Week Ending 02/08/13: $474.98 Feb 9, 2013 14:33:11 GMT -5
Post by jeffi on Feb 9, 2013 14:33:11 GMT -5
Feb 9, 2013 13:25:59 GMT -5 @greggthurman said:
Typically, we have pro and con views regarding stock buybacks. Much of these contrasting views originate from the inconsistent results of share buybacks.
I'd argue (yes, I like to argue), that both camps are correct. In other words, it depends. A stock buyback trades cash for a larger claim on future earnings. Therefore, if future earnings are to grow faster than the return on the cash, then all things being equal, the stock buyback should add to shareholder wealth. On the other hand, if future earnings are to decline, buy backs destroy shareholder wealth.
Unfortunately, its not that simple. Of course all things are not equal. If the current valuation of said stock is overvalued (e.g., high PE), and it's valuation is coming down (PE compression) than even growing earnings will not prevent a stock buyback from destroying shareholder value. And conversely, if a stock is severely undervalued with declining earnings a buy back may still add value.
Now that I've muddied the waters, I'll try to bring back some clarity.
If Apple's stock is correctly valued or undervalued (defined as valuation will be the same or higher in the future, e.g., PE expansion) and if earnings per share will increase in the future, then a stock buy back will ultimately add to shareholder wealth.
On the other hand, If Apple's stock is correctly valued or overvalued (defined as valuation will be the same or lower in the future) and if earnings per share will decrease in the future, then a stock buy back will ultimately destroy shareholder wealth.
There is a simple flaw in your statement, and that regards valuation. Finding two people that agree on value at the same time is just a little more than difficult. Couple od examples: just look at the wide range of future values projected by WS analysts, or in every trade (buyer thinks its going higher/seller doesn't.
Value is not an objective determination, it is completely subjective. So increasing/decreasing the number of outstanding shares has little impact, if any, on investors. Certainly not enough to make a difference A buyback would have to change the subjective reasoning behind an investor's estimate of value. It can't do that, for the very reason you gave above, some investors think earnings are going to grow, and others don't.
Until this week I think more felt the future of Apple was dark.
What has to change is Investor Sentiment. That's why I don't use the acronym of PE. It measures the right thing, but it use has been corrupted. The results of the calculation indicate Investor Sentiment, therefore in my view it should be called Investor Sentiment Multiplier (ISM).
The ONLY thing that can change investor sentiment are results coupled with management's guidance. If it isn't there, nothing artificial (like a stock buy back) is going to change it.
I think I lost you. Stock ownership gives you a claim/ interest on the assets and liabilities and the future earnings. If the value of the claim to the earnings are going to increase faster than the value of the claim to the cash, then logically one would be better off with a larger claim to the earnings than that of the cash.
Regarding PE or sentiment... The stock price recently ran up on the possibility that Apple may be more aggressive in distributing their cash pile (buybacks, dividends, etc.). "Price" has indicated that this is positive to sentiment, counter to your point above. Respectfully...