If a company retires 10% of its shares from a buyback, each investor now owns ~11% more of the company than they did before.

Of course markets are not perfect, and nobody knows for sure if the market value of the company is fair or not. When a company engages in stock buybacks, it’s essentially saying that it believes its stock to be undervalued, which is why stock buybacks sometimes have the surprising effect of elevating the stock price, at least in the short run. After all, who has better information about the company and its prospects than itself?

But as they say, the market is a voting machine in the short run, but a weighing machine in the long run. If it turns out that the market value of the company is higher than its intrinsic value, then stock buybacks are actually destroying shareholder value. The cash would have been better spent buying shares in an index fund.

That's not right. You have a larger piece of a smaller pie, but you have the same amount of pie.

Edit: the confusion is you are talking about total market cap while the parent is talking about share price. Total market cap is irrelevant to stockholders. Share price is all that's relevant.

Yes, this was my point. Stock buybacks are value neutral if the market value of the company is correct. Ie. the share price stays the same.

All large stock purchases have the short-run effect of elevating the stock price. It would be shocking if this didn't happen; it is not surprising in the slightest that it does.

Edit: Sorry, I got myself confused and mixed up the total market cap (which should go down) with the share price (which should stay the same, because there are now fewer of them).

Consider a company worth $100 with ten shares of stock with $10 of cash on their balance sheet. Each share is worth $10. They company uses the $10 to buy back one share of stock. The company is now worth $90 and has 9 shares outstanding. Each share is still worth $10.

Another interesting thing is that this form of buyback return channel would seem to exclude passive index funds unless they were actively shrinking (i.e. selling).

(1) Example from this morning talking how GE bought $30B of shares and later tanked. That's a pretty significant although unequally distributed return of value to those shareholders who sold vs. those still owning GE. https://finance.yahoo.com/news/general-electric-company-stoc...

> They call it “returning money to shareholders.” I call it “wasting shareholder money,” because they almost always buy at prices that are too high

It's the easiest lever a CEO can push on to look good.

The numbers don't lie, right?

When there are fewer shares, my individual stake in the company is actually performing better.

Also, and most importantly, the CEO is now in the money and can sell, so his compensation increased just by increasing the share price.

The part you're ignoring is future earnings. Assuming a company maintains its earnings, you have a bigger slice of the pie next quarter. If the company trades at the same EPS multiple, your stake definitely has gained value. You're totally ignoring enterprise value.

In a vacuum, nothing has changed about a company's future earnings when they repurchase shares.

The kind of bizarre roundabout way to consider it is if Apple bought 25% of itself with its money mountain (they can't, beside the point), your stake in the company goes up because you own shares in Apple, which in turn owns 25% of itself.

You effectively have more equity in Apple when it buys its own shares.

What the previous poster is trying to get at is that a big-ticket buyback signals an inability to invest that sum in a way that will improve growth or profitability. The best move to increase EPS is invest in capital improvements to increase earnings. If you can deploy money effectively, that means you're also growing in the long-term. Reducing the number of shares via a buyback also increases EPS, but it doesn't improve the top line.

In other words, a buyback is a way to increase your (and the CEO's) earnings per share even in the midst of stalling growth. So what I'm getting out of the previous comment is: don't confuse a buyback with continued growth; it's actually a "cashing out" moment.

Whichever combination of those items provides the best risk-adjusted return is the one (or several) that they should choose. The risk of share buybacks is quite low. You more or less know what the outcome will be, so even if the reward of a successful M&A or an organic expansion project is higher, it may still be smarter to buyback shares once you discount the former possibilities for the uncertainty. This is even more true if you believe the stock market is undervaluing your firm's shares, which of course then becomes a very common storyline when buyback programs are announced or expanded.

If you invested because you believe in the long-term growth prospects of the company, then you expect them to plow their cash into increasing the top line, and a buyback can be a disappointing signal. If you invested because you believe it's a good income stock, a buyback is exactly what you want.

No it's not because it can be sold in the market for more money. Value is what the market will pay for your shares.

If a company has lots of projects that can exceed the cost of capital, then they reinvest profits and ingest more capital. When this is no longer the case, the responsible thing to do is return money to shareholders via dividends or (more tax efficiently) via buybacks. Then investors can use the money elsewhere.

The issue here is it seems like on the margin CEOs get more risk averse on long term projects as they vest, and can grab the bird in the hand.

This is also a favorite hedge fund raid. Hedge funds open up large positions on companies. Demand board seats. Get board seats and then get the execs to sell assets, layoff employees and take out loans to buyback shares. Get out with a nice profit. And the company is left with a huge debt loan that'll crush them once interest rates rise.

Yes. That was my point.

> That’s only a tax advantage if you get options in a worthless company that later becomes valuable.

What? Since 2010, most large companies had their stock prices double, triple or even more.

> For public companies, you can reap this advantage yourself by buying and holding their stock using your cash compensation.

Except you don't get all your salary upfront.