Stock Buybacks are Boring but Interesting

Stock Buybacks

You may have heard of Stock Buybacks in investing news media, typically from companies making lots of money. For reasons I'll get into, a stock buyback is almost always big news of an upcoming windfall to investors in the company. A stock buyback is when a company buys shares "back" from institutions or individual investors that previously bought them. Doing so will reduce the number of shares available in the stock market. Remembering introductory Economics-101 tells us that reducing the number of shares available reduces the supply of shares. When supply drops, demand rises since there is less supply for the same level of demand. In stock price terms, buybacks cause the stock price to rise over time because investors must out-bid each other for the fewer shares available to purchase. That's it! No need to draw a bunch of supply and demand curves.

There are plenty of reasons why a company would want to execute a buyback. Perhaps the company feels that its stock price is too low - that the market is discounting how great the company is. This happened with Berkshire Hathaway, Warren Buffet's company, recently. The stock price was low enough in Buffet's eyes to use some of the company's cash to buy back shares. Another common reason could be that a company is sitting on $100+ Billion in cash (I'm looking at you, Apple), and influential investors are calling for the company to do something with that cash. Another simple reason is that CFOs (Chief Financial Officers) at companies want to buy back shares because doing so makes standard stock metrics like EPS (earnings per share) and P/E (price to earnings) look more attractive. Whatever the reason, stock buybacks are almost always good for stockholders. Here's the lifecycle of your typical stock buyback program and what happens at each step:

Common Stock Buyback Lifecycle

1. A company's board of directors approves buying back a certain amount of stock. Let's say they approve of repurchasing $1 billion worth of shares.
2. Starting Announcement -- The company announces news of the buyback program to the market. Since stock buybacks cause a company's stock price to rise over time, investors want to get in on the action and buy shares on the day of the announcement, driving up the stock price.
3. Buying back $1 billion of stock is quite a lot to trade in a single day, so it may take many months, or even years, for the company to complete the buyback program that the board approved. The stock price will increase steadily during this time (ignoring market swings external to the company).
4. Ending Announcement -- The company announces at some point that they have completed their $1B buyback program.

The most common anti-buyback sentiment is that buybacks are not a "creative" use of money. Critics complain that the money spent on buybacks should be spent on something else: making the products cheaper, reducing environmental impact, paying better wages, etc. Unfortunately, executives and company boards are put in place primarily to "maximize shareholder value," which is just business speak for making the stock worth as much as possible. The cartoon below captures this so, so, eloquently:

Trades

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• Brenna, Spencer, Lindsay, Chloe, Antonio, and Garrett are still sitting on the additional $1000 in cash. Please remember to update the google sheet detail tab when you buy/sell something. I look at the revision history each month so I can include your trade in this newsletter. The summary tab is at the bottom of this email as a picture and the live link to it is here.