Share Buy Back compares to dividends payment

[Temperament]

Why do companies repurchase their own shares?
Are there really any good reasons beneficial to public shareholders or benefit some "insiders"?
In another words, do you think it is better for company to use FCF to make dividend payments to public shareholders rather than repurchase company's own shares?
It seems many companies even borrow money on the cheap (low interest rate now) to buy back their own shares. What is there for you and me-public shareholders?

[Life is a game]

Decrease the total floating shares in the market and increase the shareholders entitlement to a bigger slice of the company's earnings through an increased percentage of the ownership in the company. Provided the company does not pay more than it's intrinsic value to buyback the shares which would be detrimental to the shareholders instead.

[smallcaps]

I'm definitely for dividends over share repurchase:

<<Following extracted from Security Analysis by Graham and Dodd, Chapter 44>>

Abuse of Shareholders through Open-market Purchase of Shares
During the 1930–1933 depression repurchases of their own shares were made by many industrial companies out of their surplus cash assets,6 but the procedure generally followed was open to grave objec- tion. The stock was bought in the open market without notice to the shareholders. This method introduced a number of unwholesome ele- ments into the situation. It was thought to be “in the interest of the corporation” to acquire the stock at the lowest possible price. The con- sequence of this idea is that those stockholders who sell their shares back to the company are made to suffer as large a loss as possible, for the presumable benefit of those who hold on. Although this is a proper view- point to follow in purchasing other kinds of assets for the business, there is no warrant in logic or in ethics for applying it to the acquisition of shares of stock from the company’s own stockholders. The management is the more obligated to act fairly toward the sellers because the company is itself on the buying side.
But, in fact, the desire to buy back shares cheaply may lead to a deter- mination to reduce or pass the dividend, especially in times of general uncertainty. Such conduct would be injurious to nearly all the stockhold- ers, whether they sell or not, and it is for that reason that we spoke of the repurchase of shares at an unconscionably low price as only presumably to the advantage of those who retained their interest.

[rainmaker]

Most of the time, it is to benefit the majority shareholders only. Before raising rights, they try to push up the price and then existing shareholders need to subscribe to a higher value. Some mgmt used share buyback to prop-up their own share prices as they pledge it for bank loans. That's why do not vote "Yes" and give them the mandate for share buyback or employee share option as it is quite often use to reward the cronies.

[weijian]

(1) Distribution of excess capital. Share re-purchase is chosen over dividends if the tax regime favors the former over latter.

(2) Benefits Mgt/Majority shareholders in the form of (a) support share price for the vesting options/shares, (b) squeeze out OPMIs slowly and surely, © no brainer way to increase KPIs like EPS.

[Layman A]

It depends on which angle you are looking at :

1. For people who waiting at the sideline trying to scoop up cheap share of the company, they will hate it.

2. For short selling who trying to capitalize on the price weakness and make a fortune out of it, they will hate it too.

3. For shareholders who sit on it for longer term, I don't think they will hate the effect of share price appreciation + increment in EPS (though negligible in short term) .

David Conner has done lots and lots of share buy back during his 10 years term as CEO of OCBC, I don't think shareholders of OCBC hates him in the end .

[Temperament]

Share Buy Back vs Dividend
//////////////
Perhaps the most insidious use of cash in lieu of a dividend has been the emergence of share repurchase program as the preferred means of disposing of un-reinvested profits. Why pay or increase dividends when you can buy back shares in the hope of pushing up your share price? With debt being inexpensive, borrowing money to buy shares could even boost earnings per share (EPS). Without actual increase in profit from operations, investors might see an increase in their paper wealth. The bias in favor of share repurchases has become so engrained that many companies combine share repurchases and dividends paid together as “cash returned to shareholders.” Utter rubbish.
A dividend is a commitment to a direct cash payment to an owner of the company. A share repurchase program is nothing of the sort. It is not a commitment and can be turned off at will. Many are announced with great fanfare; a lesser number are actually executed fully. Their timing is abysmal:
As of early 2010, if not most, share repurchase programs announced within the past decade were underwater. That is the shares were purchased at a higher price than the current one. The program is typically announced when companies are flush with cash and the stock prices are high. Stock issuances – for instance the banks in 2008 and 2009 – are done when the prices are low and the companies need to raise capital. That is they issue shares at the worst possible moment when capital is most expensive and most dilutive to existing shareholders.
Share repurchase plans also encourage people to go away – to sell their stakes – rather than remain long-term shareholders and collect cash dividend payments. In their worst form, share repurchased programs are designed to simply offset lavish stock-option grants to senior executives. As the options vest and the shares are sold, companies buy them back to keep the overall share count stable. Because many senior executives are compensated on EPS growth, share repurchases, especially with cheap debt, became another way to reward executives, not shareholders, by artificially inflating earnings. It bears noting that share repurchase programs have no cash benefit for existing company owners.
But the greatest hubris behind the share repurchase plans is simply that they have the company playing the stock market, trying to buy low and perhaps sell high, when it should simply be running its businesses.


NB:-
i think there are 101 reasons why but none is for or in the interestof opmi. Can we do something? Hardly i think.

[muns]

Between Cash dividends and share buybacks, one is tangible while the other is dependent on the share price. Its kind of like a "bird in hand or two in the bush" type of situation. Dividends are much more dependable and tangible while share buybacks are inherently subject to the timing issue and one would only know on hindsight (i.e. 3-5 years) if your timing was good or not. So the merits of share buyback is rather subjective.

With that being said, theoretically investors shouldn't have any preference between the two. But as mentioned above by Temperament, some rights issue or dividend repurchase programs offered at a discount may be in the interest of the controlling shareholder if some of the minority opt for cash which leaves them a smaller piece of the pie.

Especially in the low interest rate environment now, some companies (See IBM) have been borrowing at ridiculously low rate while buying back shares allowing them to earn the "spread". Nothing wrong with that, just a way of doing business

________________________________________________________
Finding the Value in a Speculative World
http://www.valueinvestasia.com

[weijian]

Some recent write up on sharebuyback since we are on this thread:

http://aswathdamodaran.blogspot.sg/2014/...y-are.html

[weijian]

Another Fundsmith article that was written 13years ago, and still worth its weight in gold. I used to be confused by how to judge SBB (share buy back) behavior by Mgt for some time, and this article made it much clearer.

Historically, companies with excess capital but also with high capital outlay needs, generally will not have happy endings when they do SBB. Also some of them seemingly bought back their "heavily beaten down" shares on the cheap. But when business/financing conditions change, the earlier cheap SBB turned out to be really expensive and a gross mis-allocation of capital down the road.

A classic case of SBB adding a huge ballast to TSR would be Apple doing its enormous SBB over the years. With an asset light model (since it contracts out all its production from silicon to electronic device) and improving future earnings, its earlier SBB turned out to buying really cheap shares down the road.

Share Buybacks Friend or Foe?

2. Investors and commentators should analyse share buybacks on exactly the same basis as they would if the company bought shares in another company

3. Investors and commentators should use return on equity to analyse the effect of share buybacks rather than movements in earnings per share

5. Accounting for share buybacks should be changed so that the shares remain as part of shareholders funds and as an equity accounted asset on the balance sheet in calculating returns

https://www.fundsmith.co.uk/media/pnbnh5...ks-pdf.pdf