I never understood the purpose of share buybacks. Sure there will be less shares outstanding but the company will be worth that much less from having spent the cash to buy the shares.
It increases demand for the shares which raise the price. It is a way of paying out the people that are most eager to leave.
For example, say you and I both owned a company together, each of us with one share. If the company had 100 bucks in the bank and an app that earned 1 dollar a month, the company could offer 60 dollars for a share. This gives us a point of discrimination where I might take the deal since I feel like I could put it to better use elsewhere.
Furthermore in some places capital gains are more attractive than dividends (I know, it is stupid. It has to do with the original purchase price and changing tax rates over the years). So what some companies do is both a dividend and a share buy back for different classes of shares both of which are convertible to a "true" share. That way you can determine which method you want to get you money out of the stock.
It transfers money from the company to the owners, just like dividends do. Other than possibly providing different tax outcomes, share buybacks and dividend payments are completely equivalent. Any shareholder can take their portion of the dividend/buyback as either as ownership of the company, or as cash, by trading the relevant amount on the market.
This is actually not true because it ignores the fact that a company's shares could be trading cheap or dear. One dollar in the form of a dividend payment is always worth one dollar (ignoring taxes), whereas if the company can buy in a share with intrinsic value of X for the cost of 0.8*X, then it is "creating value" for the remaining shares. Conversely, if the shares are expensive relative to intrinsic value, then a buyback destroys value for the remaining shares.
Comments
I never understood the purpose of share buybacks. Sure there will be less shares outstanding but the company will be worth that much less from having spent the cash to buy the shares.
How does that benefit anyone?
It increases demand for the shares which raise the price. It is a way of paying out the people that are most eager to leave.
For example, say you and I both owned a company together, each of us with one share. If the company had 100 bucks in the bank and an app that earned 1 dollar a month, the company could offer 60 dollars for a share. This gives us a point of discrimination where I might take the deal since I feel like I could put it to better use elsewhere.
Furthermore in some places capital gains are more attractive than dividends (I know, it is stupid. It has to do with the original purchase price and changing tax rates over the years). So what some companies do is both a dividend and a share buy back for different classes of shares both of which are convertible to a "true" share. That way you can determine which method you want to get you money out of the stock.
It transfers money from the company to the owners, just like dividends do. Other than possibly providing different tax outcomes, share buybacks and dividend payments are completely equivalent. Any shareholder can take their portion of the dividend/buyback as either as ownership of the company, or as cash, by trading the relevant amount on the market.
This is actually not true because it ignores the fact that a company's shares could be trading cheap or dear. One dollar in the form of a dividend payment is always worth one dollar (ignoring taxes), whereas if the company can buy in a share with intrinsic value of X for the cost of 0.8*X, then it is "creating value" for the remaining shares. Conversely, if the shares are expensive relative to intrinsic value, then a buyback destroys value for the remaining shares.
It makes sense if the company believes that it's own shares are underpriced.