting on other people betting on Apple.
1) If a corporation is worth $100 and has 10 shares issued each share is worth $10. If they retire 1 share the corporation is still worth #100 but each share is then worth $11.11. It's just math (assuming that the stock market passed grade school arithmetic)
No.
If a $100 corporation uses $10 of its equity to retire a share then it is now worth $90. You can't spend money and still be worth the same amount, that is literally having your cake and eating it. The remaining shares are still worth $10; they have a greater share of a smaller pie, with the same worth per share as it did the day before the buy back. You can't just create wealth for shareholders the way you describe.
A corporation can realise greater value in the form of future profits that exceed expectations, and therefore cause the values of the remaining 9 shares to increase at a higher rate than 10 shares would have. That's the way that buybacks theoretically make money for shareholders, by concentrating earnings per share in a smaller pool.
Of course, in practice, share trading is all about expectations, and every action has a reaction, so it gets more complicated.
That would be true if they expensed it. But that would be improper.
1) If a corporation is worth $100 and has 10 shares issued each share is worth $10. If they retire 1 share the corporation is still worth #100 but each share is then worth $11.11. It's just math (assuming that the stock market passed grade school arithmetic)
No.
If a $100 corporation uses $10 of its equity to retire a share then it is now worth $90. You can't spend money and still be worth the same amount, that is literally having your cake and eating it. The remaining shares are still worth $10; they have a greater share of a smaller pie, with the same worth per share as it did the day before the buy back. You can't just create wealth for shareholders the way you describe.
A corporation can realise greater value in the form of future profits that exceed expectations, and therefore cause the values of the remaining 9 shares to increase at a higher rate than 10 shares would have. That's the way that buybacks theoretically make money for shareholders, by concentrating earnings per share in a smaller pool.
Of course, in practice, share trading is all about expectations, and every action has a reaction, so it gets more complicated.
That would be true if they expensed it. But that would be improper.
Expensed it? What does that mean? When a company retires shares they buy them. With the company's cash, possibly financed by debt. Whether it's cash-on-hand or debt it still materially affects the companies balance sheet. And neither are improper.
1) If a corporation is worth $100 and has 10 shares issued each share is worth $10. If they retire 1 share the corporation is still worth #100 but each share is then worth $11.11. It's just math (assuming that the stock market passed grade school arithmetic)
No.
If a $100 corporation uses $10 of its equity to retire a share then it is now worth $90. You can't spend money and still be worth the same amount, that is literally having your cake and eating it. The remaining shares are still worth $10; they have a greater share of a smaller pie, with the same worth per share as it did the day before the buy back. You can't just create wealth for shareholders the way you describe.
A corporation can realise greater value in the form of future profits that exceed expectations, and therefore cause the values of the remaining 9 shares to increase at a higher rate than 10 shares would have. That's the way that buybacks theoretically make money for shareholders, by concentrating earnings per share in a smaller pool.
Of course, in practice, share trading is all about expectations, and every action has a reaction, so it gets more complicated.
That would be true if they expensed it. But that would be improper.
Expensed it? What does that mean? When a company retires shares they buy them. With the company's cash, possibly financed by debt. Whether it's cash-on-hand or debt it still materially affects the companies balance sheet. And neither are improper.
1) If a corporation is worth $100 and has 10 shares issued each share is worth $10. If they retire 1 share the corporation is still worth #100 but each share is then worth $11.11. It's just math (assuming that the stock market passed grade school arithmetic)
No.
If a $100 corporation uses $10 of its equity to retire a share then it is now worth $90. You can't spend money and still be worth the same amount, that is literally having your cake and eating it. The remaining shares are still worth $10; they have a greater share of a smaller pie, with the same worth per share as it did the day before the buy back. You can't just create wealth for shareholders the way you describe.
A corporation can realise greater value in the form of future profits that exceed expectations, and therefore cause the values of the remaining 9 shares to increase at a higher rate than 10 shares would have. That's the way that buybacks theoretically make money for shareholders, by concentrating earnings per share in a smaller pool.
Of course, in practice, share trading is all about expectations, and every action has a reaction, so it gets more complicated.
That would be true if they expensed it. But that would be improper.
Expensed it? What does that mean? When a company retires shares they buy them. With the company's cash, possibly financed by debt. Whether it's cash-on-hand or debt it still materially affects the companies balance sheet. And neither are improper.
You need to brush up on your accounting.
Help me out then. Explain yourself. What do you mean by "expensed it" and why would it be improper? Moreover, how do you think companies account for their share buybacks in their books?
1) If a corporation is worth $100 and has 10 shares issued each share is worth $10. If they retire 1 share the corporation is still worth #100 but each share is then worth $11.11. It's just math (assuming that the stock market passed grade school arithmetic)
No.
If a $100 corporation uses $10 of its equity to retire a share then it is now worth $90. You can't spend money and still be worth the same amount, that is literally having your cake and eating it. The remaining shares are still worth $10; they have a greater share of a smaller pie, with the same worth per share as it did the day before the buy back. You can't just create wealth for shareholders the way you describe.
A corporation can realise greater value in the form of future profits that exceed expectations, and therefore cause the values of the remaining 9 shares to increase at a higher rate than 10 shares would have. That's the way that buybacks theoretically make money for shareholders, by concentrating earnings per share in a smaller pool.
Of course, in practice, share trading is all about expectations, and every action has a reaction, so it gets more complicated.
Going in the right direction but you're using the metric wrong.
If a company has 10 shares and each share is worth $10 then the $100 the company is worth is its MARKET CAP (shareholder equity value). The $100 is not what the company has on its balance sheet. If it is, then its trading at book value and if the company thinks there's going to be any growth, they should buy back all their shares and take the company private.
You can't go backwards and use the market cap (shareholder equity) to determine its share price, (by knowing how many outstanding shares). It doesn't work that way. There is no way to determine a company's market cap (shareholder equity value), without already knowing its share price. The market cap of a company is usually way more than what its actually worth on its balance sheet. And how much a company is worth on its balance sheet is reflected in its share price. (or the $10 in this case). Which in turn determines its market cap (shareholder equity value). Any cash on hand could be a major factor of its share price or might not factor in at all. Spending $10 to buy back a share, directly affect its share price, not directly deducted from its market cap (shareholder equity value).
And everything goes out of whack if the company borrows money, to buy back their shares that they think are way undervalue. With taking on debt being so cheap now, a company having a lot of cash on hand, is not as valuable to a shareholder as it use to be.
If investors thinks its a good move, then the share price can go up by $1.10 (even before the actual buy back begins) and the company can still have $100 market cap (shareholder equity value) after the buy back. If the share price stays the same, then the market cap will drop to $90 and further, if the stock price drops. So the pie doesn't necessarily have to get smaller after a buy back. It depends on how much spending the $10 for the buy back affects the share price and not that since it cost $10 worth of equity to buy back the share, the pie must be smaller.
The wealth for the shareholder is not dependent on how much the company is actually worth, but on how much someone else is willing to pay for his share.
1) If a corporation is worth $100 and has 10 shares issued each share is worth $10. If they retire 1 share the corporation is still worth #100 but each share is then worth $11.11. It's just math (assuming that the stock market passed grade school arithmetic)
No.
If a $100 corporation uses $10 of its equity to retire a share then it is now worth $90. You can't spend money and still be worth the same amount, that is literally having your cake and eating it. The remaining shares are still worth $10; they have a greater share of a smaller pie, with the same worth per share as it did the day before the buy back. You can't just create wealth for shareholders the way you describe.
A corporation can realise greater value in the form of future profits that exceed expectations, and therefore cause the values of the remaining 9 shares to increase at a higher rate than 10 shares would have. That's the way that buybacks theoretically make money for shareholders, by concentrating earnings per share in a smaller pool.
Of course, in practice, share trading is all about expectations, and every action has a reaction, so it gets more complicated.
Going in the right direction but you're using the metric wrong.
If a company has 10 shares and each share is worth $10 then the $100 the company is worth is its MARKET CAP (shareholder equity value). The $100 is not what the company has on its balance sheet. If it is, then its trading at book value and if the company thinks there's going to be any growth, they should buy back all their shares and take the company private.
You can't go backwards and use the market cap (shareholder equity) to determine its share price, (by knowing how many outstanding shares). It doesn't work that way. There is no way to determine a company's market cap (shareholder equity value), without already knowing its share price. The market cap of a company is usually way more than what its actually worth on its balance sheet. And how much a company is worth on its balance sheet is reflected in its share price. (or the $10 in this case). Which in turn determines its market cap (shareholder equity value). Any cash on hand could be a major factor of its share price or might not factor in at all. Spending $10 to buy back a share, directly affect its share price, not directly deducted from its market cap (shareholder equity value).
And everything goes out of whack if the company borrows money, to buy back their shares that they think are way undervalue. With taking on debt being so cheap now, a company having a lot of cash on hand, is not as valuable to a shareholder as it use to be.
If investors thinks its a good move, then the share price can go up by $1.10 (even before the actual buy back begins) and the company can still have $100 market cap (shareholder equity value) after the buy back. If the share price stays the same, then the market cap will drop to $90 and further, if the stock price drops. So the pie doesn't necessarily have to get smaller after a buy back. It depends on how much spending the $10 for the buy back affects the share price and not that since it cost $10 worth of equity to buy back the share, the pie must be smaller.
The wealth for the shareholder is not dependent on how much the company is actually worth, but on how much someone else is willing to pay for his share.
Again we are far more in agreement than you may have thought. Nice post.
1) If a corporation is worth $100 and has 10 shares issued each share is worth $10. If they retire 1 share the corporation is still worth #100 but each share is then worth $11.11. It's just math (assuming that the stock market passed grade school arithmetic)
No.
If a $100 corporation uses $10 of its equity to retire a share then it is now worth $90. You can't spend money and still be worth the same amount, that is literally having your cake and eating it. The remaining shares are still worth $10; they have a greater share of a smaller pie, with the same worth per share as it did the day before the buy back. You can't just create wealth for shareholders the way you describe.
A corporation can realise greater value in the form of future profits that exceed expectations, and therefore cause the values of the remaining 9 shares to increase at a higher rate than 10 shares would have. That's the way that buybacks theoretically make money for shareholders, by concentrating earnings per share in a smaller pool.
Of course, in practice, share trading is all about expectations, and every action has a reaction, so it gets more complicated.
... You can't go backwards and use the market cap (shareholder equity) to determine its share price,
...
I didn't. But for some reason you assumed that I did.
Wise, knowledgeable fundamental investors like Warren Buffet compare the intrinsic worth of a company to its market valuation to determine if they want to buy into it. But typically, unless it is a startup, that analysis will begin with book value as a starting point in the analysis.
By the way, market [value] cap and share holder equity are not the same.
1) If a corporation is worth $100 and has 10 shares issued each share is worth $10. If they retire 1 share the corporation is still worth #100 but each share is then worth $11.11. It's just math (assuming that the stock market passed grade school arithmetic)
No.
If a $100 corporation uses $10 of its equity to retire a share then it is now worth $90. You can't spend money and still be worth the same amount, that is literally having your cake and eating it. The remaining shares are still worth $10; they have a greater share of a smaller pie, with the same worth per share as it did the day before the buy back. You can't just create wealth for shareholders the way you describe.
A corporation can realise greater value in the form of future profits that exceed expectations, and therefore cause the values of the remaining 9 shares to increase at a higher rate than 10 shares would have. That's the way that buybacks theoretically make money for shareholders, by concentrating earnings per share in a smaller pool.
Of course, in practice, share trading is all about expectations, and every action has a reaction, so it gets more complicated.
Going in the right direction but you're using the metric wrong.
If a company has 10 shares and each share is worth $10 then the $100 the company is worth is its MARKET CAP (shareholder equity value). The $100 is not what the company has on its balance sheet. If it is, then its trading at book value and if the company thinks there's going to be any growth, they should buy back all their shares and take the company private.
You can't go backwards and use the market cap (shareholder equity) to determine its share price, (by knowing how many outstanding shares). It doesn't work that way. There is no way to determine a company's market cap (shareholder equity value), without already knowing its share price. The market cap of a company is usually way more than what its actually worth on its balance sheet. And how much a company is worth on its balance sheet is reflected in its share price. (or the $10 in this case). Which in turn determines its market cap (shareholder equity value). Any cash on hand could be a major factor of its share price or might not factor in at all. Spending $10 to buy back a share, directly affect its share price, not directly deducted from its market cap (shareholder equity value).
And everything goes out of whack if the company borrows money, to buy back their shares that they think are way undervalue. With taking on debt being so cheap now, a company having a lot of cash on hand, is not as valuable to a shareholder as it use to be.
If investors thinks its a good move, then the share price can go up by $1.10 (even before the actual buy back begins) and the company can still have $100 market cap (shareholder equity value) after the buy back. If the share price stays the same, then the market cap will drop to $90 and further, if the stock price drops. So the pie doesn't necessarily have to get smaller after a buy back. It depends on how much spending the $10 for the buy back affects the share price and not that since it cost $10 worth of equity to buy back the share, the pie must be smaller.
The wealth for the shareholder is not dependent on how much the company is actually worth, but on how much someone else is willing to pay for his share.
Yes, that's a better, more real-world explanation of what I was trying to say. I don't think I equated the $100 market cap solely with its current equity, but if I accidentally implied that I was wrong to do so. I was also a bit too theoretical, when I clearly didn't need to be.
One thing though...
If investors thinks its a good move, then the share price can go up by $1.10 (even before the actual buy back begins) and the company can still have $100 market cap (shareholder equity value) after the buy back.
If that were to happen, and the new market valuation equals the old one, then it would be a coincidence driven by investor feelings, little else. It makes no economic sense for a company's market value to be maintained after they burn a load of cash on a stock buyback, without any other change.
Also....
The wealth for the shareholder is not dependent on how much the company is actually worth, but on how much someone else is willing to pay for his share.
While that's certainly true for the day trader it's a bit of an over simplification for other investors, and is only true at the point at which they sell. If they hold, it will be because they believe the stock has more worth in the long run than it is currently valued at. There is wealth in possibility, though it's harder to quantify, and the IRS won't accept it on a return.
1) If a corporation is worth $100 and has 10 shares issued each share is worth $10. If they retire 1 share the corporation is still worth #100 but each share is then worth $11.11. It's just math (assuming that the stock market passed grade school arithmetic)
No.
If a $100 corporation uses $10 of its equity to retire a share then it is now worth $90. You can't spend money and still be worth the same amount, that is literally having your cake and eating it. The remaining shares are still worth $10; they have a greater share of a smaller pie, with the same worth per share as it did the day before the buy back. You can't just create wealth for shareholders the way you describe.
A corporation can realise greater value in the form of future profits that exceed expectations, and therefore cause the values of the remaining 9 shares to increase at a higher rate than 10 shares would have. That's the way that buybacks theoretically make money for shareholders, by concentrating earnings per share in a smaller pool.
Of course, in practice, share trading is all about expectations, and every action has a reaction, so it gets more complicated.
... You can't go backwards and use the market cap (shareholder equity) to determine its share price,
...
I didn't. But for some reason you assumed that I did.
Wise, knowledgeable fundamental investors like Warren Buffet compare the intrinsic worth of a company to its market valuation to determine if they want to buy into it. But typically, unless it is a startup, that analysis will begin with book value as a starting point in the analysis.
By the way, market [value] cap and share holder equity are not the same.
I didn't say you did. I was referring to @Crowdley reply to your post. He was using market cap to calculate the share price and that is backwards. You can't possibly know the market cap, unless you already know the share price.
Not shareholder equity but shareholder equity value.
I only use that term because @Crowdly referred to the $100 in your example as "equity". And the $100 worth in your example is its market cap (10 shares X $10 per share).
1) If a corporation is worth $100 and has 10 shares issued each share is worth $10. If they retire 1 share the corporation is still worth #100 but each share is then worth $11.11. It's just math (assuming that the stock market passed grade school arithmetic)
No.
If a $100 corporation uses $10 of its equity to retire a share then it is now worth $90. You can't spend money and still be worth the same amount, that is literally having your cake and eating it. The remaining shares are still worth $10; they have a greater share of a smaller pie, with the same worth per share as it did the day before the buy back. You can't just create wealth for shareholders the way you describe.
A corporation can realise greater value in the form of future profits that exceed expectations, and therefore cause the values of the remaining 9 shares to increase at a higher rate than 10 shares would have. That's the way that buybacks theoretically make money for shareholders, by concentrating earnings per share in a smaller pool.
Of course, in practice, share trading is all about expectations, and every action has a reaction, so it gets more complicated.
... You can't go backwards and use the market cap (shareholder equity) to determine its share price,
...
I didn't. But for some reason you assumed that I did.
Wise, knowledgeable fundamental investors like Warren Buffet compare the intrinsic worth of a company to its market valuation to determine if they want to buy into it. But typically, unless it is a startup, that analysis will begin with book value as a starting point in the analysis.
By the way, market [value] cap and share holder equity are not the same.
I didn't say you did. I was referring to @Crowdley reply to your post. He was using market cap to calculate the share price and that is backwards. You can't possibly know the market cap, unless you already know the share price.
Not shareholder equity but shareholder equity value.
I only use that term because @Crowdly referred to the $100 in your example as "equity". And the $100 worth in your example is its market cap (10 shares X $10 per share).
Again, when I used market cap to calculate share price I was describing theory. Elsewhere I was pretty clear about the real world value being based on judgement and expectation, i.e. what share traders will pay.
Also, I did not describe the $100 worth (i.e. market cap) as equity. I was pretty explicit when I said "As I said, the stock market is about expectation and judgement, but it is at least theoretically supposed to be a representation of a company's potential to return value, which equates to companies current equity plus its expected lifetime profit." I may have been less clear when when I said "If a $100 corporation uses $10 of its equity to retire a share then it is now worth $90." but I still didn't say what you claim I said. And it's @crowley. Thanks.
Comments
That would be true if they expensed it. But that would be improper.
You need to brush up on your accounting.
If a company has 10 shares and each share is worth $10 then the $100 the company is worth is its MARKET CAP (shareholder equity value). The $100 is not what the company has on its balance sheet. If it is, then its trading at book value and if the company thinks there's going to be any growth, they should buy back all their shares and take the company private.
You can't go backwards and use the market cap (shareholder equity) to determine its share price, (by knowing how many outstanding shares). It doesn't work that way. There is no way to determine a company's market cap (shareholder equity value), without already knowing its share price. The market cap of a company is usually way more than what its actually worth on its balance sheet. And how much a company is worth on its balance sheet is reflected in its share price. (or the $10 in this case). Which in turn determines its market cap (shareholder equity value). Any cash on hand could be a major factor of its share price or might not factor in at all. Spending $10 to buy back a share, directly affect its share price, not directly deducted from its market cap (shareholder equity value).
And everything goes out of whack if the company borrows money, to buy back their shares that they think are way undervalue. With taking on debt being so cheap now, a company having a lot of cash on hand, is not as valuable to a shareholder as it use to be.
If investors thinks its a good move, then the share price can go up by $1.10 (even before the actual buy back begins) and the company can still have $100 market cap (shareholder equity value) after the buy back. If the share price stays the same, then the market cap will drop to $90 and further, if the stock price drops. So the pie doesn't necessarily have to get smaller after a buy back. It depends on how much spending the $10 for the buy back affects the share price and not that since it cost $10 worth of equity to buy back the share, the pie must be smaller.
The wealth for the shareholder is not dependent on how much the company is actually worth, but on how much someone else is willing to pay for his share.
One thing though...
If that were to happen, and the new market valuation equals the old one, then it would be a coincidence driven by investor feelings, little else. It makes no economic sense for a company's market value to be maintained after they burn a load of cash on a stock buyback, without any other change.
Also....
While that's certainly true for the day trader it's a bit of an over simplification for other investors, and is only true at the point at which they sell. If they hold, it will be because they believe the stock has more worth in the long run than it is currently valued at. There is wealth in possibility, though it's harder to quantify, and the IRS won't accept it on a return.
Not shareholder equity but shareholder equity value.
https://corporatefinanceinstitute.com/resources/knowledge/valuation/what-is-equity-value/
https://www.wallstreetmojo.com/equity-value/
I only use that term because @Crowdly referred to the $100 in your example as "equity". And the $100 worth in your example is its market cap (10 shares X $10 per share).
Also, I did not describe the $100 worth (i.e. market cap) as equity. I was pretty explicit when I said "As I said, the stock market is about expectation and judgement, but it is at least theoretically supposed to be a representation of a company's potential to return value, which equates to companies current equity plus its expected lifetime profit." I may have been less clear when when I said "If a $100 corporation uses $10 of its equity to retire a share then it is now worth $90." but I still didn't say what you claim I said.
And it's @crowley. Thanks.