There has been much talk of share buybacks recently, with the famous value investor Warren Buffet writing about the practice positively in his annual shareholder letter. Still, critics slam the process claiming it only benefits management.
Understandably, the practice has many critics, with negative comments from the bears looking at an economy that they believe is running head-on into certain doom. If they call you crazy for buying the market, this also applies to the management teams of listed companies.
Buying back shares can happen in any market, bull or bear. But now, when nearly every company you look at announces a share buyback program, it can show that management teams have confidence in their companies to ride out the storm. These managers have a longer outlook on their business than short-term bears.
As a swing trader, a company announcing a share buyback program mostly has a positive short-term impact on a share price; this is more noticeable in regular times i.e. not this unforgiving 2022- 2023 bear market.
The Board of Directors meeting is usually where it is decided whether to buy. From that time, the trader needs to keep an eye on the stock and its price difference. The trader should then understand the details of the buy-back plan to be announced after the meeting, i.e., how much stock will be purchased.
Why would a company want to buy its shares?
- Share buy-backs help companies aggregate ownership.
- Increase the price of the stock.
- Buy-backs can boost investor confidence.
A company might consider buying back shares because if it believes its stock is significantly undervalued, it can be a worthwhile investment. The process could increase Earnings Per Share (EPS) by reducing the number of shares outstanding, helping the company look more attractive. If this is the primary reason management would buy back shares, you need to ask yourself, is this for my benefit or theirs?
Firstly if you are invested in the company and need to ask this question, the lack of trust in management may show you shouldn’t be invested anyway. Viewing a company announcing a buy-back from the outside, I want to know if the management team have bonus-related schemes to increase EPS or if the management team may sell shares they own later once the price increases.
As the share count reduces, the investor will benefit from an increased holding in the company, sometimes preferring this over dividend payments that need tax paying (unless you hold shares in a tax advantage account such as an ISA).
Also, by tactically buying back stock, a company can reduce its dividend obligations as fewer shares are in issue.
Holding the shares to re-issue later
Much like the retail trader, the company may participate in trading their stock if they believe it is undervalued and often use debt to purchase these shares; this is to claim back the interest on the loan. Credit rating agencies don’t like this practice, often downgrading the company soon after.
This trading could come with a danger that affects all traders; if the stock doesn’t return, the company is left hanging with a potential margin call.
Managers should believe their company will be around for a long, so time is on their side. A bull market follows every recession, so buying now and waiting with an optimistic long-term economic outlook can make sense. Issuing these shares back is more accessible than issuing additional equity.
Buying back in a bull market?
This is when the critics of share buybacks make sense. Just as the inexperience of an investor can be seen buying at the top of a bull market, this could also apply to a company’s management team. Two main questions need to be asked:
Can the company use the cash set aside to purchase shares to expand or develop the business further? It would not make sense to use cash for repurchase programs if an attractive acquisition of business or equipment could help expand the business.
Are the shares cheap compared to their intrinsic value? If not, then management’s actions may not align with yours. We all have different ways to calculate this intrinsic value, but sometimes up in a bull market, it can be evident that one should not be buying the shares.
the Oracle of Omaha
Recently, the famous investor Warren Buffet ‘the Oracle of Omaha’ stated, “When you are told that all repurchases are harmful to shareholders or the country, or particularly beneficial to CEOs, you are listening to either an economic illiterate or a silver-tongued demagogue (characters that are not mutually exclusive),” the head of Berkshire Hathaway told investors in the company’s latest annual report.
He continued, “The math isn’t complicated: When the share count goes down, your interest in our many businesses increases. Every small bit helps if repurchases are made at value-accretive prices,” Buffett said in his letter to shareholders. “Just as surely, when a company overpays for repurchases, the continuing shareholders lose. At such times, gains flow only to the selling shareholders and the friendly but expensive investment banker who recommended the foolish purchases.”
I like the simple approach Warren Buffet takes towards investing, and he backs up my thoughts in this video from May 2019, when Buffett sat down with CNBC’s Becky Quick to share his perspective on share buybacks through the example of Berkshire and Apple.
When everyone tries to overcomplicate things remember a company should be buying stock when cheap and there’s nothing else to buy.
My success with a buyback program
An example of when I have personally taken advantage of a share buyback program is Plus 500 (PLUS), an Israel-based company listed on the London Stock Exchange that develops and operates an online trading platform for individual customers to trade contracts for difference (CFDs). The company has been buying back shares since 2018 with a more aggressive approach in the last few years.
As you can see from the chart below, the uptrend of the share price, I believe, is mostly due to this share buyback program and I have ridden the share price up gaining just over 160% since September 2019, giving a Compound Average Growth Rate (CAGR) of 27%.
There has been much talk of share buybacks recently with the famous value investor Warren Buffet writing about the practice positively in his annual shareholder letter, but critics slamming the process claiming it only benefits management.
Understandably, the practice has many critics, with negative comments from the bears looking at an economy that they believe is running head-on into certain doom. If they call you crazy for buying the market, this also applies to the management teams of listed companies.
Buying back shares can happen in any market, bull, or bear. But now when nearly every company you look at announces a share buyback program, it can show that management teams have confidence in their companies to ride out the storm. These managers have a longer outlook on their business than short-term bears.
As a swing trader a company announcing a share buyback program mostly has a positive short-term impact on a share price, this is more noticeable in normal times i.e. not this unforgiving 2022- 2023 bear market.
The Board of Directors meeting is usually where it is decided whether to buy or not. From that time the trader needs to keep an eye on the stock and its price difference. The trader should then understand the details of the buy-back plan to be announced after the actual meeting i.e., how much stock will be purchased?
Why would a company want to buy its shares?
- Share buy-backs help companies aggregate ownership.
- Increase the price of the stock.
- Buy-backs can boost investor confidence.
The main reason a company might consider buying back shares is that if it believes its stock is significantly undervalued, it can be a worthwhile investment. The process could increase Earnings Per Share (EPS) by reducing the number of shares outstanding, helping the company look more attractive. If this is the main reason management would buy back shares you need to ask yourself; is this for my benefit or theirs?
Firstly if you are invested in the company and need to ask this question, the lack of trust in management may show you shouldn’t be invested anyway. Viewing a company announcing a buy-back from the outside, I want to know if the management team have bonus-related schemes to increase EPS or if the management team may sell shares they own later once the price increases.
As the share count reduces the investor will benefit from an increased holding in the company, sometimes preferring this over dividend payments that need tax paying on them (unless you hold shares in a tax advantage account such as an ISA).
Also, by tactically buying back stock, a company can reduce its dividend obligations as there are fewer shares in issue.
Holding the shares to re-issue later
Much like the retail trader, the company may participate in trading their stock if they believe it is undervalued and often use debt to purchase these shares, this is to claim back the interest on the loan. Credit rating agencies don’t like this practice often downgrading the company soon after.
This trading could come with a danger that affects all traders; if the stock doesn’t go back up the company are left hanging with a potential margin call.
Managers should believe that their company will be around for a long time, so time is on their side. Every recession is followed by a bull market, so buying now and waiting with an optimistic long-term outlook on the economy can make sense. Issuing these shares back is easier than issuing additional equity.
Buying back in a bull market?
This is when the critics of share buybacks make sense. Just as the inexperience of an investor can be seen buying at the top of a bull market this could also apply to a company’s management team. Two main questions need to be asked:
Can the company use the cash used for purchasing shares to expand or develop the business further? It would not make sense to be using cash for repurchase programs if there is an attractive acquisition of business or equipment that could help expand the business.
Are the shares cheap compared to their intrinsic value? If not, then management’s actions may not align with yours. We all have different ways to calculate this intrinsic value, but sometimes up in a bull market, it can be obvious that one should not be buying the shares.
the Oracle of Omaha
Recently, the famous investor Warren Buffet ‘the Oracle of Omaha’ stated “When you are told that all repurchases are harmful to shareholders or the country, or particularly beneficial to CEOs, you are listening to either an economic illiterate or a silver-tongued demagogue (characters that are not mutually exclusive),” the head of Berkshire Hathaway told investors in the company’s latest annual report.
he continued “The math isn’t complicated: When the share count goes down, your interest in our many businesses goes up. Every small bit helps if repurchases are made at value-accretive prices,” Buffett said in his letter to shareholders. “Just as surely, when a company overpays for repurchases, the continuing shareholders lose. At such times, gains flow only to the selling shareholders and the friendly but expensive investment banker who recommended the foolish purchases.”
I like the simple approach Warren Buffet takes towards investing and he backs up my thoughts in this video from May 2019 when Buffett sat down with CNBC’s Becky Quick to share his perspective on share buybacks through the example of Berkshire and Apple.
When everyone tries to overcomplicate things remember, a company should be buying stock when cheap and there’s nothing else to buy.
My success with a buyback program
An example of when I have personally taken advantage of a share buyback program is Plus 500 (PLUS), an Israel-based company listed on the London Stock Exchange that develops and operates an online trading platform for individual customers to trade contracts for difference (CFDs). The company has been buying back shares since 2018 with a more aggressive approach in the last few years.
As you can see from the chart below, the uptrend of the share price, I believe, is mostly due to this share buyback program and I have ridden the share price up gaining just over 160% since September 2019, giving a Compound Average Growth Rate (CAGR) of 27%.
