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GS share buyback


marcowelby
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Share buybacks is at times an indication that the shares of a company are undervalue.

 

I noticed that Goldman Sachs have been buying back their share since 2010.  The number of shares have decreased  from 585 to 500 millions. A 14.5%  reduction in total diluted  number of shares!!

 

Goldman Sachs

Year        Shares(Diluted in millions)

2008        456

2009        551

2010        585

2011        556

2012        516

2013        500

 

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Share buybacks have nothing to do with the value of the shares. In many instances, buybacks are executed merely to offset option dilution. You need to read the management's rationale for repurchasing shares to form an opinion as to whether said buyback is in the shareholders' best interest.

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Irrespective of the management's rationale, diluted share outstanding reduction has to be good for the shareholders. It may not suggest that the shares are undervalued, but the portion of income for each share definitely goes up.

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Irrespective of the management's rationale, diluted share outstanding reduction has to be good for the shareholders. It may not suggest that the shares are undervalued, but the portion of income for each share definitely goes up.

 

Has to be? Not so much when the shares are bought back above intrinsic value. You are then spending a dollar of company cash to buy something worth less than a dollar in value.

 

Thinking all buybacks are good is not much different from thinking all dividends are good.

 

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Irrespective of the management's rationale, diluted share outstanding reduction has to be good for the shareholders. It may not suggest that the shares are undervalued, but the portion of income for each share definitely goes up.

 

Has to be? Not so much when the shares are bought back above intrinsic value. You are then spending a dollar of company cash to buy something worth less than a dollar in value.

 

Thinking all buybacks are good is not much different from thinking all dividends are good.

 

Totally agree on your point that buy backs should be done at below intrinsic value. Unfortunately very very few firms  do opportunistic buy backs and most firms opt for regular buy backs that is spread over a long period of time, so I'd hope it will average out the price near its intrinsic value.

 

Nevertheless I do take back my words "has to be"  :)

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banks have had a very rough 5 years so been great to buy back shares.

 

Unfortunately in a time of ever increasing regulation and liquidity requirements most banks haven't been able to take advantage of share buybacks but the ones that have are likely the ones that were in the best shape to weather the crisis.

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Goldman has actually slowly trickled back down to book value and 10x P/E, so buybacks this year will add a lot of value. We talk about BAC and C a lot here, but lets not forget about one of the higher quality banks like GS. I'm buying some at this price.

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GS is interesting at these levels for sure.  The one thing that concerns me is that their leverage was 20-25x when they were reaping it in back before GFC.  Now leverage is about 10x.  From what I understand increasing leverage isn't an option for foreseeable future (correct me if I'm wrong there).  Back when they had the 25x leverage their ROE was 2.5x todays but that is basically entirely accounted for by the leverage.  So is it possible that they can get back to 20-25% ROE again without more leverage?    If the answer is yes, it is a steal.  If not, it is still probably somewhat under-priced given their maneuvering through the crisis and consistently growing book.

 

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