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Another Fundsmith article that was written 13years ago, and still worth its weight in gold. I used to be confused by how to judge SBB (share buy back) behavior by Mgt for some time, and this article made it much clearer.
Historically, companies with excess capital but also with high capital outlay needs, generally will not have happy endings when they do SBB. Also some of them seemingly bought back their "heavily beaten down" shares on the cheap. But when business/financing conditions change, the earlier cheap SBB turned out to be really expensive and a gross mis-allocation of capital down the road.
A classic case of SBB adding a huge ballast to TSR would be Apple doing its enormous SBB over the years. With an asset light model (since it contracts out all its production from silicon to electronic device) and improving future earnings, its earlier SBB turned out to buying really cheap shares down the road.
Share Buybacks Friend or Foe?
2. Investors and commentators should analyse share buybacks on exactly the same basis as they would if the company bought shares in another company
3. Investors and commentators should use return on equity to analyse the effect of share buybacks rather than movements in earnings per share
5. Accounting for share buybacks should be changed so that the shares remain as part of shareholders funds and as an equity accounted asset on the balance sheet in calculating returns
https://www.fundsmith.co.uk/media/pnbnh5...ks-pdf.pdf
Historically, companies with excess capital but also with high capital outlay needs, generally will not have happy endings when they do SBB. Also some of them seemingly bought back their "heavily beaten down" shares on the cheap. But when business/financing conditions change, the earlier cheap SBB turned out to be really expensive and a gross mis-allocation of capital down the road.
A classic case of SBB adding a huge ballast to TSR would be Apple doing its enormous SBB over the years. With an asset light model (since it contracts out all its production from silicon to electronic device) and improving future earnings, its earlier SBB turned out to buying really cheap shares down the road.
Share Buybacks Friend or Foe?
2. Investors and commentators should analyse share buybacks on exactly the same basis as they would if the company bought shares in another company
3. Investors and commentators should use return on equity to analyse the effect of share buybacks rather than movements in earnings per share
5. Accounting for share buybacks should be changed so that the shares remain as part of shareholders funds and as an equity accounted asset on the balance sheet in calculating returns
https://www.fundsmith.co.uk/media/pnbnh5...ks-pdf.pdf
I am not a certified financial advisor and so nothing of what I say should be construed as financial advice. Please consult a certified financial advisor for advice instead.