Re:Microsoft Shares Soar to Record on Earnings Boost From Cloud
by kgwgk on Friday October 21, 2016 @05:01PM
(#12764760)
> Only way it would increase the stock price is by signaling that the company doesn't need money and can return it.
That's not completely true. If a company has $10bn of excess cash and a market capitalisation of $50bn you cannot simply assume that the business is worth $40bn. The market might be assigning a value to this cash lower than the nominal value (for example because there is a risk that the management will just do some stupid acquisition with the money). And beyond valuation considerations, stock prices are affected by supply and demand: buybacks create some artificial demand.
> In the process of buying shares back, the market capitalization would increase due to the increase in share price.
Wrong. If that was true, you'd have a company spending money and having a market cap that increases. See the problem? Generating money out of nothing...
> The share price would absolutely move.
Wrong. If this was true, you would just buy stocks of companies that do buybacks and make some alpha doing that. In fact there is an etf that tracks just such companies and it underperforms the S&P 500: https://www.google.com/finance?q=NYSEARCA%3ASPYB&ei=TXkKWJjO...
> This is why companies have stock buy-backs, in order to pump up the share price.
Wrong. They buy back shares to return money to investors. If you have a pile of cash sitting in your books, you can either return it to investors by paying back dividends or buying back shares. Only way it would increase the stock price is by signaling that the company doesn't need money and can return it.