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Buybacks at $46B a Month Dwarf Everything in U.S. Market (2015)

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Re: Buybacks at $46B a Month Dwarf Everything in U.S. Market (2015)

#121

Post by cowsandmilk »

JDDunn9 wrote: post #115
tomp wrote: post #111

Earlier quoted context omitted.

> Investors buying more shares with dividends doesn't decrease the number of shares outstanding. If you increase the share price without decreasing the share count, you have created value out of thin air and are saying the company was more valuable without the cash than it was with it. You're wrong. When the company issues the dividend, the share price falls for precisely the amount issued. So if everybody used that…

You're wrong. The market cap already had the cash priced into it, regardless of how it was used (as a dividend or re-invested). By your logic, a company whose profits remained flat and issued a dividend would become less valuable every year until it was worthless.

No, you are missing the point.

There is a value in a future dividend. On the ex-dividend date, the share becomes less valuable because the new holder will not receive a dividend in X days. This X is usually very small, so a share that goes from paying you $5 in two weeks to not paying you has clearly lost value close to $5.

Re: Buybacks at $46B a Month Dwarf Everything in U.S. Market (2015)

#123

Post by JDDunn9 »

tomp wrote: post #120
JDDunn9 wrote: post #115

Earlier quoted context omitted.

You're wrong. The market cap already had the cash priced into it, regardless of how it was used (as a dividend or re-invested). By your logic, a company whose profits remained flat and issued a dividend would become less valuable every year until it was worthless.

No, it happens just before the dividends. Say you own 1 share. It's trading for $20. Tomorrow the company pays $2 dividend. Then your share is worth $18 and you have $2 cash as well. Alternatively, if you're buying the share, you're willing to pay $20 for it today but only $18 tomorrow, because you know that you won't be getting a $2 dividend if you buy it. If you take future dividend payments into account, you also…

The market cap already reflects the value of all future earnings discounted to the present. The timing of dividend payments is irrelevant.

Re: Buybacks at $46B a Month Dwarf Everything in U.S. Market (2015)

#124

Post by eigenvalue »

cperciva wrote: post #6

Remember, in a perfectly liquid market without taxes, a company which executes a share buyback will have no change in its stock price, since the shared redeemed will be exactly balanced by a reduction in the value of the company; and this is also exactly equivalent to distributing profits in the form of a dividend. On the other hand, when the rate of taxation on capital gains is lower than the rate of taxation on cor…

This is not true. You are ignoring the most important factor of all, which is whether the company's share price is above or below its "intrinsic value". Of course, intrinsic value is a fundamentally fuzzy concept, but in some cases the share price is obviously out of line relative to historical measures of valuation (price to tangible book value, TEV/EBITDA, price to sales ratio, etc.). If there is no good fundamental reason for the lowered valuation (loss of patent protection, entrance of new competition, secular changes in technology, etc.), then it could create value for remaining shareholders if the number of shares is reduced and that capital is replaced with debt (or simply spending excess cash on the balance sheet). If the share price is above a conservative estimate of intrinsic value, then a company can easily destroy shareholder value by buying back shares. In that case, they might be better off issuing more shares or doing an acquisition for stock to take advantage of their overvalued currency. This sort of capital management is one of the most important ways a management team and board of directors can create value over time. For a good historical example, look at the case of Teledyne ( http://www.capitalideasonline.com/articles/index.php?id=2725 )

Re: Buybacks at $46B a Month Dwarf Everything in U.S. Market (2015)

#125

Post by phamilton »

JDDunn9 wrote: post #115
tomp wrote: post #111

Earlier quoted context omitted.

> Investors buying more shares with dividends doesn't decrease the number of shares outstanding. If you increase the share price without decreasing the share count, you have created value out of thin air and are saying the company was more valuable without the cash than it was with it. You're wrong. When the company issues the dividend, the share price falls for precisely the amount issued. So if everybody used that…

You're wrong. The market cap already had the cash priced into it, regardless of how it was used (as a dividend or re-invested). By your logic, a company whose profits remained flat and issued a dividend would become less valuable every year until it was worthless.

Profits being flat isn't quite right. Profits being zero is the case where a company issuing a dividend would eventually become worthless.

Re: Buybacks at $46B a Month Dwarf Everything in U.S. Market (2015)

#126

Post by JDDunn9 »

cowsandmilk wrote: post #121
JDDunn9 wrote: post #115

Earlier quoted context omitted.

You're wrong. The market cap already had the cash priced into it, regardless of how it was used (as a dividend or re-invested). By your logic, a company whose profits remained flat and issued a dividend would become less valuable every year until it was worthless.

No, you are missing the point. There is a value in a future dividend. On the ex-dividend date, the share becomes less valuable because the new holder will not receive a dividend in X days. This X is usually very small, so a share that goes from paying you $5 in two weeks to not paying you has clearly lost value close to $5.

The market cap already reflects the value of all future earnings discounted to the present. The timing of dividend payments is irrelevant.

If your argument was true, that a stock's price predictably fell the day after the dividend, investors could simply short the stock and get a guaranteed profit, which is not possible in an efficient market.

Re: Buybacks at $46B a Month Dwarf Everything in U.S. Market (2015)

#127

Post by JDDunn9 »

phyalow wrote: post #119
JDDunn9 wrote: post #116

Earlier quoted context omitted.

Market cap = shares outstanding * share price. Reducing shares increases the price (while keeping market cap the same). Share splits increases the shares outstanding and decreases the price. So... yes, shares outstanding does matter.

Now you are confusing outstanding shares with market float. Shares repurchased become treasury stock and are now apart of equity.

Whether the company destroys the shares or retains them as treasury stock is irrelevant. Investors don't care if their share price went up by 10%, or if they effectively have 1.10 shares.

Re: Buybacks at $46B a Month Dwarf Everything in U.S. Market (2015)

#128

Post by tomp »

JDDunn9 wrote: post #123
tomp wrote: post #120

Earlier quoted context omitted.

No, it happens just before the dividends. Say you own 1 share. It's trading for $20. Tomorrow the company pays $2 dividend. Then your share is worth $18 and you have $2 cash as well. Alternatively, if you're buying the share, you're willing to pay $20 for it today but only $18 tomorrow, because you know that you won't be getting a $2 dividend if you buy it. If you take future dividend payments into account, you also…

The market cap already reflects the value of all future earnings discounted to the present. The timing of dividend payments is irrelevant.

Either you're stupid, or there's a misunderstanding. Probably the latter. Let me try again. Assume that δ is the discount factor (δ = 1 / (1 + r)), P is price, and D_i is the dividend in year i.

Before dividend:

  P = D_0 + δ D_1 + δ^2 D_2 + δ^3 D_3 + ...
After dividend:

  P = δ D_1 + δ^2 D_2 + δ^3 D_3 + ...

Re: Buybacks at $46B a Month Dwarf Everything in U.S. Market (2015)

#129

Post by Retric »

eigenvalue wrote: post #124
cperciva wrote: post #6

Remember, in a perfectly liquid market without taxes, a company which executes a share buyback will have no change in its stock price, since the shared redeemed will be exactly balanced by a reduction in the value of the company; and this is also exactly equivalent to distributing profits in the form of a dividend. On the other hand, when the rate of taxation on capital gains is lower than the rate of taxation on cor…

This is not true. You are ignoring the most important factor of all, which is whether the company's share price is above or below its "intrinsic value". Of course, intrinsic value is a fundamentally fuzzy concept, but in some cases the share price is obviously out of line relative to historical measures of valuation (price to tangible book value, TEV/EBITDA, price to sales ratio, etc.). If there is no good fundamenta…

Intrinsic value does not exist. Which is why we have markets in the first place.

The obvious way to demonstrate this is you sell 10 shares for a higher price than 10 billion shares.

Re: Buybacks at $46B a Month Dwarf Everything in U.S. Market (2015)

#130

Post by phamilton »

rsp1984 wrote: post #102
cperciva wrote: post #6

Remember, in a perfectly liquid market without taxes, a company which executes a share buyback will have no change in its stock price, since the shared redeemed will be exactly balanced by a reduction in the value of the company; and this is also exactly equivalent to distributing profits in the form of a dividend. On the other hand, when the rate of taxation on capital gains is lower than the rate of taxation on cor…

and this is also exactly equivalent to distributing profits in the form of a dividend. I don't see this equivalence. I guess It's rather like settling debt since after a buy-back there will be fewer future dividends to pay. But nothing changes for continuing shareholders, does it?

Assume an investor takes all dividends and buys more shares.

Example:

Assume 10M shares at $1 each. With a 10 cent dividend ($1M total), an investor with 100k shares (1% of the company) receives $10k. The market cap drops to $9M (since cash holdings decreased) and the stock price drops to $0.90. They then buy ~11k (10k/.9) shares and have 111k shares, or 1.1%.

Now instead assume the company does a buyback of 1M shares. Now there are 9M shares, each still priced at $1 (cash holdings decreased). The investor has 1.11% of the company.

Lots of assumptions here (no fluctuation in price due to market reaction, cash is not discounted in market cap, etc) but the numbers check out in a perfect world.

The point is that with a Dividend investors can choose whether to reinvest, whereas with a buyback everyone essentially reinvests.

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