Saturday, September 22, 2012

Stock Buy backs can damage Investors.


The Ruinous Truth Behind Apple's Stock Buyback

Take Apple Inc. (Nasdaq: AAPL) is the stock everybody loves these days.

This $653 billion company recently announced a $10 billion stock buyback over three years, beginning October 1. Naturally, shareholders cheered, believing the buyback would boost the share price. 

But consider this: Apple is buying back shares at several times book value, so the buyback will actually dilute Apple's book value per share. 

Based on the latest quarter, Apple's tangible book value was $106.3 billion, or $113 per share, while its stock closed today near $697 a share, or 6.2 times book value. 

If Apple does a $10 billion buyback, it will reduce its book value by $10 billion to $96.3 billion while it reduces its share count by $10 billion/697 or 14.3 million shares, thus reducing its book value per share by 8.0% to $104. 

Yes, its share price may trade at a greater premium to the reduced book value, but the chances are its premium will only increase modestly - in which case the $10 billion share buyback will REDUCE Apple's share price. 

What's more, Apple is so generous to its top management and its share price is so high that its $10 billion share buyback will probably not be sufficient to satisfy management's stock options. 

That means that at the end of the three years, Apple will have more shares outstanding than it had at the start. 

Given that the buyback will almost certainly be carried out in private transactions between Apple and the large investment institutions, the benefit of the buyback to us ordinary shareholders thus escapes me. 

Apple has also started paying a cash dividend, which is worth something; in this respect, good for them! But the buyback is a pure waste of shareholder money. 

The other problem with the Apple buyback is that, being carried out at a price above $600, it is very expensive. For Apple, this may not matter much; the company's cash pile is so vast that it may be able to continue buybacks even during the next recession. 


Summary: 

Dividends are paid in cash, to all shareholders, and thus represent a real value return on your investment.

On the other hand, stock buybacks give nothing to the individual shareholder, may reduce his share price if carried out at too high a price, and may endanger his dividend by reducing the company's cash reserves in the next recession.


Courtesy: http://moneymorning.com/2012/09/21/what-wall-street-will-never-tell-you-about-stock-buybacks/

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