Stock Buybacks - The Good And The Bad Explained
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- Опубликовано: 5 ноя 2020
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The stock buyback is broadly viewed as a positive thing by value investors, but how exactly does it work, and can it actually be a net negative in some circumstances? We answer these questions in today's video.
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DISCLAIMER:
This channel is for education purposes only and is not affiliated with any financial institution, although Richard does work as an employee for an investment manager. Richard Coffin is not registered to provide investment advice and as such does not provide recommendations on The Plain Bagel - those looking for investment advice should seek out a registered professional. Richard is not responsible for investment actions taken by viewers.
thank you bagel man
Bagel is not good to physical health.
@@LittleRadicalThinker shuuuut uuuppp
A great channel especially for those of us with limited financial literacy. Thanks.
I prefer share buy backs over dividends for tax reasons 😀
same here . One of the most common benefits from buybacks
I don't understand, with a buyback don't you only get the money if you sell your share, where a dividend let's you keep the share
@@poisonpotato1 buy backs happen somewhat regularly.
@@poisonpotato1 But conversely with dividends your ownership share of the company doesn't increase unless you reinvest the dividends you received by buying more shares of the same company.
Theoretically for an individual investor, reinvesting the dividends into the same company is equivalent to a share buyback if the investor doesn't sell his shares.
Also theoretically, receiving dividends and not reinvesting them is equivalent to a share buyback if the investor sells a portion of his shares that's equal as a percentage to the portion of the shares of the company that were bought back.
So in both cases, the investor theoretically has the same option of getting cash or not getting cash (though in practice some investors are not active and will not consider those options). When things like taxes and trading costs are considered dividends and share buybacks may no longer be equivalent even for a more active investor who weighs the available options.
@Luís Andrade "dividends give you more flexibility"
In theory, both options have the same flexibility for publicly traded stocks because an investor can always choose to buy/sell as much as he wants.
"buy backs only happen when a company wants while dividends are the ones who happen regularly"
Both dividends and buybacks have to be decided at the general meeting. Dividends are only regular if it's decided so. They don't happen any more automatically than buybacks.
"A company consistently buying back its shares is a huge red flag"
Why is it a huge red flag?
Love your videos as always!
Could you make a series explaining about each sector and its pros and cons? even in nutshell is fine, to make us beginner investor understand more in what we are doing in each sector
I just want to drink coffee and have a bagel and talk stocks with you.
Thank you for your honest and highly educational content! Love your videos.
Topic well covered and well explained in a brief video. Thanks!
9:45 "As with MOST things in investing, not ALL that glitters is gold."
You mean, Smash Mouth lied to me?
Wdym? Smash Mouth said shooting stars break the mold.
They lied to all of us, Anton... All of us.
Clearly explained and entertaining, I love it!
I’m not fond of stock buybacks funded through debt issuance such as bonds etc. Quite a few companies have been known to do that, especially in this period of low interest rates.
@StonkSlayd like the airlines who are barely staying alive due to massive debt they accured to buy back stocks?
@Luís Andrade "That's why dividends> buybacks"
That doesn't make any sense. Debt-funded dividends should (in theory at least) be just as good or bad as debt-funded buybacks.
@@seneca983 both are stupid imo, debt isn't bad but if it's just being used to pay investors it's a waste of interest rate. Just don't take on the debt and increase profitability due to less interest on your debt.
@@inigomontoya4109 "if it's just being used to pay investors it's a waste of interest rate"
I disagree. If the interest rate is low enough, it's not waste.
As a comparison, suppose the company earned some money and then would have the option of paying dividends or keeping the money in a bank account earning the same (low) interest rate as that hypothetical debt. Would keeping the money in a bank account make sense? Paying the dividends would just as much be "waste of interest rate" as taking a loan (as we're assuming the interest rate would be the same). I say it doesn't make sense. If the interest rate is low enough then it makes more sense to pay dividends as the paltry rate of return is not worth it for the investors.
@@seneca983 They could invest the loan into the business
Loved how detailed this explanation was.
Such a good Explanation!
Always learning when I watch this channel. Thank you.
simplified explaination with basic examples. Thank you!
Great explanation! Thx.
Very educational! Thanks, Richard!
New CEO arrives: I'm gonna do what's called a pro-gamer move
I gain so much knowledge from your video! thanks as always
Thank you for sharing. I learned a lot
Thanks. Great info to think about given the current amc buy back.
Nice explanation. Thank you
Sucks when RUclips doesn’t push a video. I’m subbed with the bell icon, and still didn’t see this for 36 hours :/ love the channel, and keep up the amazing content! ❤️
odd I get instant notifications when its activated
Share Buybacks positively distort the share price and consolidate share ownership, which obviously benefits shareholders, so the relevant question is *who owns shares?*
These benefits are disproportional, with the largest shareholders benefitting the most, so when relatively few shareholders own most of the shares, this increases inequality between shareholders, but also between shareholders and the rest of the population.
There's also a significant opportunity cost, as the money used to buy back shares could instead be invested in the company, to acquire better equipment and more skilled workers, to improve training and to research innovation.
Consequently, the company suffers from less investment, so shareholders can become richer.
Great content!
Very detailed explanation. The EPS increase example specifically was something that I hadn’t thought of.
Don’t you think however that if such thing happens like your example, the stock price could ultimately go down as a result of doing a relative valuation with its peers or the sector, and that until the market becomes rational and accepts it as the new P/E ratio it could remain affected? (Which, as we know, is an unknown amount of time)
stock splits are also "great catalysts" and they reduce EPS by doubling or 5x ing share count. still no value creation, just moving money around and effecting number of shares.. PE ratio is the real significant number. price/num of share with regards to EPS .
One of the few good sources on the topic, bravo!
Love the channel. The argument of dividend double taxation is not really applicable because (at least in Canada) the CRA “grosses up” incoming dividends to individuals and then provides a tax credit to the individual based on the grosses up amount to offset taxes paid at the corporate level. Great vid as always!
Edit: obviously the buybacks still defer taxes of an individual compared to a dividend paid.
Very helpful!
Great video!
I think you may have forgotten one reason why companies buy back stocks: if the company gives out shares to employees as part of their compensation package, over the years the number of outstanding shares will increase. To stabilize the market they basically have to buy back the shares.
If they just gave additional money to the employees, their books would look worse -- and by buying back shares they have passed out, they are sending "positive" signs to the investors. So it seems to be a no-brainer to partially compensate employees with company shares.
That’s kind of insane. They’re literally disincentivized from paying out bonuses, because it ‘looks worse’ to other capitalists
You’re taking the ps, no! Give out shares to employees!? What’s wrong with you?
@@elinys2843 Stock based compensation
Very informative.
Well, not exactly buyback, but Vedanta ltd. (Company from India), proposed a delisting offer at 87 Rs. a piece, whereas its stake in a subsidiary company had the value of 130 Rs a piece, and its book value was 3.5 times the value the Promoter offered. Value destruction of small and retail investors by this big corporations for their own benefit is common in Indian Stock Market. Anyways, love your work as always, Richard. My first video was the Dot-com Bubble and since watched each and every video of yours. Keep up the good work.
Luckily vedanta ki delisting nahi hui😂
@@Kushagra.j Thanks to LIC.
This was much better than More Perfect Union’s video on the topic. I knew within the first minute of that video that I was watching egregiously biased information, maybe even propaganda.
super helpful info
Companies usually do share buy backs at the worst time, when shares are expensive.... best time to do it is when the stock is tanking...
good job
Buy backs. It’s good to be able to spot them so you don’t invest in a company that’s abusing them. Unfortunately usage of this knowledge is not common or otherwise very practicable among employees of the firms.
This is a very informative channel, well explained. Thanks. And by the way, if you take topic requests, can you please create video about important things to check or checklist when looking at a financial statement. Such as ratios, book values,etc. So we can know whether the company is growing and worth investing. Thanks.
It sucks when companies do stock buybacks immediately after the government gave them huge breaks which enabled them to do this even though they 'could' invest back into employees with a higher wage.
Nothing is stopping them from leaving.
If a company has a high dividend it’s actually in their favor in the long term to buy back shares since then they’d have less shares to pay dividends too forever.
It could cut its dividend if it plans a buyback or a privatization.
this is his most positive sounding video in a long time
would be nice of the video to point out that the buyback does take free cash off the company balance sheet. so where a company had value in cash its just now value in its own shares. There is no value creation in a buyback until the stock then does better (than the company holding cash, or giving a dividend)
can a company do the reverse?
ie print new stocks and devalue the current shareholder's holding to raise capital?
Yep! It’s called share dilution
It's called Right Issue iirc, and it dilutes your share ownership.
If you want a real recent example, type in google what Tesla has done in September.
@@aitorlopete3913 That's different. Tesla did a stock split, which means that the investors get more stocks but the amount of money invested stays the same (e.g. if you had 1 stock of $1000, and the company does a 2-for-1 stock split, you will have 2 shares of $500 at the end)
@TheRidersDream Actually Tesla did also issue shares as well (I can't remember if it was i ln September, but I know it was around that time). Something like a few billions worth of shares
The shares don't just disappear after a buy back. While I imagine you stated that as an oversimplification in an attempt to avoid confusion, they actually go into an account called "treasury stock", which does appear on the balance sheet.
Heard PLTR was doing a buyback, this video helped
I'm late to the party but could you elaborate on a situation like the U.S. airlines' buybacks the last few years? Outside of being an investor I'm not seeing the upside of using 90%+ of cash flow for buybacks which necessitates no rainy day fund and reliance on governmental intervention
There is a bit of information I don't seem to be able to find: Do companies have to disclose their share buybacks?
Even if there is no legal framework regarding disclosure, how can one keep track of any buybacks a company has been doing throughout the year? Appreciate any thoughts on this.
What about executive's options
Could a company do a forced buybacks? (I am thinking of a scenario where none of the stock owners are willing to sell)
There is always a price for which some people will want to sell. Usually it is just the price of the share. The share has this price BECAUSE the owners of shares accept to sell it at this price
If a majority of shareholders vote on it they can. Look at the Activision acquisition by Microsoft. They voted on a price to buy out all shareholders.
I am currently holding a stock which is tradig at .2 p/bv and 4x PE and who is also doing share buy backs. Is this a good investment?
And this is what makes the world go round
I have a real life example, that I can't quite grasp: If a bank has massive cash equity caused by covid restrictions, solid growth and standing, and is currently on a level, or lower in terms of market cap compared to it's competitors, what could cause share buyback to NOT affect the share price in meaningful sense?
When share buybacks we're common knowledge half a year back, you'd expect stock price to reflect it's value after the buyback. Yet it doesn't show?
Now buybacks are underway, and stock price is slowly rising. But really that seems to be more about fear of growing interest rates and january effect... It seems counter intuitive anyone would NOW buy stock at higher price, because of buyback? It should be priced in. Yet by every metric it seems to still trade undervalued, and that's even increasing as buybacks reduce number of shares?
Any thoughts on that?
But that
I like the tax implications of company issuing dividend. a company that issues an income lets you deduct loan interest of borrowing to invest in them. and that loan interest deduction is a much higher taxation than dividend tax.
Companies have inside trading information when they buy back their own stock. I seriously doubt they do buybacks as favors to investors/owners.
haha I wont lie, you had me fooled when you said 'thanks for watching' after what felt like 2 seconds of starting the video.
In a buyback are the Shares always destroyed or do some companies add them to treasury shares?
Thanks for an interesting video. I was surprised to learn that the shares bought back cease to exist. Were you talking metaphorically? The reason I ask is I am thinking about Tesla’s recent disposal of $5 billion worth of shares. Are these shares different from share buy-back shares?
Yes, the business the buys back the stock from current shareholders to reduce the outstanding share count. Tesla recently issued new common equity which dilutes the shareholders, opposite of buybacks. Buybacks are good for shareholders and new share issuance is dilutive (bad)
Note that just like how buybacks have pros and cons, share dilution also does. In Tesla's case, it might be good that they issued shares when the stock was at an all time high (in theory allowing them to use the cash to improve the company etc. etc.); as mentioned in the video, buy low, sell high
A question that I have that is left unanswered by the video is which shareholders exactly get their stock bought back? Surely, if a company wants to buy its shares back, a requisite number of shareholders who own it must be willing to sell.
@@TheInternetEnzymeYes, obviously. How it works is, whoever is selling stock when the buyback takes place sells it to the highest bidder, which is usually the company.
The most informative video I have seen about this subject!!!!
8:20 That's why you don't tie compensation to earnings per share.
please can someone answer this for me?
i don't think buybacks are the same as dividends (let's ignore taxes for the moment).
in case of dividends, we get money in our bank account without selling any shares.
but in case of a buyback, we can get the money only if we choose to participate in the buyback by selling our shares. if we don't participate in the buyback, the only advantage we get is having an increased stake in the company but we won't get any money in that case.
so aren't dividends better?
QUESTION how’s a company investing in itself with buyback if those shares are disappearing? Isn’t the company essentially just giving money/dividend to shareholders? I don’t understand this idea that company is investing in itself, making it sound like they will own the shares they buyback. They won’t right? Those shares disappear right? Appreciate any help here
Richard is starting a bagel buy back program (BBB)
HPIL doing a share buyback and the stock is highly undervalued
Amazing!
But when people don’t know the reason behind the buyback they just panic and make stupid decisions.
Quick question> Imagine a CEO has 100 shares in the company they are working for. Is it a thing where the CEO organises a share buyback for the sole reason of increasing share price, that way they can cash in on their 100 shares?
Interesting video! Sounds like only the well established blue chip companies making great profits and are undervalued should be doing share buy backs. I was just thinking about how useless dividends are (unless you're in retirement, when you actually need money from your nest egg to live off of). What is the purpose of dividends if you're just going to re-invest it back into the same company? I'd rather invest in companies that pay 0 dividends that actually use that money to reinvest earnings in research and development of new technology and products. If the company is doing really well, they can thank their share holders by doing share buy backs. Saves us the taxes.
I agree, but a lot of companies pay dividends because some of the largest shareholders are execs and when a dividend pay out, they could stand to make hundreds of thousands - or even millions - a year thru quarterly divs.
I actually thought the video was over at 1:25 🤣
it feels like a conflict of interests but i'm not sure that stock buybacks during a good year are such a bad thing either, but gain a stigma because of the financial incentive to managers. if your company has a bad year, the stocks are likely to soon fall, but a stock buyback could delay that outcome through assurances to investors. it might be handy in volatile sectors and could be one of the reasons why bonuses in some companies are handled that way. an apt comparison might be how the body regulates energy and nutrition. the body doesn't change it's metabolism(logistical arrangements, supply routes) overnight. and even a change in diet(raw materials, customer base) can be detrimental or at least take awhile to have any noticeable impact. so it's necessary for a corps to have flexibility in times of famine. in the case of the body, it actually begins to cannibalize itself until suitable nutritive intake is supplied. (ironically, executives get a bonus, while the human brain gets endorphins during periods of starvation) so it feels like that's the way it should be, when your staple food source is either scarce or less predictable.
in the case of larger companies, you need to eventually trim the fat. so when your food source is scarce as indicated by falling revenue, and you have a larger body to feed, your body will burn fat before flesh. on the corporate level this means selling off less profitable assets or just bad assets. when the year was bad enough to not net the company a profit, there is no reason to assume outright that the next year will be any better, so it makes sense to not take too many risks going forward until you've secured your next food source. on occasion, staying in one place is a better strategy than expending calories chasing food. looking at it a different way, if your large company can't even make bank on a good year, i would consider that company obese.
stock market value = homeostasis. every analogy has limits, but it's fun to think about it.
what if you went on the flipside, and instead of paying entire dividends, you purposefully lowered your dividend payouts and instead did % buybacks as a matter of your firm's immutable public policy? do some companies actually do this?
So if a company wants to buy back shares, it gives me the option to sell correct? Cause if I believe I a company I wouldn’t want to sell my shares until I’m ready.
So glad you exist. Great teacher. So tired of Bs advice
Can you do a video about reverse split and reverse mergers please?
Interesting topic for sure. The splits are fairly easy. You just get less shares with a higher value. But the total $ amount won't change. It's usually done when a stock price dropped too much ( to avoid a delisting from an exchange for becoming a penny stock for example)
@@WeLoveValue thanks for the explanation! I am really more interested on the whole process of reverse mergers and why some companies choose to go that route
@@simonchau8675 Have you seen the china huste? Good documentary
Reverse mergers are a way to get on the stock exchange and avoid some scrutiny. Too complex for a RUclips comment :) Maybe I make a video about it its actually an interesting topic
Less shares also means less dividends to pay out also ?
*Amazing as usual* 👏👍👏👏
why the profit do not change after a buyback?
Almost had a shock on 1:17, thinking what is wrong with RUclips or the channel.
The main implication is company is moving to being more private. And i don't find that mentioned anywhere
To clarify, share buybacks don’t increase private ownership, they just INCREASE how much of the company is controlled by remaining shares. Private ownership would occur from a buyout
@@ThePlainBagelthis is EXACTLY why buybacks should be illegal
Hey Richard, could you make a video on DCA vs LSI and maybe add how can the right timing in longing etfs could maximize a passive portfolio or is it even a practice? Thanks!
Bagels alway served Fresh here.
Are there regulations🤔
what is the point of owning a higher percentage of a company if the stock price didnt increase ?
when a company buys its own shares they stop existing
so every investor gets a bigger piece of the piece
can they just buy their stock without removing the shares in order to get a bigger piece for themselves?
Not really, because a company cannot "own" itself, someone external has to benefit from the company's operations (a company that 100% owned itself would never benefit anyone with its profits, since it would retain all its earnings to no one's benefit and never pay out a dividend; there would also be no control over the company). That's why when a company buys its shares they are effectively removed from the market.
@@ThePlainBagel can’t the company just reissue those shares though? Or does it have to go through the same process as issuing new shares?
I dont get it. If a company buys its own shares is it really decreasing the amount of shares? Or just increasing its ownership of its own business. Like, that person who had 60k and borrowed 40k from his friend, if he then bought back that 40k, there'd still be the same amount of shares just that they'd all be owned by the same person, right?
I agree, I think the information in the video is incorrect.
I read it as stonk buybacks lmao
You've seen too many stonk memes.
Sndl!
So buy backs are usually a bullish sign?
I prefer a mix, divided and a small buy back.
Allows you to grow your stake, and have income for other securities or day to day functions!
Helps alleviate selling earlier in a position you like if you're utilizing more volatile securities as a rainy day/savings fund.
Is this just a re-upload of the same video you posted last year?
My other video was on the opposite of the buyback, share dilution. Is that the video you're referencing?
Buying puts would work then
With the rules the way they are, I can't understand why companies still pay dividends when buybacks are a far superior alternative to the investors and possibly easier for the companies to manage as well.
In time with Vedanta buyback failure
What exactly is the benefit for a firm to have highly valued shares? How does that help the firm's profits?
It doesn't help. Highly valued shares give more money to stakeholders
A high-value share usually means a company can raise capital more easily. Aside from that it doesn’t directly help their profits.
It used to be a way to buy out very small shareholders to cut some costs. Companies used to (maybe they still do) mail out information to their shareholders which costs the company the same amount of money regardless of their stake in company.
Share buybacks are what caused the great depression. We need to bring back the laws before 1982 when buybacks were illegal. For the big players it is just a pump and dump with extra steps. The employees get squeezed and inequality increases at the same time value is lost. This is a method of value extraction not value creation.
That sound effect at 2:01 really had an impact on me. It's like I jumped into a painting and fell into a different world
Im glad one other person gets it
Hey I thought when a company paid out a (qualified) dividend you don’t pay income tax on the dividend income, only capita gains rate instead. Am I mistaken?
You pay taxes on the dividend
@@Curtis69213 you didn’t answer
@@IStillLikeIke REIT dividend are taxed as ordinary income up to a maximum of 37%. REIT are taxed in a different tax category because they are exempted from corporate interest rate taxes
What happened in case the company wants to buy back all shares because it extremely undervalued
They can force the share holders to sell at low price?
No, they can't force shareholders to sell their shares.
Unless someone wants to take the company private and most shareholders vote for it.
If a company wishes to go from public to private, do they have to buy back 100% of their shares in order to leave the market?
Yes
Plain Bagel is what I look for on RUclips and Breakfast.
What stops a company from selling puts on their own stock?
a bit risky for a company to be trading options
That would *definitely* be insider trading. When companies announce buybacks, they are weeks ahead before they happen and are announced to the entire market.
@StonkSlayd no, because the whole idea behind buybacks is that they are announced well ahead of time and give the market to react. The whole point of puts and other options is that the decision can be made in literally seconds to profit off of the fluctuation of the price of the stock - and the company will obviously be privy to significantly more information than average traders to make those decisions. And if you are to suggest the company announce ahead of time their options trading then that would literally defeat the point as the market would correct in whichever direction the company is selling/buying
@StonkSlayd It's not stupid if you understand the basics of the stock market. A company doing *anything* that can manipulate the price of their stock *MUST* be announced. They announce stock buy-backs so that investors can (1) adjust their positions in their holding if they believe the value of their stocks will change as a result (2) analyze and critique the companies actions (should they be investing that money instead!?) (3) be well aware when a large institutional investor, like the company itself, is about to change to a significant degree the amount of outstanding stocks and the value thereof
@StonkSlayd I’m not sure if you’ve even watched the video... it’s also basic economics. Buybacks increase demand, and increase demand = increase in price. Full stop.
Buy back to reduce market shares which raises dividends, this is why way back when this type of manipulation was illegal
PUMPamentals >>> Fundamentals