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Why do companies repurchase their own shares?
Are there really any good reasons beneficial to public shareholders or benefit some "insiders"?
In another words, do you think it is better for company to use FCF to make dividend payments to public shareholders rather than repurchase company's own shares?
It seems many companies even borrow money on the cheap (low interest rate now) to buy back their own shares. What is there for you and me-public shareholders?
WB:-
1) Rule # 1, do not lose money.
2) Rule # 2, refer to # 1.
3) Not until you can manage your emotions, you can manage your money.
Truism of Investments.
A) Buying a security is buying RISK not Return
B) You can control RISK (to a certain level, hopefully only.) But definitely not the outcome of the Return.
NB:-
My signature is meant for psychoing myself. No offence to anyone. i am trying not to lose money unnecessary anymore.
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22-09-2014, 07:15 PM
(This post was last modified: 22-09-2014, 07:17 PM by Life is a game.)
Decrease the total floating shares in the market and increase the shareholders entitlement to a bigger slice of the company's earnings through an increased percentage of the ownership in the company. Provided the company does not pay more than it's intrinsic value to buyback the shares which would be detrimental to the shareholders instead.
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I'm definitely for dividends over share repurchase:
<<Following extracted from Security Analysis by Graham and Dodd, Chapter 44>>
Abuse of Shareholders through Open-market Purchase of Shares
During the 1930–1933 depression repurchases of their own shares were made by many industrial companies out of their surplus cash assets,6 but the procedure generally followed was open to grave objec- tion. The stock was bought in the open market without notice to the shareholders. This method introduced a number of unwholesome ele- ments into the situation. It was thought to be “in the interest of the corporation” to acquire the stock at the lowest possible price. The con- sequence of this idea is that those stockholders who sell their shares back to the company are made to suffer as large a loss as possible, for the presumable benefit of those who hold on. Although this is a proper view- point to follow in purchasing other kinds of assets for the business, there is no warrant in logic or in ethics for applying it to the acquisition of shares of stock from the company’s own stockholders. The management is the more obligated to act fairly toward the sellers because the company is itself on the buying side.
But, in fact, the desire to buy back shares cheaply may lead to a deter- mination to reduce or pass the dividend, especially in times of general uncertainty. Such conduct would be injurious to nearly all the stockhold- ers, whether they sell or not, and it is for that reason that we spoke of the repurchase of shares at an unconscionably low price as only presumably to the advantage of those who retained their interest.
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Most of the time, it is to benefit the majority shareholders only. Before raising rights, they try to push up the price and then existing shareholders need to subscribe to a higher value. Some mgmt used share buyback to prop-up their own share prices as they pledge it for bank loans. That's why do not vote "Yes" and give them the mandate for share buyback or employee share option as it is quite often use to reward the cronies.
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(1) Distribution of excess capital. Share re-purchase is chosen over dividends if the tax regime favors the former over latter.
(2) Benefits Mgt/Majority shareholders in the form of (a) support share price for the vesting options/shares, (b) squeeze out OPMIs slowly and surely, © no brainer way to increase KPIs like EPS.
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Share Buy Back vs Dividend
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Perhaps the most insidious use of cash in lieu of a dividend has been the emergence of share repurchase program as the preferred means of disposing of un-reinvested profits. Why pay or increase dividends when you can buy back shares in the hope of pushing up your share price? With debt being inexpensive, borrowing money to buy shares could even boost earnings per share (EPS). Without actual increase in profit from operations, investors might see an increase in their paper wealth. The bias in favor of share repurchases has become so engrained that many companies combine share repurchases and dividends paid together as “cash returned to shareholders.” Utter rubbish.
A dividend is a commitment to a direct cash payment to an owner of the company. A share repurchase program is nothing of the sort. It is not a commitment and can be turned off at will. Many are announced with great fanfare; a lesser number are actually executed fully. Their timing is abysmal:
As of early 2010, if not most, share repurchase programs announced within the past decade were underwater. That is the shares were purchased at a higher price than the current one. The program is typically announced when companies are flush with cash and the stock prices are high. Stock issuances – for instance the banks in 2008 and 2009 – are done when the prices are low and the companies need to raise capital. That is they issue shares at the worst possible moment when capital is most expensive and most dilutive to existing shareholders.
Share repurchase plans also encourage people to go away – to sell their stakes – rather than remain long-term shareholders and collect cash dividend payments. In their worst form, share repurchased programs are designed to simply offset lavish stock-option grants to senior executives. As the options vest and the shares are sold, companies buy them back to keep the overall share count stable. Because many senior executives are compensated on EPS growth, share repurchases, especially with cheap debt, became another way to reward executives, not shareholders, by artificially inflating earnings. It bears noting that share repurchase programs have no cash benefit for existing company owners.
But the greatest hubris behind the share repurchase plans is simply that they have the company playing the stock market, trying to buy low and perhaps sell high, when it should simply be running its businesses.
NB:-
i think there are 101 reasons why but none is for or in the interestof opmi. Can we do something? Hardly i think.
WB:-
1) Rule # 1, do not lose money.
2) Rule # 2, refer to # 1.
3) Not until you can manage your emotions, you can manage your money.
Truism of Investments.
A) Buying a security is buying RISK not Return
B) You can control RISK (to a certain level, hopefully only.) But definitely not the outcome of the Return.
NB:-
My signature is meant for psychoing myself. No offence to anyone. i am trying not to lose money unnecessary anymore.