All in a day's work

If some of you still do not know, there has been some major share buyback programs that has been declared recently.

1. Microsoft - US$ 40b
2. HP - US$ 8b
3. Nike - US$ 5b
4. Vodaphone - US$ 2b
5. Anheuser Busch - US$ 1b

These are the biggest companies in the world that has been declaring their Shares Buyback program.

So what exactly is Shares Buyback?
In this post, I'll only address Shares Buyback and not other FA theories or Formulas

First and foremost, please understand that cash used for the buyback can always be used alternatively on new investments, new products or marketing, which MIGHT increase the revenue of the company.

Investor Point of View

1. When the fund buys its shares at a discount, the net-asset value for the remaining shareholders rises.

Imagine a company has $100 in assets and 10 shares issued, making each share be worth $10.

If the Share Price is trading at $9 and the company buys back 1 shares at $9, what is left is assets of $91 and 9 shares.

This buyback increases the NAV per share to $10.11, or 1.1%

2. Buying back of shares creates an impression that the management is confident of the prospects of the company and feels that at current traded price, the company is undervalued.

3. A Buyback reduces the number of shares available, thus increasing the company's earnings-per-share and makes it appear more attractive.

Company's Point of View

Before we go into this area, 2 points to note:

Shareholders and Management are 2 different class of personnel in the Company.

Has it occured to you the fact that instead of a buyback, why not increase the Dividends paid out?

1. The Management of the company might have a clause to receive compensation in relation to the company stock price. This simply means that with the higher the stock price, the more it benefits the mangement, be in stock options or bonus.

2. Stock buyback has the immediate impact on the share price. Short Termist Management will deem this strtegy as the most effective as compared to Divided Payout.

So Now What ?

Look for Cash Flow and Dividends Payout.

Dividend Payout Ratio - With a lower dividend payout ratio, Company A will have more Cash to reinvest in the business. However, do note is the business is worth the investing.