Stock Buybacks - The Good And The Bad Explained

The stock buyback is broadly viewed as a positive thing by value investors, but how exactly does it work, and can it actually be a net negative in some circumstances? We answer these questions in today's video.

This video is sponsored by Blinkist

DISCLAIMER:
This channel is for education purposes only and is not affiliated with any financial institution, although Richard does work as an employee for an investment manager. Richard Coffin is not registered to provide investment advice and as such does not provide recommendations on The Plain Bagel - those looking for investment advice should seek out a registered professional. Richard is not responsible for investment actions taken by viewers.

[maddog]

A great channel especially for those of us with limited financial literacy. Thanks.

[MapAtlass]

I prefer share buy backs over dividends for tax reasons 😀

[ianig]

I’m not fond of stock buybacks funded through debt issuance such as bonds etc. Quite a few companies have been known to do that, especially in this period of low interest rates.

[AntonWongVideo]

9:45 "As with MOST things in investing, not ALL that glitters is gold."
You mean, Smash Mouth lied to me?

[GonzoTehGreat]

Share Buybacks positively distort the share price and consolidate share ownership, which obviously benefits shareholders, so the relevant question is *who owns shares?*
These benefits are disproportional, with the largest shareholders benefitting the most, so when relatively few shareholders own most of the shares, this increases inequality between shareholders, but also between shareholders and the rest of the population.
There's also a significant opportunity cost, as the money used to buy back shares could instead be invested in the company, to acquire better equipment and more skilled workers, to improve training and to research innovation.
Consequently, the company suffers from less investment, so shareholders can become richer.

[jesse_cole]

It sounds like if you’re an independent person who owns a few shares of stock, you could benefit from knowing that the company is doing buybacks. You could just not sell, and then your share would go up too when those other shares the company bought "disappear." Unfortunately, there's no way to know when the company is doing it. Maybe the key to stopping corporations buying back their stocks instead of reinvesting in the company and/or hiring workers is to force them to declare when they're buying back stocks. Then, nobody would sell their shares back to them, incentivizing the company to invest in their workers and future value.

[ChristianAviles]

I just want to drink coffee and have a bagel and talk stocks with you.

[michaelrussel]

Love your videos as always!

Could you make a series explaining about each sector and its pros and cons? even in nutshell is fine, to make us beginner investor understand more in what we are doing in each sector

[dhvanitmerchant]

Well, not exactly buyback, but Vedanta ltd. (Company from India), proposed a delisting offer at 87 Rs. a piece, whereas its stake in a subsidiary company had the value of 130 Rs a piece, and its book value was 3.5 times the value the Promoter offered. Value destruction of small and retail investors by this big corporations for their own benefit is common in Indian Stock Market. Anyways, love your work as always, Richard. My first video was the Dot-com Bubble and since watched each and every video of yours. Keep up the good work.

[jcsjcs]

I think you may have forgotten one reason why companies buy back stocks: if the company gives out shares to employees as part of their compensation package, over the years the number of outstanding shares will increase. To stabilize the market they basically have to buy back the shares.
If they just gave additional money to the employees, their books would look worse -- and by buying back shares they have passed out, they are sending "positive" signs to the investors. So it seems to be a no-brainer to partially compensate employees with company shares.

[GKSTR]

New CEO arrives: I'm gonna do what's called a pro-gamer move

[yashpatel]

Share buybacks are what caused the great depression. We need to bring back the laws before 1982 when buybacks were illegal. For the big players it is just a pump and dump with extra steps. The employees get squeezed and inequality increases at the same time value is lost. This is a method of value extraction not value creation.

[weswest]

If a company has a high dividend it’s actually in their favor in the long term to buy back shares since then they’d have less shares to pay dividends too forever.

[behrensf]

Companies usually do share buy backs at the worst time, when shares are expensive.... best time to do it is when the stock is tanking...

[kandredfpv]

Loved how detailed this explanation was.

[TheKeyTakeaway]

Very detailed explanation. The EPS increase example specifically was something that I hadn’t thought of.

Don’t you think however that if such thing happens like your example, the stock price could ultimately go down as a result of doing a relative valuation with its peers or the sector, and that until the market becomes rational and accepts it as the new P/E ratio it could remain affected? (Which, as we know, is an unknown amount of time)

[CaseyBurnsInvesting]

Buy backs. It’s good to be able to spot them so you don’t invest in a company that’s abusing them. Unfortunately usage of this knowledge is not common or otherwise very practicable among employees of the firms.

[ethanboyd]

Wait, a buyback for personal gain that hurts the company would violate a boardmember's fiduciary duty. And that can't happen.

[acommenter]

can a company do the reverse?
ie print new stocks and devalue the current shareholder's holding to raise capital?

[n.r.]

Love the channel. The argument of dividend double taxation is not really applicable because (at least in Canada) the CRA “grosses up” incoming dividends to individuals and then provides a tax credit to the individual based on the grosses up amount to offset taxes paid at the corporate level. Great vid as always!

Edit: obviously the buybacks still defer taxes of an individual compared to a dividend paid.