Comment by mdemare
11 days ago
This is not quite correct. If a dividend happens, the market capitalisation drops by the amount of the dividend, the number of shares remains constant, so the share price dips by the amount of the dividend per share. All investors get the dividend.
If a buyback happens, the market capitalisation drops by the amount of the buyback, and the number of shares drops by the same ratio, keeping the share price initially constant. The money goes to the investors who sell.
Buybacks are nevertheless good for investors who hold. They now have shares in a company whose market cap is 100% growing enterprise, instead of 90% enterprise and 10% bag of money. That means that if the company keeps doing well, the share price will increase faster than it would have done otherwise (it will also drop faster - it's no longer anchored to an inert pile of cash).
> The money goes to the investors who sell.
The investors who sell are wealthier by amount $X because now they have fewer shares and more dollars.
The investors who don't sell are wealthier by the same amount $X because the shares they kept are worth more, because prices go up.
> keeping the share price initially constant. This statement is definitely incorrect, unless you're being very technicaly and pedantic about "initially". You can think about it theoretically or you can look at empirical evidence. It is well-supported empirically that share prices go up after buybacks, and in fact they do so quantitatively by exactly the amount necessary for the equation implied above to hold.
No, this is incorrect. Investors like buybacks, so when the buyback is announced, share prices may rise, but certainly not by the amount of the buyback. They don't go up when the buyback gets executed, unlike dividends, which decrease the share price at the moment when they get distributed.
The equations are: nr_shares * share_price = cash_of_company + value_of_company_excluding_cash.
In a buyback, cash_of_company decreases by the buyback, and nr_shares decreases by buyback / share_price.
Consider the extreme case, a lemonade stand with a bank account with $1M. 1000 shares outstanding, share price $1000. After a buyback of $900K is announced, 900 shares are sold for $1000. $100K remains in the company's bank account, 100 shares remain outstanding, at ... $1000 per share.
The second sentence relies on the assumption of infinitely liquid shares, which isn't compatible with an ever–dwindling number of shares outstanding.