Showing posts with label stock repurchase. Show all posts
Showing posts with label stock repurchase. Show all posts
Wednesday, January 28, 2015
Monday, February 10, 2014
Apple's $14bn share buyback
An article asks whether Apple's huge buyback could be better used - perhaps in developing new products.
The motivations for a buyback are complex (and responding to Karl Icahn's pressure may be one), but in terms of a simple IRR analysis, a buyback generates a return of about 3% + 0.8*5% = 7% for shareholders. This is the expected return on AAPL stock (using the the CAPM).
While I am sure Apple has plenty of interesting research and development projects, it might be the case that returning money to shareholders so that they can invest it, rather than keeping it money market securities provides the best return. Shareholders are then free to reinvest this money in other firms which might be seeking dollars to finance their R&D programs.
CAPM assumptions:
RF = 3%
Market Risk Premium = 5%
AAPL Beta = 0.8
The motivations for a buyback are complex (and responding to Karl Icahn's pressure may be one), but in terms of a simple IRR analysis, a buyback generates a return of about 3% + 0.8*5% = 7% for shareholders. This is the expected return on AAPL stock (using the the CAPM).
While I am sure Apple has plenty of interesting research and development projects, it might be the case that returning money to shareholders so that they can invest it, rather than keeping it money market securities provides the best return. Shareholders are then free to reinvest this money in other firms which might be seeking dollars to finance their R&D programs.
CAPM assumptions:
RF = 3%
Market Risk Premium = 5%
AAPL Beta = 0.8
Monday, March 19, 2012
Felix opines on Apple's dividend.
Felix Salmon, talks about Apple's dividend. I usually agree with what Felix says - he's a smart, insightful guy, but I think he's off base here on a couple of points.
First he argues that Apple has no control over the level of the dividend yield (D/P) because Apple can't set its stock price. This is plain wrong. Sure, Apple can't control its stock price, but it should at least think about the level of the dividend that it is paying relative to the stock price. Personally, I think that the 1.8% yield is pretty healthy.
Second, Felix doesn't think that the firm should issue debt. He says - what would the firm do with the cash? Well, the firm could buy back stock. As any finance students knows, the firm's cost of capital is based on its WACC. Debt is tax deductible, and for a firm that is so crazy profitable as Apple, any sort of tax deduction would seem like a good idea. This would involve a lot of stock buying back, but so what?
Still an interesting post and worth reading.
First he argues that Apple has no control over the level of the dividend yield (D/P) because Apple can't set its stock price. This is plain wrong. Sure, Apple can't control its stock price, but it should at least think about the level of the dividend that it is paying relative to the stock price. Personally, I think that the 1.8% yield is pretty healthy.
Second, Felix doesn't think that the firm should issue debt. He says - what would the firm do with the cash? Well, the firm could buy back stock. As any finance students knows, the firm's cost of capital is based on its WACC. Debt is tax deductible, and for a firm that is so crazy profitable as Apple, any sort of tax deduction would seem like a good idea. This would involve a lot of stock buying back, but so what?
Still an interesting post and worth reading.
Wednesday, September 28, 2011
Berkshire Hathaway to buy back shares
This story is a few days old, but Berkshire Hathaway is planning to start a share buyback. This is pretty big news in that the company has never distributed cash to shareholders before. Warren Buffet claims that the stock is significantly undervalued. If this is so, then the buy back probably makes sense. The evidence on buy backs is a little mixed, but in general there it supports the view that firms that do buy backs usually do so when their stock is undervalued. We know this from two observations. First buyback announcements are usually greeted with a positive stock price reaction, and second, valuation models show that firms that commence buybacks are, on average, undervalued compared to other firms.
Monday, August 22, 2011
Do repurchases destroy value?
An op ed piece in today's Financial Times claims that share repurchases destroy value because they are often done at market peaks. In other words firms are paying too much when they repurchase stock.
Unfortunately, the article is a little sloppy in that it only looks at aggregate data and then only considers a very short time period. More importantly though, I think that the article draws the wrong conclusion.
When we look at the the academic evidence on share repurchases we find support for firms timing their repurchases for periods when the firm's stock is low relative to the stock's fundamental value. For example, a paper by Ikenberry, Lakonishok and Vermaelen in 1995 finds that value stocks in particular seem to do very well after repurchases - consistent with managers timing the repurchase when stock prices are low. The opposite result is usually found for share issuances - these usually occur when the firm's stock value is high and subsequent returns are low. Both of these are manifestations of the "Market Timing" theory of capital structure - something that I've done a bit of research on. In general there is pretty strong evidence that managers time stock issuances and share repurchases to benefit long term shareholders.
I'm also a little concerned about the idea that a share repurchase could destroy value. First of all, firms are awash with cash - cash that is just sitting in corporate coffers - and share repurchases are an efficient way of getting that cash back to the shareholders. Second, even if the firm buys back shares when the prices are high, this doesn't destroy value per se. All it does is transfers wealth from the shareholders not participating in the buy back to those who are participating.
So while it might be the case that share repurchases may not have been optimally timed in the past 2-3 years, the larger evidence doesn't support the article's contention.
The article does make an interesting point however, that managers may be tempted to boost EPS by buying back shares. They would do this because they are compensated on the level of EPS. Surprisingly, many managerial compensation contracts are often pretty vague and may not preclude manipulation of EPS via repurchases thus opening the door for such window dressing. However, if you buy stock in a company that uses such a poor performance metric to compensate the managers, then you probably deserve what you get!
For more on this topic - you can see an earlier post here and Damodaran's excellent post on the valuation effects of buybacks.
Unfortunately, the article is a little sloppy in that it only looks at aggregate data and then only considers a very short time period. More importantly though, I think that the article draws the wrong conclusion.
When we look at the the academic evidence on share repurchases we find support for firms timing their repurchases for periods when the firm's stock is low relative to the stock's fundamental value. For example, a paper by Ikenberry, Lakonishok and Vermaelen in 1995 finds that value stocks in particular seem to do very well after repurchases - consistent with managers timing the repurchase when stock prices are low. The opposite result is usually found for share issuances - these usually occur when the firm's stock value is high and subsequent returns are low. Both of these are manifestations of the "Market Timing" theory of capital structure - something that I've done a bit of research on. In general there is pretty strong evidence that managers time stock issuances and share repurchases to benefit long term shareholders.
I'm also a little concerned about the idea that a share repurchase could destroy value. First of all, firms are awash with cash - cash that is just sitting in corporate coffers - and share repurchases are an efficient way of getting that cash back to the shareholders. Second, even if the firm buys back shares when the prices are high, this doesn't destroy value per se. All it does is transfers wealth from the shareholders not participating in the buy back to those who are participating.
So while it might be the case that share repurchases may not have been optimally timed in the past 2-3 years, the larger evidence doesn't support the article's contention.
The article does make an interesting point however, that managers may be tempted to boost EPS by buying back shares. They would do this because they are compensated on the level of EPS. Surprisingly, many managerial compensation contracts are often pretty vague and may not preclude manipulation of EPS via repurchases thus opening the door for such window dressing. However, if you buy stock in a company that uses such a poor performance metric to compensate the managers, then you probably deserve what you get!
For more on this topic - you can see an earlier post here and Damodaran's excellent post on the valuation effects of buybacks.
Tuesday, January 25, 2011
Stock Repurchases
Aswath Damodaran ponders the reasons behind the recent increase in stock repurchases. Required reading for all MBA finance students!
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