https://hbr.org/2014/09/profits-without-prosperity

"Consider the 449 companies in the S&P 500 index that were publicly listed from 2003 through 2012. During that period those companies used 54% of their earnings—a total of $2.4 trillion—to buy back their own stock, almost all through purchases on the open market. Dividends absorbed an additional 37% of their earnings. That left very little for investments in productive capabilities or higher incomes for employees."

"Stock-based instruments make up the majority of their pay, and in the short term buybacks drive up stock prices. In 2012 the 500 highest-paid executives named in proxy statements of U.S. public companies received, on average, $30.3 million each; 42% of their compensation came from stock options and 41% from stock awards. By increasing the demand for a company’s shares, open-market buybacks automatically lift its stock price"

http://www.nber.org/digest/nov98/w6467.html

"Jolls finds that the average executive in her sample of firms with repurchase activity enjoyed a $345,000 increase in stock option value as a result of the repurchase activity. "

http://www.wsj.com/articles/buybacks-can-juice-per-share-pro...

I'd argue that GM is closer to undervalued than anything else. It's capable of yielding at least $6 billion in net income over the next four quarters, giving it in the neighborhood of a 10 multiple. The economy looks to remain strong'ish over 12 months, the consumer is spending and able to borrow at low rates, which will continue to float GM's sales.

It's also worth noting it's not enough to only take the over / under valuation of the stock into account when doing a buyback. You have to account for use of cash - that is, what's the best use of your cash holdings. If there are no great alternatives - for any number of reasons - there is nothing wrong with doing stock buybacks when the stock price is richly valued (especially if the cash held is producing mediocre returns, as cash does today). Buying the stock back may be a vastly superior choice to sitting on the cash when it comes to producing returns for shareholders.

Chipotle is famous for doing this despite their very hefty valuation and relatively rapid expansion. Has turned out very well for shareholders.

Warren Buffett has written the opposite of this numerous times. Paying $1 for something that is worth 80 cents (even if it's your own stock) destroys shareholder value. The math and logic behind this is so basic, I don't understand how anyone could believe otherwise.

If an outside investor buys stock, of course, under/overvaluation matters.

Let's say you have a company with only $100M in discounted future earnings (and no significant balance sheet assets), but it is trading on the market for $1B. This 10x intrinsic value scenario isn't common in real life but we definitely see examples like it during market bubbles.

The company wants to distribute $1M back to shareholders. If it pays a dividend, shareholders receive the full million less taxes - so perhaps $600-750k in their pockets.

If on the other hand the company buys back $1M in stock, they are buying 0.1% of $100M in future earnings, or $100k.

If my post doesn't make sense, google "Buffett on buybacks." He's written about the subject in a number of his annual letters.

A stock repurchase is a way to move money from the company to the stockholders. Exactly the same as dividends.

In an efficient market, the effects on market capitalization (outstanding stock * stock price) of dividends and stock repurchases will be exactly the same.