Black Monday

[Scrunch]

Do you think company buybacks make sense to anyone other than company management?

Absolutely if you can't return tax efficiently return cash to shareholders through dividends which is my understanding of the situation in the US.

Say you buy back 5% of the shares on issue and retain unchanged profitability you just achieved 5% eps growth for the remaining shareholders.

[winner69]

Absolutely if you can't return tax efficiently return cash to shareholders through dividends which is my understanding of the situation in the US.

Say you buy back 5% of the shares on issue and retain unchanged profitability you just achieved 5% eps growth for the remaining shareholders.

....5.3% eps growth on that logic .....but what if they borrowed to fund the buyback

[kiwico]

The other aspect of share buy backs is the timing of them as companies seem to be much better at buying their shares when the share price is high rather than than when they look cheap.

[Scrunch]

....5.3% eps growth on that logic .....but what if they borrowed to fund the buyback

If you are profitable and trading on a pe of 15-20 and paying a minimal dividend the cash for the buyback could come from operations leaving cash levels at the end of the year similar to those at the start.

[winner69]

If you are profitable and trading on a pe of 15-20 and paying a minimal dividend the cash for the buyback could come from operations leaving cash levels at the end of the year similar to those at the start.

Alright in theory but many buy backs are debt funded

Additionally a lot of buybacks are done merely to transfer stock from outside shareholders to corporate insiders that have executive stock and option plans.

[winner69]

Some describe buybacks as the ‘New Magic Beans’

[Scrunch]

Alright in theory but many buy backs are debt funded

Additionally a lot of buybacks are done merely to transfer stock from outside shareholders to corporate insiders that have executive stock and option plans.

Buybacks to neutralise shares on issue effects of bloated senior mgmt compensation isn't a bad thing either. It removes the dilution effect that would otherwise occur as shares on issue increase.

Bloated senior mgmt option schemes, that's a different issue .....

[Aaron]

Buybacks make a lot of sense in certain circumstances. I am not sure if you are talking from a NZ or global perspective. But in NZ, if I hold shares in a company that has no imputation credits to impart, but has plenty of cash, I do not want them paying me a dividend. This would be destroying shareholder wealth. I would rather they complete a buy back. Hope that makes sense.

Thanks for that.
Not sure how they would get plenty of cash without paying tax, possibly tax free capital gains on land or businesses sold. You need to choose to sell your shares to benefit from a share buyback. As to destroying wealth either dividend or buying back shares on market will reduce the company bank account. I guess the buyback is a return of capital and not taxable in the hands of the shareholder which might make sense if a company has sold off a business and is now smaller and has excess cash it can't invest elsewhere.

I will have to keep my eyes open for an example of a buyback in NZ and see if the reasoning behind it stacks up. I know some of the power companies were buying back shares but wouldn't they be better reducing debt. Borrowing to buy back shares doesn't seem sensible. The argument that debt funding is cheaper doesn't make sense as the shareholders are the owners.
I guess in this day and age a strong balance sheet is just an opportunity for an investment company to buy up the company, milk it for all its worth and sell it back with a public listing and a lot more debt.

Looking forward to more Black Mondays in the near future.

[mikeybycrikey]

Alright in theory but many buy backs are debt funded

I don't know more generally but I know Apple's share buybacks were largely debt funded but, yet again, that was for tax reasons. Much of their cash was outside the US and they would've needed to pay 35% tax to bring it into the country. Instead they borrowed money and waited for the inevitable tax amnesty. And with low interest rates, the cost of borrowing was fairly low.

[blackcap]

Thanks for that.
Not sure how they would get plenty of cash without paying tax, possibly tax free capital gains on land or businesses sold. You need to choose to sell your shares to benefit from a share buyback. As to destroying wealth either dividend or buying back shares on market will reduce the company bank account. I guess the buyback is a return of capital and not taxable in the hands of the shareholder which might make sense if a company has sold off a business and is now smaller and has excess cash it can't invest elsewhere.

I will have to keep my eyes open for an example of a buyback in NZ and see if the reasoning behind it stacks up. I know some of the power companies were buying back shares.

No problems. I know of a company that has no imputation credits, but they have a lot more cash than profits. They are cash flow positive now but make losses most years because of high depreciation due to their business model being capital intensive. At the recent AGM of NWF they talked about Capital management initiatives. There was a question of dividends posed from the floor. The directors said it would be wrong to pay dividends out of free cash flow because they could not attach imputation credits and that would not be fair to shareholders. But they did say there were other ways for returning cash to investors and the inference was a buy back of shares. It really made sense to me.