The Crash Chronicles

[Value Collector]

How about the P/E's, especially considering that the E part has been fudged by buybacks bought with debt?

How do buy backs fudge earnings?

 

[luutzu]

How do buy backs fudge earnings?

I think he meant Earnings per Share: Same earning amount but less share outstanding so higher EPS.

It also reduces the Equity, as you know.

One or both of those measures align with long-term "incentives" so management aren't always looking out for shareholders' best interest. Not that buy-back doesn't have its place and can be a wonderful thing when management see no other opportunity to deploy cash than buying a company they know best...

When used right, buybacks are great for shareholders, BUT...

There's the debt binge to buyback stock Uncle talks about. Then there's also the financial play rather than investing in R&D, investing in the workforce, nicer chairs, a bonus or two for the labour force (as opposed to management incentives and bonuses).

 

[Value Collector]

I think he meant Earnings per Share: Same earning amount but less share outstanding so higher EPS.

It also reduces the Equity, as you know.

.

It doesn’t fudge earnings per share either, the increase in earnings per share is genuine.

It only reduces equity if money is being borrowed to buy back shares, but returning capital to shareholders through buy backs and replacing it with some low cost long term debt isn’t a bad thing, having a good balance between bonds and shares in the capitalsation of a company is good for shareholders.

 

[luutzu]

It doesn’t fudge earnings per share either, the increase in earnings per share is genuine.

It only reduces equity if money is being borrowed to buy back shares, but returning capital to shareholders through buy backs and replacing it with some low cost long term debt isn’t a bad thing, having a good balance between bonds and shares in the capitalsation of a company is good for shareholders.

I know, the EPS is genuine in terms of maths where you get the Earnigs divvy by the number of shares.

The earnings are still the same though.

When earnings remain the same - as in, it's x total earnings per year for the entire company... but the Earnings per share is higher... It's a way of playing with the reported EPS. i.e. showing 'growth' in EPS.

I agree with you that under an ideal scenario where management couldn't find, and couldn't see anything in a foreseeable future, where capital could best be invested... then yes, share buybacks is a reasonable and legitimate way of allocating shareholders capital. BUT...

But seeing that share buyback is really a way of returning capital to shareholders because management couldn't figured how else they could deploy the excess cash better so they're passing it back to us owners to figure it out... And assuming that that's the only legitimate way of a buyback, not tied to management bonuses and options based on improved EPS (and hence improved share price)...

Then we, as owner, got to ask... why are we hiring the management and then do their job for them. i.e. why are we paying people who couldn't do proper investment in the business that they'd rather give us back the cash. And unless there's WWIII or everything of value is done being invented or produced, able management ought to keep the cash and invest it.

Yes, there are exception... it depends on the size and scale of the buyback etc.

Anyway, I don't mind the buyback on an individual level so much as it increases the shareprice but I'd rather it be invested in some real business. That and to buy out other fellow shareholders knowing that they're selling out on the cheap... Aren't we supposed to be all for one and one for all?

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Buybacks without borrowing reduces equity further than with borrowing.

Major components of Equity are Contributed Eq., and Retained Earnings.

If the company uses its earnings for the year to buy back shares, it has less earnings to put towards that "retained earnings" column... and since it buy back the shares, it reduces the Contributed Equity.

Pretty sure I got that right

 

[Value Collector]

I know, the EPS is genuine in terms of maths where you get the Earnigs divvy by the number of shares.

The earnings are still the same though.

When earnings remain the same - as in, it's x total earnings per year for the entire company... but the Earnings per share is higher... It's a way of playing with the reported EPS. i.e. showing 'growth' in EPS.

I agree with you that under an ideal scenario where management couldn't find, and couldn't see anything in a foreseeable future, where capital could best be invested... then yes, share buybacks is a reasonable and legitimate way of allocating shareholders capital. BUT...

But seeing that share buyback is really a way of returning capital to shareholders because management couldn't figured how else they could deploy the excess cash better so they're passing it back to us owners to figure it out... And assuming that that's the only legitimate way of a buyback, not tied to management bonuses and options based on improved EPS (and hence improved share price)...

Then we, as owner, got to ask... why are we hiring the management and then do their job for them. i.e. why are we paying people who couldn't do proper investment in the business that they'd rather give us back the cash. And unless there's WWIII or everything of value is done being invented or produced, able management ought to keep the cash and invest it.

Yes, there are exception... it depends on the size and scale of the buyback etc.

Anyway, I don't mind the buyback on an individual level so much as it increases the shareprice but I'd rather it be invested in some real business. That and to buy out other fellow shareholders knowing that they're selling out on the cheap... Aren't we supposed to be all for one and one for all?

---------------

Buybacks without borrowing reduces equity further than with borrowing.

Major components of Equity are Contributed Eq., and Retained Earnings.

If the company uses its earnings for the year to buy back shares, it has less earnings to put towards that "retained earnings" column... and since it buy back the shares, it reduces the Contributed Equity.

Pretty sure I got that right

What is the difference between company A buying shares in company B and hence increasing its eps by 5%, and company A buying shares in company A and increasing its eps by 5%.

You hirer management to run the company, and if they run the company well they will produce excess cash, now I would much rather them do the unimaginative share buyback in a their own company which we know inside out and is producing the excess cash, than to go and be a maverick and do some silly deal.

I also don’t mind companies replacing equity will debt if they can source the long term debt cheaply.

If for example Disney could borrow $150 Billion at 1% using 100 year bonds, and they used that to buy out all the other share holders except me.

The interest would be $1.5 Billion, and that would leave $8 Billion in profits for me on a share holding that was only worth $100k prior to the massive buy back.

I could pay myself $4 Billion in dividends a year, and use the other $4 Billion to pay of the loan over 30 years or so.

So I would get a 4,000,000 % dividend yield, while also owing the company with 100% equity in 30years.

Now if I am happy for a large scale buy back, I should be ok with a smaller one.

 

[luutzu]

What is the difference between company A buying shares in company B and hence increasing its eps by 5%, and company A buying shares in company A and increasing its eps by 5%.

You hirer management to run the company, and if they run the company well they will produce excess cash, now I would much rather them do the unimaginative share buyback in a their own company which we know inside out and is producing the excess cash, than to go and be a maverick and do some silly deal.

I also don’t mind companies replacing equity will debt if they can source the long term debt cheaply.

If for example Disney could borrow $150 Billion at 1% using 100 year bonds, and they used that to buy out all the other share holders except me.

The interest would be $1.5 Billion, and that would leave $8 Billion in profits for me on a share holding that was only worth $100k prior to the massive buy back.

I could pay myself $4 Billion in dividends a year, and use the other $4 Billion to pay of the loan over 30 years or so.

So I would get a 4,000,000 % dividend yield, while also owing the company with 100% equity in 30years.

Now if I am happy for a large scale buy back, I should be ok with a smaller one.

Yea, but that's why you're a capitalist and I'm a commie

And where do you get 1% on interest for 100 years?

There's no black and white on share buybacks, as there aren't black and white in much of anything. It all depends and whether a decision is "good" or not depends on its long term impact.

If Company A can get the same EPS buying either its own stock or a share in another, it's better to buy another (all else being equal) because it diversifies the empire and you'd expect management to underpay, make worst case scenario etc. in their valuation to get that 5% increase.

That and it's better, somewhat, that the other guy's shareholders pay for their management mistake rather than your own shareholder getting screwed. That's not the Disney Way.

 

[Value Collector]

1, And where do you get 1% on interest for 100 years?

2, There's no black and white on share buybacks, as there aren't black and white in much of anything. It all depends and whether a decision is "good" or not depends on its long term impact.

3, If Company A can get the same EPS buying either its own stock or a share in another, it's better to buy another (all else being equal) because it diversifies the empire and you'd expect management to underpay, make worst case scenario etc. in their valuation to get that 5% increase.

4, That and it's better, somewhat, that the other guy's shareholders pay for their management mistake rather than your own shareholder getting screwed. That's not the Disney Way.

1, just an example, but when you can get low interest rates of 2 -3% for 10+ years as you have been able to recently, you can see why Buy backs are good for share holders.

2, All that really matters is the quality of the company and the price. if it's a fair value for the stock and the interest rate is lower than the earnings yield, it makes sense.

3, Buy backs can be part of taking over other businesses, When Disney bought Pixar, Lucas film and marvel the owners wanted a portion of the payment in Disney shares, Disney Obliged and then instigated a share buy back to reduce the number of shares, effectively turning the deal back into a cash deal, they are doing the same with the current 2oth century Fox deal, Murdoch wants shares, Disney commits to buying back $25 Billion of stock before and after the deal.

4, Share market history is littered with deals where managements messed up on acquisitions and destroyed share holder value, in those cases they would be better to have just bought stock, look at BHP's entry into US oil shale, they flushed billions down the toilet.

 

[luutzu]

1, just an example, but when you can get low interest rates of 2 -3% for 10+ years as you have been able to recently, you can see why Buy backs are good for share holders.

2, All that really matters is the quality of the company and the price. if it's a fair value for the stock and the interest rate is lower than the earnings yield, it makes sense.

3, Buy backs can be part of taking over other businesses, When Disney bought Pixar, Lucas film and marvel the owners wanted a portion of the payment in Disney shares, Disney Obliged and then instigated a share buy back to reduce the number of shares, effectively turning the deal back into a cash deal, they are doing the same with the current 2oth century Fox deal, Murdoch wants shares, Disney commits to buying back $25 Billion of stock before and after the deal.

4, Share market history is littered with deals where managements messed up on acquisitions and destroyed share holder value, in those cases they would be better to have just bought stock, look at BHP's entry into US oil shale, they flushed billions down the toilet.

Wait, if Disney issued shares to Lucas and Steve Jobs as part of the price for their companies... then bought back, say the equivalent number of shares they just issued... That's not really good for the current owners who sells but are very good for the new owners. Right?

I mean, say Murdoch is going to be paid cash and 5% of the new Disney. Then Disney uses its cash/debt to buy out other shareholders (who aren't Murdoch, 'cause he ain't selling)... So not only are the current shareholders just had their ownership diluted, the new Fox in the hen house just got more real estate.

But yea, I thought I agreed with you that under certain circumstances a buyback makes perfect sense... under other situation it's just market manipulation and ensuring that bonus is in the bank.

 

[Value Collector]

Wait, if Disney issued shares to Lucas and Steve Jobs as part of the price for their companies... then bought back, say the equivalent number of shares they just issued... That's not really good for the current owners who sells but are very good for the new owners. Right?

why? how is it any different for the shareholders selling out, if the company is in the market buying up its own shares it would be helping the shareholders exit at a better price than they would otherwise get.

The sellers were probably going to sell anyway, Millions of shares are traded daily.

I mean, say Murdoch is going to be paid cash and 5% of the new Disney. Then Disney uses its cash/debt to buy out other shareholders (who aren't Murdoch, 'cause he ain't selling)... So not only are the current shareholders just had their ownership diluted, the new Fox in the hen house just got more real estate.

No, you are missing the point.

When Fox and Disney join, the company will be much bigger, Yes I will temporarily own a smaller piece of Disney's assets, but I am replacing that with some of fox's assets, but once the share buybacks are complete, I will own the same percentage of Disney assets as before, Plus a chunk of 20th century fox.

 

[luutzu]

why? how is it any different for the shareholders selling out, if the company is in the market buying up its own shares it would be helping the shareholders exit at a better price than they would otherwise get.

The sellers were probably going to sell anyway, Millions of shares are traded daily.

No, you are missing the point.

When Fox and Disney join, the company will be much bigger, Yes I will temporarily own a smaller piece of Disney's assets, but I am replacing that with some of fox's assets, but once the share buybacks are complete, I will own the same percentage of Disney assets as before, Plus a chunk of 20th century fox.

Yes, true and fair enough.

But aren't management supposed to look after all shareholders' interests. So in a way, asking the current owners to sell their ownership at a "higher than the current market" price... but doing so knowing that the company is getting a bargain... isn't that deceiving shareholders who sells?

I know they're all adults and they may, or may not, have better opportunities out there... or are just day traders anyway.

 

[Value Collector]

But aren't management supposed to look after all shareholders' interests. So in a way, asking the current owners to sell their ownership at a "higher than the current market" price... but doing so knowing that the company is getting a bargain... isn't that deceiving shareholders who sells?

Shareholders only sell if they want to, and the buy back will help them get a better price than they other wise would.

 

[luutzu]

Shareholders only sell if they want to, and the buy back will help them get a better price than they other wise would.

That's what the presentation slides says.

 

[Value Collector]

That's what the presentation slides says.

can you describe what sort of share holder you are worried about and how they would be negatively affected?

no body is asking share holders to sell, the buy backs I mentioned are all on market

 

[luutzu]

can you describe what sort of share holder you are worried about and how they would be negatively affected?

no body is asking share holders to sell, the buy backs I mentioned are all on market

You do realise that I kinda agreed with you right? But since we're bored and want to nitpick, I got a few issues with buybacks.

First... in that Disney/Fox example where they offered Murdoch shares of Disney then, separately, also buy back some $20B of Disney stock, as you said.

If you think about it, that's like giving Murdoch the pro-rata share of that extra $20B in ownership of Disney.

So that's not good for the existing Disney shareholder who, for some reason, want to sell or buy - depends on whether the offer price was fair or high.

Let say that the offer was fairvalue for the Fox assets. Murdoch got his fair price and some, say, 5% of the new Disney/Fox.

The $20B buyback would, using existing shareholder cash, would reduce the stocks and increase Murdoch's holdings. So he's getting to have his cake and eat it too.


But... you're saying, those shareholders who select to sell... that's their decision, the buyback would actually increase the market price and they select to sell so it's better for them otherwise.

IF the buyback is done at a "fair" (ie. cheap) price... and it better be else management is making a mistake at existing shareholders' expense (all probably to justify their bonuses)... So if buybacks are done at fair/cheap value, then those shareholders who sell out are selling at or below their holding's fair value.

I mean, management can't overpay... and if they underpay, then those shareholders are losing out. Right?

This could, could possibly, lead to the board/management/large shareholders manipulating the market... or scheme somehow (that's legal) to drive the share price down... or at least to keep the good news well hidden but the bad news more prevalent.

This would keep the market unimpress, the share price low for a while... then they offer to buy back from long suffering shareholders who ought to know better.

Not saying management always do that, but it's possible.

So while share buyback do have their merits, it all depends.

Most clear though is that under the best scenario where management is able and honest and are buying an asset that is undervalued... then their fellow/former shareholders are necessarily losing out and being taken advantaged of.


It also depends on the type of business and the company's financial situation too. I mean, unless the company have so much cash they can stack it sky high and still have left over to not know what to do with, then a buyback is sensible.

 

[Country Lad]

I am currently on a mission to ignore numerous threads in which I have no interest. If this doesn't stop simply being an argument between 2 argumentative people it will go on the ignore list which would be a pity because it was an interesting thread until the nonsense started.
Take it somewhere else like PMs

 

[luutzu]

I am currently on a mission to ignore numerous threads in which I have no interest. If this doesn't stop simply being an argument between 2 argumentative people it will go on the ignore list which would be a pity because it was an interesting thread until the nonsense started.
Take it somewhere else like PMs

You can choose to ignore (annoying) individuals, don't have to ignore the thread.

 

[Value Collector]

The $20B buyback would, using existing shareholder cash, would reduce the stocks and increase Murdoch's holdings. So he's getting to have his cake and eat it too.


.

you completely lost me on the first half of the post, I have no idea what you are talking about.

I mean, management can't overpay... and if they underpay, then those shareholders are losing out. Right?

no, they aren't losing out, because they were going to sell out no matter what, whether the buy back was happening or not, no doubt they enjoy having the extra buy orders rolling in keeping the share price higher than it would be other wise.

Most clear though is that under the best scenario where management is able and honest and are buying an asset that is undervalued... then their fellow/former shareholders are necessarily losing out and being taken advantaged of.

No, because they would be worse off if the buy back wasn't happening, the buy back helps them get a fairer price than they would if the buy back doesn't exist.

The market price of shares isn't determined by management.

It also depends on the type of business and the company's financial situation too. I mean, unless the company have so much cash they can stack it sky high and still have left over to not know what to do with, then a buyback is sensible

this is the case with some companies.

Disney for example produces ship loads of cash, it has used this cash to build make plenty of investments, and pays a growing dividend, but it still has cash left over and has room to use some debt on its balance sheet so it is a good idea to buy back shares, and it buys between $6Billion and $10Billion per year.

 

[luutzu]

[[The $20B buyback would, using existing shareholder cash, would reduce the stocks and increase Murdoch's holdings. So he's getting to have his cake and eat it too.]]

you completely lost me on the first half of the post, I have no idea what you are talking about.

I don't know the particulars of the two companies or the deal, but the deal as you described goes something like this (note, exaggerate certain figures to make the point):

Say Disney is fairly valued at $150B and Rupert's Fox is fair at $50B.

Disney offered to pay Rupert for his fox at $50B. $40B in cash, $10B in Disney stocks.

So the Disney+Fox company is now worth $200B with Rupert owning 10/200 or 5% of the company (and took $40B in cash home, away from Disney).

Disney had also announced a share buyback of, say $20B. This is 10% of the company's stock.

Disney had 100 shares outstanding. Of which Rupert own 5 shares.

Disney bought back 10 shares from other holders, total stock outstanding is now 90, of which Rupert still own 5.

5/90 = 5.56%. Rupert just had his 5% ownership jumped to 5.56%, or gained 10% extra.

So the original price of $50B for Fox was in fact $40B cash + $10B stock + $1B extra.


But you're saying...

The stock buyback is post-Fox so it's also Murdoch's cash that bought it back.

Not really... because the buyback was announced before he became shareholder; and it is going to be paid with cash that Disney accumulated/borrowed/earned... not with his cash.

 

[luutzu]

....
no, they aren't losing out, because they were going to sell out no matter what, whether the buy back was happening or not, no doubt they enjoy having the extra buy orders rolling in keeping the share price higher than it would be other wise.

No, because they would be worse off if the buy back wasn't happening, the buy back helps them get a fairer price than they would if the buy back doesn't exist.

That's only true if we assume that in all sales, the seller would sell out anyway.
It could also be that the buyback announcement increase the sales price a bit, enticing owners who would otherwise not sell to get out... and gotten out at what, assuming management does know what it's doing, getting out at a lower value than it ought to be.

There are examples of stock buyback that I know of where I don't think management is buying it back because it's cheap. So in that case it might help the sellers.

So yea, can go either way... depends.

The market price of shares isn't determined by management.

Can be massaged by management, their forecasts, speeches and pessimism/optimism.

this is the case with some companies.

Disney for example produces ship loads of cash, it has used this cash to build make plenty of investments, and pays a growing dividend, but it still has cash left over and has room to use some debt on its balance sheet so it is a good idea to buy back shares, and it buys between $6Billion and $10Billion per year.

I agree with you.

 

[Value Collector]

I don't know the particulars of the two companies or the deal, but the deal as you described goes something like this (note, exaggerate certain figures to make the point):

Say Disney is fairly valued at $150B and Rupert's Fox is fair at $50B.

Disney offered to pay Rupert for his fox at $50B. $40B in cash, $10B in Disney stocks.

So the Disney+Fox company is now worth $200B with Rupert owning 10/200 or 5% of the company (and took $40B in cash home, away from Disney).

Disney had also announced a share buyback of, say $20B. This is 10% of the company's stock.

Disney had 100 shares outstanding. Of which Rupert own 5 shares.

Disney bought back 10 shares from other holders, total stock outstanding is now 90, of which Rupert still own 5.

5/90 = 5.56%. Rupert just had his 5% ownership jumped to 5.56%, or gained 10% extra.

So the original price of $50B for Fox was in fact $40B cash + $10B stock + $1B extra.


But you're saying...

The stock buyback is post-Fox so it's also Murdoch's cash that bought it back.

Not really... because the buyback was announced before he became shareholder; and it is going to be paid with cash that Disney accumulated/borrowed/earned... not with his cash.

All shareholders that don’t sell will have their share of the assets increase,

Any way, not really interested in nit picking