RE:RE:KelvinKelvin wrote: Well CountryBoy69 I must be thick or something. I still don't get it. If you have a pool of $1000 with 1000 people having an equal claim on it then that's $1 per claim or share. So say you want to reduce the number of shares to 500. How do you do that? One way is to take $500 from that $1000 pool and buy 500 shares from 500 people so that you have $500 left claimed by 500 people which is $1 per share, the same as it was when you had 1000 people claiming $1000. I can't think of a way to reduce the number of shares and have the sp go up.
You need to find the cash somewhere to buy the shares. The only place that it can come from is the pool or total assets. I guess that you could borrow the $500 but then the lender now has a claim on that $1000 pool leaving $500 available for 500 people or, again, $1 per share.
Or you could increase the pool to $2000 by increasing net income by $1000. So now you have $2000 claimed by 1000 people or $2 per share. To buy back 500 shares would cost $1000 leaving $1000 claimed by 500 people or $2 a share, the same as it was before the buy back.
So there we have it. The only way to increase sp is to increase total assets because even paying a dividend reduces total assets just like share buy backs do.
So instead of using fcf to buy back shares or pay dividends use it to grow total assets instead. That way the sp is sure to go up and stay up.
I'm watching live coverage of hurricane Idalia on Fox Tampa Bay on Youtube. It's gonna be devastating for the big bend area on the Florida coast. Talking about a 15 foot storm surge!
Your example doesn't work because it is static. Corporations are not static, they are going concerns.
So, if you have 1000 in distributable cash and 1000 shares, and you buy back 500 shares at a buck a piece you're left with 500 bucks and 500 shares out. It's a buck a share.
But, as I said, the corporation is a going concern. The following year it again produces 1000 in distributable cash. You've only got 500 shares out, so the corp has earned 2 bucks per share in distributable cash.
Buybacks lower the sharecount so assuming mgmt doesn't turn around and re-dilute by handing out shares to mgmt as comp, each share goes up in value.