How do you account for buybacks in your valuation?

[Luke]

Recently, we discussed Apples current Valuation and the possible 10 year forward IRR. 

 

Since Apple uses the majority of its cash to buy back their own shares instead of giving shareholders the cash via dividends, its an important factor for the returns to be made. 

 

Buybacks depend on>

 

1 Volume, shares able to be bought in the open market 

2 Purchase price at depressed valuation or exuberant valuation

 

Since it is difficult to model possible depressed valuations, well known Mr.Bloomstran includes multiple valuations with buybacks at certain level of book value, the lower the price to be purchased the higher the return. 

 

Considering a rather illiquid stock with less volume, how do you model buybacks? The new increase in buyers will shoot the stock upwards, buybacks are less effective. 

 

The obvious decision then would be to pay dividends,given no other capital allocation options inside the business. 

 

Just wondering how the board thinks about modelling them over longer periods. Pabrai once posted this nice graph>

 

How hard does it get at these specific checkpoints? What if the shareholder base left doesnt sell enough? 

 

 

 

 

Cheers!

 

Edited July 2, 2023 by Luca

[ValueArb]

I think I would model them as dividends because you don't know whether buybacks can be done at prices that are accretive or dilutive in the future. The most important criteria is what you think of managements capital allocation skills, if you think they are really smart and good at it, then buybacks are opportunistic upside. If you don't trust management to buy back stock at reasonable prices, then it can be a negative since some happily overpay to drive the price up so they can unload their options for bigger profits.

 

With Apple I think Tim Cook has done a great job but historically it's stock has been clearly undervalued so he couldn't go wrong. Today at $197 I think it's either overvalued or fairly valued, and last quarter Apple was still buying back shares last quarter within the $135 to $155 range. If this quarter he's buying back shares above that range I'd say he might not get it. He may have just heard "buy back stock" from Buffett not the "when it's undervalued" part.

[rogermunibond]

If buybacks aren't making material dents in shares outstanding, if they are used to offset options dilution, if they are done at materially high prices but not when the stock is trading very cheaply, then don't give the company any credit for sensible return of FCF to shareholders and move on.