Thread: Key takeaways from Siren Call: Share repurchases by @Edelweiss_Cap
Investors tend to love buyback programs, but are not aware that they destroy, rather than create, value most of the time
Investors tend to love buyback programs, but are not aware that they destroy, rather than create, value most of the time
Buyback programmes only create value if the company is buying back its stock below its intrinsic value. If this isn't the case, the company shouldn't be buying back any stock.
Lets look at reasons that can make a company buy back stock, even when it's not creating value:
Lets look at reasons that can make a company buy back stock, even when it's not creating value:
1. To offset EPS/ share dilution due to stock based compensation
2. To cause an increase in EPS by decreasing the share count. This can occur if managements bonuses/ incentives are based on the EPS metric.
2. To cause an increase in EPS by decreasing the share count. This can occur if managements bonuses/ incentives are based on the EPS metric.
We can expect the CEO of the company to know the intrinsic value of the company better than anyone. This is because they know the company's strategy and thus can calculate intrinsic value with better accuracy.
Lets look at an example:
Lets look at an example:
The intrinsic value per share for this company is $10. So lets look the shareholder returns for all three scenarios.
It is clear that buybacks only create value if the shares are bought below their Intrinsic Value, by far.
It is clear that buybacks only create value if the shares are bought below their Intrinsic Value, by far.
Then if its so clear, why does management still buyback shares if they aren't trading below intrinsic value. Its simply due to the institutional imperative. This is the tendency of management to imitate the behaviour of other management no matter how irrational their decision is.
During the 2004 and 2011 period, most buyback programs in the S&P 500 destroyed value. The main issue was bad timing. Companies tend to buyback shares when things are going well and the stock price is high but then dial it down when the stock price is low.
They however should...
They however should...
be doing the exact opposite.
Lets look at the examples of share buyback programmes between 2012 and 2021 for the following companies:
a.) Apple
- is the buyback king and the results prove it
-however in 2012, Apple bought back stocks in order to offset dilution. This was...
Lets look at the examples of share buyback programmes between 2012 and 2021 for the following companies:
a.) Apple
- is the buyback king and the results prove it
-however in 2012, Apple bought back stocks in order to offset dilution. This was...
a red flag because stocks should on be bought back only if they are trading below intrinsic value.
That's all for today. Please like, follow and retweet. Thanks to @Edelweiss_Cap for such an insightful piece.
Link to piece:
edelweiss.substack.com
That's all for today. Please like, follow and retweet. Thanks to @Edelweiss_Cap for such an insightful piece.
Link to piece:
edelweiss.substack.com
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