Posts filed under “Buybacks”
Today’s chart comes from a very interesting article on stock buybacks from Aswath Damodaran, a professor at New York University.
This has been a big year for stock buybacks, continuing a return to a trend that started more than two decades ago and was broken only briefly by the crisis in 2008.
Ultimately, buybacks return cash to shareholders. In terms of earnings, the impact of buybacks is somewhat more complex.
It’s best to think of buybacks in a broader context and not simply as a reduction in share count.
According to Damodaran:
The problem is that a buyback alters the risk profile of a firm and should also change its PE ratio (usually to a lower number).
Before a company calls for a stock buyback, it has risky assets (its operating business) and riskless assets (cash). After the buyback, the company has less of its riskless asset (cash) but also has fewer outstanding shares.
Hence, we end up with a somewhat riskier stock. Damodaran argues, rationally, that a buyback by an all-equity funded company should be a value-neutral transaction. In other cases, the shift should be reflected in by assigning the company a somewhat lower price-earnings ratio.
Laurence Fink, chief executive officer of Blackrock Inc., the world’s largest money manager with more than $4 trillion in assets, recently issued a warning to U.S. companies: Stop focusing on short-term returns at the expense of longer-term investments. “It concerns us that, in the wake of the financial crisis, many companies have shied away from…Read More
Common Stock Repurchases during the Financial Crisis Beverly Hirtle Liberty Street Economics, July 10, 2013 Large bank holding companies (BHCs) continued to pay dividends to their shareholders well after the onset of the recent financial crisis. Academics, industry analysts, and policymakers have noted that these payments reduced capital at these firms at a…Read More