BHP Buyback Scheme

[R Man]

Hey folks,

I was just wondering if those who are up to date with their knowledge on the share market could explain to me (as a lehmann on this topic) what the benefits are for the shareholder to sell back their shares to BHP.

I understand they are offering to buy their shares back at a reduced rate, but the flipside is we don't have as much 'capital gains tax' to pay or something to that effect.

So, apparently, we can say that we made a loss on our shares to offset any gains we may make in the future with other shares...?

Help.... haha

 

[Ghostwriter]

A company I hold is currently doing a buy back, and the price is rising.

 

[DoubleA]

Another reason not to sell?

http://www.heraldsun.news.com.au/common/story_page/0,5478,18669279%5E664,00.html

 

[snagage]

A share buyback is when a company with spare cash buys some of its own shares. This effectively takes some shares off the market and increases the value of the remaining shares on the market. It's a capital management technique used to return value back to shareholders (similiar in that aspect as dividends).

Example - company XYZ
Net Profit pa = $1million
Number of shares = 1million
Profit per share = $1

Say the company has lots of spare cash and wants to return value back to shareholders and decide to buy 500K shares from a total of 1M from the market. After the purchase there are now 500K outstanding shares and the profit per share becomes $2. You end up having "more company" per share.

 

[Borscht Mat]

A share buyback is when a company with spare cash buys some of its own shares. This effectively takes some shares off the market and increases the value of the remaining shares on the market. It's a capital management technique used to return value back to shareholders (similiar in that aspect as dividends).

Example - company XYZ
Net Profit pa = $1million
Number of shares = 1million
Profit per share = $1

Say the company has lots of spare cash and wants to return value back to shareholders and decide to buy 500K shares from a total of 1M from the market. After the purchase there are now 500K outstanding shares and the profit per share becomes $2. You end up having "more company" per share.

ummmm no.

Putting aside "market expectations" simplisticly the value of a share is the value of the company divided by the number of shares....not profit per share. So, using your example:

Example - company XYZ
Value of Company = $1million
Number of shares = 1million
Price per share = $1

If the company then buys back 500k shares @ the market price then the company looks like this:

Value of Company = $500k ($1M minus $500k spent on the shares)
Number of shares = 500k
Price per share = $1

So why does the price of companies go up (generally) when there is a share buyback, and down when there is a capital issue ?

The answer is purely psychological. First you have to ask yourself "who knows the most about the future operations of the company ?". It is not some ********er fund manager, or some housewife screen jockey. The people who know the most about the future value of the company are the management of the company (ie the company itself). Under a share buyback, what is the management (company) doing ? They are buying . So, if the people who know best are buying the stock then it must be a good time to buy and so the market follows.

If a company is issuing new capital then it is selling part of the company. So if the people who know best are selling then the market also sells and the share price goes down.

In some countries there may be some different tax treatment between dividends and buybacks, but even when there is no difference (say in UAE where both rates are 0% share prices still rise on buybacks (typically about 2.5%) and fall on issues by the same amount.

 

[Kurt Angle ©]

A company will buy back it's shares if it's own analysts deem the share price to be under valued.

The main reason is equity is more expensive than debt.

It seeks to remove the amount of equity in the market.

 

[snagage]

Value of Company = $500k ($1M minus $500k spent on the shares)
Number of shares = 500k
Price per share = $1

So why does the price of companies go up (generally) when there is a share buyback, and down when there is a capital issue ?

The answer is purely psychological. First you have to ask yourself "who knows the most about the future operations of the company ?". It is not some ********er fund manager, or some housewife screen jockey. The people who know the most about the future value of the company are the management of the company (ie the company itself). Under a share buyback, what is the management (company) doing ? They are buying . So, if the people who know best are buying the stock then it must be a good time to buy and so the market follows.

If a company is issuing new capital then it is selling part of the company. So if the people who know best are selling then the market also sells and the share price goes down.

You do know the difference between net tangible assets, market capital and intrinsic value? Your calculations are based on NTA which has nothing to do with what the company is actually worth.

Share buybacks happen when a company has spare cash and don't have any new things to undertake with it that will return similiar margins they currently do. Issuing of share happen when a company is either out of money or new more money for new projects.

It's nothing about the people that best knows the company thinks it's a good buy. They gain nothing from it. If they thought it was a good buy they'd be buying for their own personal account. Share buybacks are about returning value to shareholders.

Here's some education for you: http://en.wikipedia.org/wiki/Dividend. There's a section on share buybacks.

 

[Borscht Mat]

You do know the difference between net tangible assets, market capital and intrinsic value? Your calculations are based on NTA which has nothing to do with what the company is actually worth..

actually it doesn't matter. It is simply division. The market values a company at a given value (based loosely around the present value of expected future earnings) and the share price is this divided by the number of shares issued. My point was simply that what most people miss in analysing share buybacks is that value leaves the company. In this way a SBB is no different from paying a dividend. It is a return of capital to shareholders.

Share buybacks happen when a company has spare cash and don't have any new things to undertake with it that will return similiar margins they currently do. Issuing of share happen when a company is either out of money or new more money for new projects.

How many companies would come out and say "we have too much money and we do not know what to do with it". Now shareholders like cash....because cash inside a company gets spent on nice carpet and corporate jets, so shareholders would typically like to have the cash and then decide themselves whether to reinvest. But companies can achieve this through paying a dividend as well....so why would a company choose a SBB over a dividend even in some countries where the tax situation is identical ?

It's nothing about the people that best knows the company thinks it's a good buy. They gain nothing from it. If they thought it was a good buy they'd be buying for their own personal account. Share buybacks are about returning value to shareholders.

Actually, it is everything about that.

Simplistically coompanies have 3 choices. In this example imagine I run a company that you own. It is worth $2 and you have 2 shares.

a. I can do nothing (retain all value in the company). You have

2 shares @ $1 each and zero cash in your pocket. Total s.h. value = $2

b. Pay a dividend of $1.

You now have 2 shares worth $0.50 plus $1 cash. Your total value = $2.

c. Buy back one of your share for $1.

you now have 1 share worth $1 and $1 cash. Your total value = $2.

So, in a rational world, and where tax is equal you would not care one way or the other.

Now most shareholders prefer cash in their hand so most companies either pay a dividend or a share buyback. But out of (b) or (c) why would you care one way or another ?


SBB are a way of returning capital to shareholders (as are dividends) but not value. The value a shareholder has is still $2 in the above example