Thursday, May 1, 2014

On buyback

To my understanding, when the company buys back stocks to reduce the number of outstanding shares, so in theory the remaining shares should appreciate in value in this aspect. However, the company uses the company's cash, then in theory again, the stock value should remain the same. So, it is a no win and no loss situation and supply and demand should not hold for this situation.

However, the management understands better than any one about the value of the company. They buy back due to a good value with respect to how to use the company's cash such as giving dividends, plowing back to research/development... They also in theory consider the total return of the investor (tax rates...).

Most officers take care of themselves first: How to boost the value of their stock options. In last several years, boosting dividends have proven to raise the stock price.

If the number of the outstanding shares has been reduced, many metrics with earning per share will be improved such as P/E.  If the company borrows money to buy its stock, the metrics on debts will head to the other direction.

One's two cents.

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