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Thread: Share buy backs

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    Default Share buy backs

    Can someone please explain to me the purpose of company share buy backs?

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    Quote Originally Posted by justakiwi View Post
    Can someone please explain to me the purpose of company share buy backs?
    Not sure but this is Mercury's explanation.

    Mercury Chair Joan Withers said the Board’s view is that a purchase of the company’s shares at current market prices is an efficient use of excess balance sheet capacity that also reflects Mercury’s desire to maintain capital flexibility for future value-enhancing initiatives for its shareholders.

    “The Board believes that the buyback is a prudent method of addressing the company’s low gearing relative to its target capital structure and is an efficient way of returning capital to shareholders,” said Mrs Withers. The buyback will bring the company’s gearing levels near 2.0x for debt to EBITDAF, consistent with the conservative end of Mercury’s target range of 2.0x to 3.0x.

    Mrs Withers said that holding the shares as treasury stock reflected the company’s desire to maintain capital flexibility. This will add to the 1.6% of shares already held as treasury stock from Mercury’s buyback in FY2014.



    So they buy their own shares on market with debt? So they have shares to sell if they need additional capital to provide "capital flexibility". Although they would be less likely to need capital flexibility if they didn't buy back their shares and left their "excess capacity" on their Balance Sheet. They could have used their excess capacity to bump up our dividends.

    I don't really know either, maybe check to see if Management bonuses depend on an increasing share price or if consultants or brokers get fees for pointless fluffing around. Maybe it is just sensible to have more debt in a world trying to destroy the value of debt through inflation? Certainly wish I had been less scared of debt over the years.

    I will need to wait with you for a more knowledgeable poster to provide a purpose for it all.
    Last edited by Aaron; 30-05-2019 at 04:15 PM.

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    Quote Originally Posted by justakiwi View Post
    Can someone please explain to me the purpose of company share buy backs?
    Here is a quote from Chapter 18 of "The Buffettology Workbook" which should go a long way to answering your question.

    "Let's say a company has 100 million shares outstanding and Warren owns 10 million of these shares, which equates to owning 10% of the entire business. If the company goes into the stock market and buys back 40 million of its shares, it will have only 60 million shares outstanding. Warren's ownership interest in the business would have increased from 10% to 16.6%. His ownership in the company increased without investing any more money. The company's own capital was used to increase his ownership interest."

    "Now consider this: If the company had paid out the money that it spent on buying back shares, Warren would have had to pay income tax on his portion of the dividends, which means he would have about 30% less money to invest with. By having the company repurchase its own shares, Warren is able to avoid the tax man and in the process increase his own percentage of ownership of the business."

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    Last edited by Snoopy; 30-05-2019 at 07:43 PM.
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    OK. So share buy backs are good for shareholders with a significant holding in a company? (But less useful for small investors). What affect does a buy back have on the share price? How does the company decide what they are prepared to pay for the shares or does it not really matter what price they get them at?



    Quote Originally Posted by Snoopy View Post
    Here is a quote from Chapter 18 of "The Buffettology Workbook" which should go a long way to answering your question.

    "Let's say a company has 100 million shares outstanding and Warren owns 10 million of these shares, which equates to owning 10% of the entire business. If the company goes into the stock market and buys back 40 million of its shares, it will have only 60 million shares outstanding. Warren's ownership interest in the business would have increased from 10% to 16.6%. His ownership in the company increased without investing any more money. The company's own capital was used to increase his ownership interest."

    "Now consider this: If the company had paid out the money that it spent on buying back shares, Warren would have had to pay income tax on his portion of the dividends, which means he would have about 30% less money to invest with. By having the company repurchase its own shares, Warren is able to avoid the tax man and in the process increase his own percentage of ownership of the business."

    SNOOPY

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    Quote Originally Posted by justakiwi View Post
    OK. So share buy backs are good for shareholders with a significant holding in a company? (But less useful for small investors).
    I think its the same for all shareholders. Every 1 share counts the same in % terms.

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    Quote Originally Posted by Snoopy View Post
    Here is a quote from Chapter 18 of "The Buffettology Workbook" which should go a long way to answering your question.

    "Let's say a company has 100 million shares outstanding and Warren owns 10 million of these shares, which equates to owning 10% of the entire business. If the company goes into the stock market and buys back 40 million of its shares, it will have only 60 million shares outstanding. Warren's ownership interest in the business would have increased from 10% to 16.6%. His ownership in the company increased without investing any more money. The company's own capital was used to increase his ownership interest."

    "Now consider this: If the company had paid out the money that it spent on buying back shares, Warren would have had to pay income tax on his portion of the dividends, which means he would have about 30% less money to invest with. By having the company repurchase its own shares, Warren is able to avoid the tax man and in the process increase his own percentage of ownership of the business."

    SNOOPY
    This makes sense to me if the company buy the shares and cancel them. I am less clear of the effect of holding the shares as treasury stock.

    Are they not just taking on debt to increase their assets? They will then benefit from any increase in share price and dividend payouts.

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    Yes that’s true, but I was looking at it more from the point of view of dividends and tax. A share buy back looks to be preferable for someone with huge numbers of stock, whose dividend income (and thus tax) would be significant. Whereas for someone like me, a dividend pay out/DRIP is a greater benefit than a % increase in my holding under a buy back.

    Unless of course, I am not fully understanding this, which is very possible

    Quote Originally Posted by blackcap View Post
    I think its the same for all shareholders. Every 1 share counts the same in % terms.
    Last edited by justakiwi; 31-05-2019 at 08:40 AM.

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    Quote Originally Posted by justakiwi View Post
    Yes that’s true, but I was looking at it more from the point of view of dividends and tax. A share buy back looks to be preferable for someone with huge numbers of stock, whose dividend income (and thus tax) would be significant. Whereas for someone like me, a dividend pay out/DRIP is a greater benefit than a % increase in my holding under a buy back.

    Unless of course, I am not fully understanding this, which is very possible
    The number of shares an investor holds in a company makes no difference to the argument justakiwi. A dividend is taxable, and the funds you reinvest via a DRIP have to be declared as income, and tax is paid. After tax is paid the residual from the gross dividend funds that remain after tax has been paid are reinvested in new shares, increasing the number of shares in circulation, under the DRIP.

    If instead of paying a dividend the company bought back its own shares, and cancelled them, then you would have the same number of shares but each share would be worth more and you would have no tax bill. Theoretically the increase in the value of your existing shares would exceed the increase in your wealth more than from the incremental increase in the number of shares you own under the alternative scenario of the DRIP. This is because under a DRIP you pay tax, but if that same money was instead invested in a share buyback you do not pay tax,

    SNOOPY
    Last edited by Snoopy; 31-05-2019 at 10:33 AM.
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    Quote Originally Posted by justakiwi View Post
    OK. So share buy backs are good for shareholders with a significant holding in a company? (But less useful for small investors).
    No. (see my previous post).

    What affect does a buy back have on the share price?
    The profits from the underlying business are spread among less shares. So if 10% of the shares are bought back, that means each shares that remains should be worth:

    100/90 = 11.1% more

    How does the company decide what they are prepared to pay for the shares or does it not really matter what price they get them at?
    This question is not so straightforward to answer. One might argue that whatever price a company pays for its own shares will reduce the number of shares on issue and so increase earnings per share. So the price the company pays does not matter. However it is clear that the lower the share price, the more of its own shares a company is able to buy with the same money. So I would argue that the price the company pays for its shares does matter. This means a company can pay too much for its own shares, in my view.

    How much is too much? Not an easy question to answer. But if a company buys back its own shares then somewhere down the track decides to issue new shares at a lower price than their buyback price, that is a sure sign the buyback price was too high.

    SNOOPY
    Last edited by Snoopy; 31-05-2019 at 10:49 AM.
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    Gotcha ... thanks for the explanations


    Quote Originally Posted by Snoopy View Post
    No. (see my previous post).



    The profits from the underlying business are spread among less shares. So if 10% of the shares are bought back, that means each shares that remains should be worth:

    100/90 = 11.1% more



    This question is not so straightforward to answer. One might argue that whatever price a company pays for its own shares will reduce the number of shares on issue and so increase earnings per share. So the price the company pays does not matter. However it is clear that the lower the share price, the more of its own shares a company is able to buy with the same money. So I would argue that the price the company pays for its shares does matter. This means a company can pay too much for its own shares, in my view.

    How much is too much? Not an easy question to answer. But if a company buys back its own shares then somewhere down the track decides to issue new shares at a lower price than their buyback price, that is a sure sign the buyback price was too high.

    SNOOPY

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