Buyback stock life cycle

[jobyts]

Please educate me. I'm trying to understand the life cycle of buyback stocks.

 

My primitive understanding is

 

a. The company buys its own shares from the public market.

b. The bought back shares are given to the employees as per the employee incentive plan.

c. The employee sells the shares in the public market.

 

If the above statements are correct, isn't the increase in the EPS due to step (a) is nullified by the decrease in the EPS due to step ©.

So where is the argument of EPS-goes-high-on-buybacks?

[SHDL]

The number of shares repurchased doesn’t have to (and almost never does) equal the number of shares issued to employees as compensation.  If fact you probably want to avoid investing in companies that do the sort of thing you listed while claiming to be returning capital to shareholders via buybacks... 

 

A company can just hold on to the repurchased shares as treasury stock or cancel them.  Either way the number of shares outstanding goes down on a permanent basis and that makes each share represent greater ownership of the company.

[Cigarbutt]

I second SHDL concerning the need for individual company evaluation.

The way to pay executives and its impact on dilution, and the share buyback decision involve two different processes.

It seems that many buyback decisions do not apply the two principles that Mr. Buffett described as many companies manifest a pro-cyclical behavior and some even state clearly that the intent of the buybacks is to counter the dilution secondary to options and all...

In the past, when doing a post-mortem and evaluating the outcome and the return related to a specific investment, I've decomposed the return into: 1+Total Return= (1+RevΔ%)(1+NPMΔ%)(1+PEΔ%)(1+est.dividend%)(1/(1-net share count reductionΔ%)) and have occasionally found that the net share reduction change to be surprisingly significant when done opportunistically and/or over a long period.

 

If you want to look at this with an 'aggregate perspective', you may want to read the following even if construed with a certain political slant. The report still contains a lot of useful info and the appendices show that the net effect of share reduction varies widely. You can question parts of the methodology and some of their conclusions but the authors tend to agree with your thesis. They basically compared EPS growth at the company level and at the aggregate level and conclude that, for some time, 1-most buyback activity and retirement of shares have been mostly nullified by concurrent issue of options and shares as part of the compensation packages and 2-there has been some net reduction in share count in the aggregate and that could explain about 1% per year growth in EPS.

https://www.yardeni.com/pub/TS84.pdf

[SharperDingaan]

The company does the buyback because it currently has no internal opportunities that could earn more.

The buyback is to avoid paying a dividend. Avoid having to come up with the same amount every quarter, and creating expectations.

 

The bought shares could be cancellled. Increases EPS by reducing the share count, and makes debt numbers worse by reducing equity.

The shares could be held as treasury. Reduces/eliminates share dilution from share based compensation. Does not affect equity.

 

Short-term investors prefer large buybacks and share cancellation. Puts a floor under prices (may even elevate them), raises EPS (higher prices) and ensures bids in size. Investors sell into the bids, and walk-away. Longer-term investors prefer smaller buybacks that are combined with debt repayment, and only net share cancellation (buyback shares-compensation shares) - ratio's remain undisturbed, BS strength improves, and EPS improves. Short and long-term interests are not the same.

 

They are just another tool.

 

SD.

 

 

[Liberty]

Please educate me. I'm trying to understand the life cycle of buyback stocks.

 

My primitive understanding is

 

a. The company buys its own shares from the public market.

b. The bought back shares are given to the employees as per the employee incentive plan.

c. The employee sells the shares in the public market.

 

If the above statements are correct, isn't the increase in the EPS due to step (a) is nullified by the decrease in the EPS due to step ©.

So where is the argument of EPS-goes-high-on-buybacks?

 

Read Buffett on buybacks. He explains them well, how they can create value, destroy value.

[jobyts]

 

The bought shares could be cancellled. Increases EPS by reducing the share count, and makes debt numbers worse by reducing equity.

The shares could be held as treasury. Reduces/eliminates share dilution from share based compensation. Does not affect equity.

 

Short-term investors prefer large buybacks and share cancellation. Puts a floor under prices (may even elevate them), raises EPS (higher prices) and ensures bids in size. Investors sell into the bids, and walk-away. Longer-term investors prefer smaller buybacks that are combined with debt repayment, and only net share cancellation (buyback shares-compensation shares) - ratio's remain undisturbed, BS strength improves, and EPS improves. Short and long-term interests are not the same.

 

They are just another tool.

 

SD.

 

How do they cancel the shares? Telling the SEC stating that they won't be selling it to anyone?

 

Where do the outside get the info on the buyback (number of shares and the purchase price)? Is it in the audited quarterly report?

[SharperDingaan]

 

The bought shares could be cancellled. Increases EPS by reducing the share count, and makes debt numbers worse by reducing equity.

The shares could be held as treasury. Reduces/eliminates share dilution from share based compensation. Does not affect equity.

 

Short-term investors prefer large buybacks and share cancellation. Puts a floor under prices (may even elevate them), raises EPS (higher prices) and ensures bids in size. Investors sell into the bids, and walk-away. Longer-term investors prefer smaller buybacks that are combined with debt repayment, and only net share cancellation (buyback shares-compensation shares) - ratio's remain undisturbed, BS strength improves, and EPS improves. Short and long-term interests are not the same.

 

They are just another tool.

 

SD.

 

How do they cancel the shares? Telling the SEC stating that they won't be selling it to anyone?

Share count is reduced, and there a note disclosure in the next financial statement

Where do the outside get the info on the buyback (number of shares and the purchase price)? Is it in the audited quarterly report?

You don't. The note disclosure in the next financial statement will just speak to the total quantity bought, the total $ paid, and the price range of the purchases.

 

See the above in italics

SD