No. of Recommendations: 37
In essence
Stock buybacks increase the value of current shareholders' investments by reducing the number of outstanding shares and improving key financial metrics
This belief is the overwhelming concensus, in fact I rarely find any opposition to it. CEOs themselves frequently quote this view.
In this sense the AI search is correct and doing what it is designed to do - it is assimilating the consensus view. It did this correctly.
Nevertheless there are many views in the world that are at concensus but are simply wrong. This not an important one, but it is one of them.
The confusion very likely lies in that EPS indeed increases when shares are repurchased.
But EPS also increases if cash is used to make a really bad investment in an unrelated dud, or overpriced, company with even some small earnings. EPS then increases and cash goes down and whether the aggregate value has gone up depends whether what was purchased is today worth more than the cash used.
Another part of the confusion might lie in the falicy that if not buying back shares then the cash will never be used for any other capital allocation, and will just remain unused forever.
For example if shares are bought back, this will overwhelmingly also increase the value of the company when comparing to the company not using that cash for anything and for 15 years and being declined the option to use it. Such a contract of having no option for cash other than buybacks never is written of course.
By the way, there is economically no difference between Berkshire doing a buyback on the one hand, and on the other hand just adding Berkshire as another stock within its published portfolio, without any shares cancelled. Same economic effect, just different way of doing the accounting. If buybacks were expressed in this way, Wall St would start to understand better that a buyback is just a stock purchase along the same lines as any stock purchase.
When Berkshire uses cash to buy shares of Apple, we don’t say it is “returning cash to shareholders”. In exactly the same way it make no sense whatsoever to say that buying shares of Berkshire is “returning cash to shareholders”.
I explained this to Tom Gaynor at Markel after a conference cal where he described a buyback as returning cash to shareholders, and to his credit he had the mental agility to agree after being explained.
Explaining to a few won’t change the concensus view however. That will remain forever.
- Manlobbi
