A company that decides to split its stock, forward or reverse, generally has that decision reflected in the price chart of its' stock. If one goes to Yahoo Finance, for example, one will see the correction in selling price that took place subsequent to these splits shown on a company's historical price chart. If a company decides to buyback shares, no adjustments are made in the price chart of Yahoo Finance or any other of the popular providers of such information. Is this correct?
Yes, on yahoo the adjusted price will take care of splits and dividends. You can see the dividends also listed with the prices. The chart will show the adjusted price and there are little marks for splits.The buy back does not "change" the price of the stock. IT does affect the number of shares outstanding and we hope that increases the price, but there is no way to tie the number of shares bought back to the adjusted close other than just allowing the free market dictating the price.So, yes that is correct.DrTarr
It can be persuasively argued that in the case of dividends, the stock price should also be altered for graphs, tracking return, etc. (since the after-dividend price doesn't reflect this benefit you've received), which you'll notice that Yahoo does (at least for mutual funds) for it's historical price feature. However, for a buy-back, the stock price correctly reflects any benefit you receive---there is no reason to alter the price.Puss
However, for a buy-back, the stock price correctly reflects any benefit you receive---there is no reason to alter the price---------Do share prices generally trade down after a large share buyback? I would think they would since book value has been reduced. Or has it? Treasury stock has increased, common equity outstanding has decreased. Perhaps it's a wash. I imagine one argument for a company's shares not trading down after a buyback would be this: Should Capital Invested be reduced subsequent to the buyback, important metrics, such as NOPAT, will look that much better - when compared against this lower capital number. But I'm not sure how the accounting is handled in this area.
Do share prices generally trade down after a large share buyback? I would think they would since book value has been reduced.Assume a company has $10,000 in assets, $5,000 in liabities, and $5,000 in equity (book value). The company has 1,000 shares outstanding at $10 each, for a price/book of 2.It now decides to buy back 100 shares for $1,000. Assets are $9,000 after this and book value $4,000. If price/book remains unchanged at 2, the market value of the company is $8,000 and the stock price is $8,000/900 = $8.89.If the shares had been trading at a price/book = 1, for a stock price of $5, the buyback would have reduced book value to $4,500. The stock price would have been unchanged at $4,500/900 = $5.So the answer to your question is that if price/book value remains unchanged before and after the buyback, the stock price declines if the company trades above a price/book of 1. That is, if the buyback is financed from the company's assets and not out of earnings.Because book value is an accounting measure and therefore subject to all kinds of judgment calls, price/earnings may be a better valuation measure (or price/cash flow if you prefer). If earnings remain unchanged before and after the buyback, the stock price will increase because the number of shares outstanding has decreased, so there are more earnings per share.Hope this helps,Calpinist
Just as there's no clear-cut way to value a company, there's no clear-cut way to value a share buy-back. You could certainly do a study to try to determine the average or median effect of a share buy-back, but may not help much in predicting future reactions.If the stock is extremely cheap, and there are no attractive capital investments (available to the company), a stock buy-back will add value. If the stock is extremely expensive, or there are plenty of very attractive capital investments available to the company, a stock buy-back will destroy value. Same rules generally apply to dividends (good when cheap/no attractive investments, bad when expensive/attractive investments available).Note that I'm using relative terminology here. It's not trivial to determine "cheap" from "expensive;" neither is it trivial to determine the return on a capex before incurring the capex.Puss
"Because book value is an accounting measure and therefore subject to all kinds of judgment calls, price/earnings may be a better valuation measure (or price/cash flow if you prefer). If earnings remain unchanged before and after the buyback, the stock price will increase because the number of shares outstanding has decreased, so there are more earnings per share."_____________________________ Now you do recognize this is not a fact correct? Shares will NOT always gain value on a buyback. If shares were expensive in the markets opinion, a buyback will be an EXTREMELY poor use of a company's assets, at book or better undervalued adds value, respectively. In my experience as often as not buybacks have shown no great immediate or shorter term impact. Will it have a positive impact on the shares? It should, but a return of capital to the shareholders or an investment in the company may have been better choices. Not all buytbacks are benign or better, and a company's motives in a buyback should not be automatically assumed to be pure.
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