Share buybacks?

Tom99

Linton wrote: »

The same argument also applies to dividends.


The valuation that matters is how much potential investors are prepared to pay now to own the future value. The current net assets may well be just a relatively small % of this and of little relevence to an investor's assesment. For example Apple has a price to book ratio of around 9. Glaxo 17, BAE about 3 to take three companies I chose at random. So in Apple's case a 10% share buyback should theoretically only cause about 1% loss of value.

[FONT=Verdana, sans-serif]That would imply every one US$ Apple hold in cash shareholders value at 10 cents, quite a discount? [/FONT]
[FONT=Verdana, sans-serif]Is it more likely that shareholders value Apples c $250bn cash at say $200bn/$225bn or so rather than $25bn?[/FONT]

kidmugsy

maxie014 wrote: »

Two companys merge.
The share price gradually goes down the proverbial sh****er to half price


Or am i missing something hmmmmmm.

You're missing the point that your first two sentences are consistent with the evidence that mergers, especially between very large companies, more often destroy value than create it.

The rest of what you have to say seems to be without merit.

Linton

Tom99 wrote: »

[FONT=Verdana, sans-serif]That would imply every one US$ Apple hold in cash shareholders value at 10 cents, quite a discount? [/FONT]
[FONT=Verdana, sans-serif]Is it more likely that shareholders value Apples c $250bn cash at say $200bn/$225bn or so rather than $25bn?[/FONT]

I dont think that most investors (other than asset strippers) value net current assets at all beyond a sanity check that there are some. What they are buying is the future profit and growth. Whether they want the profit to be re-invested or returned to them via dividends or share buyback depends on their objectives and the nature of the company and the sector in which it operates. If the company kept the money it currently distributes would the future profit and growth be better or are its sales and profits limited by constraints other than investment capital?

Linton

short_butt_sweet wrote: »

that doesn't make sense.

the standard way to value the company is by doing a discounted cash flow calculation for the business, and then adjusting for net cash currently held by the company. which implies that each $1 of cash held by the company increases its market capitalization by $1.

I see three problems with that:
1) Discounted cash flow is hugely dependent on predicting future income. Uncertainties in that would surely swamp the annual variations in current assets, particularly in growth companies.
2) Most investors are not accountants. They would not carry out that sort of valuation and use that as a basis to buy or sell. If they did I suspect they would in many cass never buy in the first place. Market capitalisation depends primarily on the behaviour of investors, not the details of the annual accounts. It is also highly dependent on the amount of spare cash available to those with sufficient wealth tio invest.

3) It implies that a company making efficient use of its assets is less desirable than one that doesnt, other things being equal.

Tom99

Linton wrote: »

I dont think that most investors (other than asset strippers) value net current assets at all beyond a sanity check that there are some. What they are buying is the future profit and growth. Whether they want the profit to be re-invested or returned to them via dividends or share buyback depends on their objectives and the nature of the company and the sector in which it operates. If the company kept the money it currently distributes would the future profit and growth be better or are its sales and profits limited by constraints other than investment capital?

[FONT=Verdana, sans-serif]You are the one who said the net asset value to market cap ratio was relevant to the increase in share price, following a share buyback.[/FONT]
“[FONT=Verdana, sans-serif]So in Apple's case a 10% share buyback should theoretically only cause about 1% loss of value “[/FONT]
[FONT=Verdana, sans-serif]My point is that a share buyback will only increase the price per share if the stock is undervalued, or to put it another way each $1m of cash held by the company is valued at less than $1m.[/FONT]

short_butt_sweet

Linton wrote: »

I see three problems with that:
1) Discounted cash flow is hugely dependent on predicting future income. Uncertainties in that would surely swamp the annual variations in current assets, particularly in growth companies.

you are correct that small changes in assumptions can make big changes to the valuation of a company based on discounted cash flow.

but that is not a problem with the suggestion that DCF is the standard basis for valuing companies based on fundamentals. in fact, it explains why opinions on the value of a company can differ among investors at any one time, and why they can change significantly from year to year (i.e. why share prices are volatile).

basically, i'm not aware of any other plausible alternative approach to DCF for making fundamental valuations of companies. there are of course also non-fundamental approaches to deciding what share to buy or sell (e.g. this share has positive momentum / sentiment, so it will continue to go up); the non-fundamental approaches are essentially trading rather than investing.

2) Most investors are not accountants. They would not carry out that sort of valuation and use that as a basis to buy or sell. If they did I suspect they would in many cass never buy in the first place. Market capitalisation depends primarily on the behaviour of investors, not the details of the annual accounts. It is also highly dependent on the amount of spare cash available to those with sufficient wealth tio invest.

you don't have to be an accountant to use DCF.

frankly, i've no idea what "most investors" do. perhaps most investors don't know what they're doing. i suspect most investors don't have any "edge". or perhaps they are traders rather than investors.

3) It implies that a company making efficient use of its assets is less desirable than one that doesnt, other things being equal.

i don't follow. how does it imply that?

Thrugelmir

Tom99 wrote: »

[FONT=Verdana, sans-serif]Is it more likely that shareholders value Apples c $250bn cash at say $200bn/$225bn or so rather than $25bn?[/FONT]

What if Apple is borrowing in the US markets to fund the share buybacks. Due to the tax implications of repatriating the cash from overseas.

maxie014

Yes it was standard life aberdeen i was referring to.
I got mixed up and should have said return of capital.
I havent got a large amount of shares but have been reinvesting the dividends to try and build them up.
Then they do a return of capital and i end up back at square one.
The share price has plummeted since the merger and lo and behold the return of capital happens at half the price of 12 months ago.

londoninvestor

Thrugelmir wrote: »

What if Apple is borrowing in the US markets to fund the share buybacks. Due to the tax implications of repatriating the cash from overseas.

Interesting Bloomberg article on the topic of buybacks generally, and Apple specifically.

short_butt_sweet

maxie014 wrote: »

Yes it was standard life aberdeen i was referring to.
I got mixed up and should have said return of capital.
I havent got a large amount of shares but have been reinvesting the dividends to try and build them up.
Then they do a return of capital and i end up back at square one.
The share price has plummeted since the merger and lo and behold the return of capital happens at half the price of 12 months ago.

ok, so you seem to have two issues:

1) the share price has plummeted (so perhaps the merger destroyed value, as many mergers do; or the business is declining for other reasons).

2) you were trying to buy more shares, and now you have fewer, as result of the buyback.

the obvious solution to (2) would be to use the cash returned to buy more SLA shares. OTOH, if the business is declining and not going to recover (1), then perhaps you should sell the shares you still have, and reinvest in something better. so make your mind up!

in general, most people shouldn't really be dabbling in holding individual shares, and would be better off buying a multi-asset fund instead. so perhaps selling all your SLA shares and putting it in a multi-asset fund would make sense. or, as a compromise, you could keep what you still have but put the cash that's just been returned into a multi-asset fund.

however, you seem to be combining those two issues in a way that doesn't quite make sense. the price at which the return of capital happened to take place doesn't matter. it doesn't disadvantage (or advantage) you if it happens at a low (or high) price.

if you held H% of the shares outstanding in SLA before the return of capital, and they returned £1bn of capital, then you have received H% of £1bn, and you now hold H% of the (reduced) number of shares still outstanding in SLA.

that holds true regardless of the share price at which the return of capital took place.