No. of Recommendations: 25
I mean, obviously it's not a return to shareholders. Do you own shares of any company that did buybacks? Show us a scan of the cheque you received. Oh yeah, you didn't : )
Sure, EPS went up. But cash per share went down.
In the admittedly ridiculous hope that I might persuade someone that share buybacks are NOT returning cash to shareholders, one might consider this:
Company X is worth $1b, because ther are 1 million shares outstanding and each is worth $1000. The company has $100m of cash that it has no immediate use for, and its shareholders don't want dividends, because of the tax implications. One might reasonably say that the operations of the company are worth about $900m, and the $100m cash pile is worth... $100m.
Now since I am a shareholder who owns 1% of the company (10,000 shares), I own $10m worth of this company - in other words, I own $9m worth of the company's operations, and my share of their cash pile is worth another $1m.
Now the company decides to repurchase shares. They do it slowly, so as not to disturb the market price, and now the company really is worth just $900m. Fortunately, although I still only own 10,000 shares, that is now a larger proportion of the overall company; 10,000/900,000 = 1.11%.
So for me, what has changed, is that I now own more operating assets (1.11% of that $900m value, so that would be $10m worth instead of $9m worth), and NO cash at all, since the company didn't send me any and I no longer have 1% of their $100m cash pile. The company has not returned me any value at all, they have just changed my ownership from being $9m in operating assets and $1m of cash into $10m in operating assets and zero cash. In effect, they have forced me to become a bigger owner of the operating assets by taking my $1m in cash and sending it out to other shareholders, in exchange for a higher proportion of the operating business.
Of course, if I want to keep owning cash, not more of the business, I can always sell the new 0.11% of shares I own, and then I would have $1m in cash again, this time in my hands, minus whatever taxes I may have to pay. But if I like the business, and think it's worth as much or more as the cash I have forfeited, then this will have been a good deal for me.
But not because they ever returned me any cash - quite the opposite.
Regards, DTB
