Buyback Derangement Syndrome

[Altavest_Erik]

https://www.wsj.com/articles/buybac..._tag=collabctx&cx_navSource=newsReel#cxrecs_s

 

[d08]

So, let me get this straight, borrowing for buybacks is a good strategy?
Good is bad and light is dark.

He also suggests buybacks reduce market cap? Logically I would say that it's not the case. Yes, shares are removed BUT the price is inflated.

What am I missing here?

 

[dozu888]

I posted a few times about the Fed Model.... these things are related... when you can borrow for x% to buy something that yields y%, it will work as long as x < y... and right now the bond yields are still way too low compared to equity earning yields..

stocks are dirt cheap here... it's not derrangement... it's simply money flows to the best value.

 

[Saltynuts]

So, let me get this straight, borrowing for buybacks is a good strategy?
Good is bad and light is dark.

He also suggests buybacks reduce market cap? Logically I would say that it's not the case. Yes, shares are removed BUT the price is inflated.

What am I missing here?

Well they do reduce market cap over time of course. As more and more money comes out of the company, over the long haul share price will have to drop to reflect dwindling corporate assets. There can be temporary deviations based on other factors, but imagine a company that keep buying back it s stock until it has paid out every single dollar of assets and has nothing left. Any remains share will have very little if any value and market cap would be virtually nothing at that point.

 

[dozu888]

Well they do reduce market cap over time of course. As more and more money comes out of the company, over the long haul share price will have to drop to reflect dwindling corporate assets. There can be temporary deviations based on other factors, but imagine a company that keep buying back it s stock until it has paid out every single dollar of assets and has nothing left. Any remains share will have very little if any value and market cap would be virtually nothing at that point.

nah..

the reduction of cash on book is compensated by the now higher earnings per share, which should raise the stock price is the P/E remains unchanged.... so in theory buy backs should not affect market cap.

 

[dozu888]

So, let me get this straight, borrowing for buybacks is a good strategy?
Good is bad and light is dark.

He also suggests buybacks reduce market cap? Logically I would say that it's not the case. Yes, shares are removed BUT the price is inflated.

What am I missing here?

you didn't miss anything, just another garbage article on the internet written by a clueless person.

 

[newwurldmn]

So, let me get this straight, borrowing for buybacks is a good strategy?
Good is bad and light is dark

It is if the price of stock is low enough. Though most companies buy back stock when the stock price is high which I think is value destructive.

 

[destriero]

XYZ is running 10% ROC and the shares are flat or down in a year with rising revs, earnings and decent macro. You don't DCA into some buyback program?

 

[d08]

It is if the price of stock is low enough. Though most companies buy back stock when the stock price is high which I think is value destructive.

Low/high is quite subjective in my opinion. But we're at highs and buybacks are at record highs, so...