Hey friends. I hope you had a wonderful Thanksgiving. The passing of Thanksgiving means Christmas is just around the bend.
Last week I introduced the common practice among publicly-traded companies of stock repurchases. This week I’ll offer some of the reasons for buybacks.
Whether repurchased shares are retired or placed into the corporate treasury, the shares bought back are reduced from the outstanding share count. The outstanding share count is the basis number used in determining all per share amounts (earnings per share, book value per share, cash per share, etc.).
Obviously, reducing this denominator used in per share calculations results in higher per share amounts. Since earnings per share (eps) is perhaps the single most popular metric used by the stock market in attempting to derive fair value, corporations are often motivated to repurchase stock in order to increase the eps number. A company showing a decline in total earnings can end up reflecting an increase in eps if the outstanding share count is reduced (via buybacks) proportionally more than the decline in earnings.
Corporations also can create demand for shares through their buybacks. That is, the buybacks can increase the buying pressure and thereby maintain or help inflate the stock price. By monitoring the form 4s (SEC insider trading filings), I’ve observed that corporate managers are often selling their shares while the company is actively buying back shares. In effect, the company cash is being used to buy stock from company management. This observation makes me feel somewhat cynical about companies with regard to whether management is primarily working for shareholders or for itself.
When I was interviewed by Jake Taylor of Five Good Questions, he raised the issue during the interview of corporations often buying stock more […]
