Stock Market, companies are buying back their shares, results???

Discussion in 'Economics & Trade' started by wgabrie, Aug 20, 2018.

  1. wgabrie

    wgabrie Well-Known Member Donor

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    I'm under the impression that the stock market is going higher and higher because companies are buying back their shares to increase the price of the stock to please investors.

    Well, what happens when they buy back all of their shares???
     
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  2. squidward

    squidward Well-Known Member

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    They're rich
     
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  3. james M

    james M Well-Known Member

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    Goofy
    1) Since they don't plan to buy back all
    2) if they did buy it all back ownership would be in hands of last shareholder
     
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  4. Kode

    Kode Well-Known Member

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    They are buying back shares to benefit majority investors who hold the controlling interest (corporate elite) and to boost the value of options held by corporate elite. This comprised the greater part of the corporate elite's "compensation".

    They only need to buy back enough to boost the stock price. And when they see that it's time, they will sell their excess shares and exercise their options for a windfall as the stock then crashes and leaves you and me "holding the bag" (except I'm already out of stocks, mostly).
     
    Last edited: Aug 20, 2018
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  5. Old Man Fred

    Old Man Fred Active Member

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    Companies often reissue shares during growth periods, and buy them back during retractions. It's a great way to avoid accumulating large amounts of debt. The problem, if you're a major company, is that shareholders are often entitled to a cut of the profits, and low payout during a surging stock market can lead to major drops in the valuation of a company.

    To prevent paying out too high a ratio of it's profit, a company will often buy back shares and reduce the number of shares entitled to a payout.
     
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  6. Kode

    Kode Well-Known Member

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    That's not quite what's happening in this case. It is wide-spread and it is boosting stock values. And the fact is that in the case of executives with compensation packages providing them with 8, 10, 20, or 60 million dollars or more, it's not coming from salaries.
     
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  7. squidward

    squidward Well-Known Member

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    They are accumulating new debt to do the buybacks, not using accumulated capital
     
  8. Old Man Fred

    Old Man Fred Active Member

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    While it's hard to nail down exact corporate management, as there's a lot of companies out there, most publicly traded companies have a system of which most municipal government in the United States is based off of.

    In the Council-Manager system, voters(shareholders) elect a board, who in turn hires a city manager(CEO) to carry out daily operations. Board members typically have a small(comparatively) salary and expense account, and they're majority shareholders personally looking out for their investments.

    They don't want the share price to drop, ever, and options have no impact on the share price of a given company. If an executive exercises an option, the company gives them that many shares, which he sells, but is hardly a blimp in the radar of daily trading volume.
     
  9. Old Man Fred

    Old Man Fred Active Member

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    I made a statement of what typically happens, and then went on to clarify why a company would do buybacks now.
     
  10. squidward

    squidward Well-Known Member

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    It's just not what's happening and what the OP is talking about
     
  11. jay runner

    jay runner Well-Known Member

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    Sometimes companies do the opposite -- issue new shares. Sometimes they get all the cash they hoped for, sometimes a lot less. Sometimes market price is adversely affected.

    Never even been in a boardroom to collect wine glasses for the dishwasher so idk, but if they buy back low and don't have to pay significant dividends on those shares any longer, they're probably ahead in just a few years, assuming the underlying business is good. Rukeyser used say there's a real business behind every stock certificate (or there should be).
     
    Last edited: Aug 22, 2018
  12. The Don

    The Don Well-Known Member

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    Buying back shares is very popular with existing shareholders because it's the company using cash (or debt depending on how the buyback is funded) to which the shareholders do not have immediate access to increase the value of the remaining shares. Depending on how the buyback is arranged, those who are willing to sell back their shares can also get a healthy premium on current market price (though that tends to be in the case where the company is comparatively small and the shares are relatively illquid).

    A smallish (market cap of around £250m) company in which I have a reasonable shareholding did a share buyback a few years ago and the value of my shareholding got a tidy 10% bump. Furthermore, because they wanted to keep dividend rates the same, my dividends got a nice increase too.
     
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  13. Old Man Fred

    Old Man Fred Active Member

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    That's exactly what's happening.

    Corporate profits are great and all, but what people care about is earnings per share and dividend yield. Share buybacks boost both, and helps a company retain more profits to fund expansion.
     
  14. squidward

    squidward Well-Known Member

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    There have been massive leveraged buybacks
     
  15. Old Man Fred

    Old Man Fred Active Member

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    And Costco borrowed billions to pay out a massive special dividend to avoid paying taxes.

    Companies do stupid **** all the time, but no one's trying to crash a company's price to "cash in their options".
     
  16. Baff

    Baff Well-Known Member

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    Typically they borrow money from the bank at rates lower than the price they pay their shareholders and use it to buy back their shares.
    This means the money they borrow is cheaper and hence they make more profit.

    When they buy back all of their shares, they cease to be a publicly traded company.
    The very last share holder is the owner.
     
    Last edited: Aug 22, 2018
  17. Baff

    Baff Well-Known Member

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    I'll give example.

    During the Credit Crunch, Barclays bank wished to buy the failed bank Lehman Brothers for a snip.
    Barclays had no spare money to buy it. They could not borrow from other banks because other banks also had no spare money (and if they did have they would have bought it for themselves).

    So instead of being able to borrow at 0.5% interest rates Barclays had to find people willing to lend to it.
    So they issued more shares. A rights issue.
    And then people like me lent them the money in the form of buying shares. But I charged them 6% on my money because I don't lend my hard saved money in return for peanuts.

    So later on when the Credit Crunch is over and they have either made big profits or more likely are able to borrow again at the interbank rate of 0.5%, they bought back their shares. Saving themselves 5.5% interest rates on borrowing the same amount of money.
     
    Last edited: Aug 22, 2018
  18. Kode

    Kode Well-Known Member

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  19. kazenatsu

    kazenatsu Well-Known Member Donor

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    If companies buy back shares, it doesn't really do anything fundamental.
    In a way, it's sort of like paying out a large dividend.

    Suppose there are 1000 shares, and the company is going to buy back 500 of them. What that effectively is going to do is double the fraction of ownership in the company each of the remaining shares have.
    Suppose there are 500 shareholders and each person owns 2 shares. Then suppose the company buys back 1 share from each person. What the company has essentially done is pay out money to the shareholders, but each shareholder owns the same fraction of the company they did before. It's just like the company paying out a large dividend.
     
    Last edited: Aug 29, 2018
  20. kazenatsu

    kazenatsu Well-Known Member Donor

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    If a company buys up shares, it makes the remaining shares have a greater fraction of ownership in the company.
    This could continue until there was only 1 share left and 1 owner.
    Your question is ultimately the same hypothetical as asking what would happen if a company had only 1 share of stock outstanding and decided to "buy back" that share of stock. Assuming the stock was bought back at fair market value, this would essentially be a liquidation of the company's assets. What the company is going to be left with is 0 market value, theoretically.
    But if you want to look at it this way, at that point the corporation would own itself. It would never be liable for paying dividends to anybody.
    Sort of a little bit like a non-profit organization.
     
    Last edited: Aug 29, 2018
  21. kazenatsu

    kazenatsu Well-Known Member Donor

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    There is a difference between the price of shares of stock going up, and the "stock market" going up.
    In this particular instance you have to be a little bit careful what you mean by "the stock market going up".

    Of course the price of shares in the company is likely to go up when they're paying out dividends. Not because there are fewer shares, but now the company is finally paying out money which is what the owners of the shares have been waiting for all along.
     
    Last edited: Aug 29, 2018
  22. kazenatsu

    kazenatsu Well-Known Member Donor

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    Basically nothing. The owners are just cashing out of the company.

    In other words, the company has made record profits and the managers of the company don't see a need to reinvest those profits anymore.
     
  23. Ndividual

    Ndividual Well-Known Member

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    If they buy back all their shares they become private owned. Isn't that what happened with Dell?
     
  24. Kode

    Kode Well-Known Member

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    A "problem" facing executives is an item of legislation under Clinton which effectively limited CEO salaries to $1 million. They got around that problem by issuing back-dated options to executives. Those options are held by some and exercised by some. I don't believe they have an expiration date associated with them. And the value of options that are held can be boosted significantly by rising share prices. And any shares held by executives are also obviously benefitted by rising share prices. So stock buy-backs serve the purpose of boosting share prices for the benefit of executives holding options and stock.

    When the stock values begins to exceed the corporate earnings, the stock is then rising on the basis of investor confidence which keeps bidding up the price. So corporations are even manipulating investor confidence for the benefit of executives with their stock buy-backs. And nearly always, the executives know ahead of time when their corporate stock is going to start to slip, so they can be the first ones out, leaving the small investor holding the bag.

    It is illegal to do such "insider trading" but just try to enforce the laws on it. Good luck.
     
  25. Kode

    Kode Well-Known Member

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    Ya nothing except bid up the price of the stock, like when anyone buys up shares.

    Whoa whoa whoa!!! You need to explain what you're saying! If ANY investor buys up shares that are on the market, it bids up the price of that stock. Supply and demand, ya know? If the company buys half (500) shares on the open market, it has exactly the same effect as when any investor buys them. What you're saying ("what that effectively is going to do is double the fraction of ownership in the company each of the remaining shares have") is only true if the company takes those shares off the books, effectively decommissioning them and making them non-issued shares. IOW it's like a reverse split.
     

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