Wednesday 4 August 2010

share buybacks

IT REALLY IRRITATES THE RAVEN WHEN SELL SIDE COMMENTATORS SAY THAT SHARE BUYBACKS ARE A WASTE OF MONEY BECAUSE OF THE PRICE THAT IS PAID ON THE SHARES. IT IS JUST STUPID.

Imagine there are two shares in a listed company, the intrinsic value of the company is $400 lets say made up of $250 of hard assets and $150 of cash, the company has no liabilities. So the intrinsic value of one share is $200.

Lets say the company decides to buy back 1 share, ie. 50% of the shares issued. if they pay $x for that share to you as a shareholder. If they pay $100 for the share, you as a shareholder then have $100 of cash, and 1 share left in the company, which then has an intrinsic value of ... $50 of left over cash+$250 of hard assets = $300. So as a shareholder you're left with $400. If they pay $1 for the share, then you have $1 cash + 1 share worth $250+$149 = $400.

WOW its the same.

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