Stock Buybacks Are Booming, but Share Prices Aren’t Budging

[No Duff (troll)]

2 hours ago, jm51 said:

Something I've always wondered about stock buybacks:

What happens if a company buys back ALL of its stock?

Most unlikely I know but what would be the legal/commercial consequences of a company owning itself 100%.

They do.  That is one of the current trends.  Taking themselves private.  Eventually there will be nothing left for us.  It is also happening in effect if not in name.  I been doing some work on Private Equity which had taken me through many entities to the Cayman Islands, etc where the secrecy makes the trail harder.  A small group seems to own most of everything.

[kibuc]

I'm obviously an idiot, but with every intention of improving. Can please someone explain

If issuing new shares should not affect the price of existing shares, as company's valuation goes up thanks to all that extra money

then why should buying back shares affect the price of the remaining ones? After all, the overall valuation should go down as the company throws money away.

 

Example:

Initial valuation: £10m, shares issued: 10m, price: £1.

Extra 10m shares issued at £1, £10m raised, new valuation: £20m, shares issued: 20m, price: £1.

5m shares bought back at £1, £5m spent, new valuation: £15m, shares issued: 15m, price: £1.

 

I'm a simple guy and I like thinking simple.

[sancho panza]

47 minutes ago, kibuc said:

I'm obviously an idiot, but with every intention of improving. Can please someone explain

If issuing new shares should not affect the price of existing shares, as company's valuation goes up thanks to all that extra money

then why should buying back shares affect the price of the remaining ones? After all, the overall valuation should go down as the company throws money away.

 

Example:

Initial valuation: £10m, shares issued: 10m, price: £1.

Extra 10m shares issued at £1, £10m raised, new valuation: £20m, shares issued: 20m, price: £1.

5m shares bought back at £1, £5m spent, new valuation: £15m, shares issued: 15m, price: £1.

 

I'm a simple guy and I like thinking simple.

Issuing shares will 'dilute' the shares outstanding and will therefore-most likely-result in a drop in the share price.

buying back shares mainly affects the earnings poer share calculation as per my example.

 

the problem with your example is that you're presuming the company does nothing with the new capital which they inevitably would.That's where the revaluations occur as capital assets go up and down,as do intangibles like goodwill.

[kibuc]

19 hours ago, sancho panza said:

Issuing shares will 'dilute' the shares outstanding and will therefore-most likely-result in a drop in the share price.

buying back shares mainly affects the earnings poer share calculation as per my example.

 

the problem with your example is that you're presuming the company does nothing with the new capital which they inevitably would.That's where the revaluations occur as capital assets go up and down,as do intangibles like goodwill.

That was my initial thinking as well, which made me say to myself "so how is share dilution even legal?", but then I stumbled upon websites saying "fear not, when they issue new shares they raise capital proportionately and the proverbial pie gets bigger, so share price remains unchanged". I'm trying to apply the same logic to shares buy-backs - it's a capital expenditure after all, causing the pie to shrink. I appreciate that it's probably just an academic theory, or probably one designed specifically to vindicate share dilution in the first place.