Buyback Ratio
Categories: Company Management, Trading, Stocks, Accounting, Tax
Sometimes companies buy back their own shares from outside investors. They do this for several reasons: to eliminate having to pay dividends, to pull control back into the business, or even if they feel the shareholders are undervaluing the shares. The buyback ratio is the amount of money the business has spent buying back its shares, divided by its market capitlization over that same period (usually measured over a year).
Buybacks allow management more flexibility, with more control and less concern for regular payments to shareholders. Plus, the fewer outstanding shares, the greater the shares that are still outstanding are worth. Often, businesses that do buybacks are high performers, because they're the businesses making changes and keeping shares moving, rather than letting the shares (and their businesses) do the same old same old...for years.
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Finance: Why Do Companies Buy Back Their...21 Views
And finance allah shmoop why do companies buy back their
own stock Well sometimes wall street simply gets it wrong
Investors place of value on a company based on whatever
price its stock is trading at and when investors do
get it wrong on the low side cos they're usually
the first to realize the disconnect and they're usually wise
to proactively take advantage of it in buying back their
own stock That's the basic quick and dirty But the
details answer for why companies buy back their own stocks
a bit more complex companies who have excess cash used
to just pay a dividend and when they still had
more cash than they needed for upgrading those smelting plants
and improving their assembly line efficiency and perfecting the quality
of their pooper scoopers while they simply up to their
dividend But then tax laws changed Basically tax rates went
higher Acme hemorrhoid cream supply company makes a billion dollars
in operating profit a year and it pays three hundred
million bucks in taxes to net seven hundred million dollars
in earnings but then pays three hundred million dollars in
dividends back to shareholders but then shareholders pay tax on
that three hundred million well in california for example shareholders
would pay something like one hundred million dollars in taxes
on those three hundred million in dividend distributions so the
company just earned a billion box and four hundred million
of it went back to the government well eventually companies
and individuals got sick of such a heavy tax burden
So instead of paying out taxable dividends companies began using
that excess cash to buy back their own stock Instead
buy backs are not taxed so that entire three hundred
million dollars that might have gone out for dividends had
the company used it all for buybacks would be some
thirty percent more efficient Keep in mind that buying back
stock shrinks the pie of ownership That is if a
company has two hundred fifty million shares outstanding and earned
five hundred million bucks in a year each year for
five years But each year the company bought back ten
million shares than at the end of those five years
The company would have just two hundred million shares out
standing while still earning the same five hundred million bucks
Initially the company was earning two dollars a share about
with fewer shares that two dollars per share grew to
fifty a share So even on flat earnings the company
was able to grow its earnings per share just by
buying back its own stock So yeah all of this
is nice and can work well if the company trades
at a low price to earnings Multiple low means that
the company believes it will be around for the next
fifty years or so It earns a dollar share and
trades for ten dollars a share and has no debt
and is growing revenue steadily it in a five six
seven Eight percent a year and lives in an industry
which this year for some stupid reason is out of
favor with young wall street investors So the stock which
used to trade a twenty five times earnings now trades
at only ten times and with the company believing it'll
still grow earning sizably in the future at ten times
this year's earnings nine times next years and eight times
the following year's earnings the company looks like a bargain
if the's low multiples So let's say a company has
no cash and no debt and will earn a dollars
Share this year in trades for ten bucks a share
Well if it took half of its earnings to buy
back stock and if the stock price stated ten bucks
and the earning stayed flat at a buck a share
well they'd have fought back the entire company in twenty
years In reality with fewer shares and even just flat
earnings i'ii earnings that aren't growing a company's stock price
would almost always go up So in a sense this
is a way for a company to force ah higher
stock price or force wall street to recognize its value
So all of this is great In theory the reality
is that many companies think they're better than they really
are and spend billions buying back their own stock at
twenty bucks a share after it fell from eighty on
ly to see the stock Ten bucks a share two
years later the wall street pros do nothing all day
over even figure out the trends that shaped stock prices
in the future So it's a rare company that can
see that vision more clearly than the droves of professional
investors all around him of course there's a second possibility
Maybe a company just has a sentimental attachment to its 00:03:58.453 --> [endTime] stock and the missing reunited And it feels good