Expanded Share Buyback

  

See: Share Repurchase.

Company X was buying back its stock at a clip of 10,000 shares a week, steady Eddie, keeping up with its own dilution via the granting of stock options to employees. It prevented share creep, at least a bit. But then the stock went from $30 to $22 a share, and the company thought that, at $22 a share, their own stock was a steal...so they received Board resolution and expanded their share buyback.

This fine process is usually done via the filing of an 8K form and then a 10b5-1 plan, which clearly states to anyone bored enough to read the forms how and when and in what way the company will buy back its own stock.

Key thought: you do not want to be the lawyers putting together these documents. That circus clown gig would have been way more fun.

Related or Semi-related Video

Finance: What is a share buyback?1 Views

00:00

Finance allah shmoop what is a share buyback Investors put

00:07

a price on stocks every day every minute every second

00:10

they're willing to pay a certain price for that little

00:12

slice of pie of ownership in a company in that

00:15

price is re calculated all during the trading day Well

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generally speaking over time those prices are there or at

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least fair enough that is they're close enough to the

00:24

value that the company places on itself that the company

00:27

doesn't directly actively try to do anything about its share

00:30

price Structurally companies are of course always trying to you

00:33

know market themselves toe wall street but it's a rare

00:36

thing when companies actively hold up three fingers and tell

00:40

wall street Teo you know read between the lines when

00:43

companies flip the street the bird they're basically saying you

00:46

guys are idiots you don't get us our stock is

00:49

worth way more than what you're paying for it so

00:51

then cos basically put their money where their mouths or

00:54

ah you know fingers are sometimes both so then the

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company begins the process of buying itself back from whatever

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pieces are controlled are owned by wall street and or

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the public that is The company goes into the open

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market and starts buying back its stock one share at

01:09

a time Mcgee dot com makes gummy shaped candies in

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weird semi erotic shapes A recent dental rating came out

01:22

which stated that shmoop gigi's were terrible for your teeth

01:25

and people should not eat them It came from that

01:27

darn fifth dentist who never recommends colgate toothpaste All right

01:31

well under this news fourteen of the six thousand stores

01:36

who sell shmoop gigi's pull the shmoop gigi's from their

01:39

shelves costing the company may be a penny a share

01:42

in earnings that quarter Like no big deal Instead of

01:45

earning a dollar and a penny this year well they'll

01:47

only earn a dollar big love big crisis in the

01:50

press though for like thirty seconds and then really no

01:53

big deal financially iii nobody cares That's mcgee's air bad

01:57

for you They are the chewy version of cigarettes and

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kim kardashian right Well the stock however goes from trading

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at twenty five dollars a share to just eight dollars

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a share under a daily day luge of negative blog's

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from school mothers who swear they'll never buy shmoop gigi's

02:13

again And what were they buying Semi erotic shape things

02:16

for their children anyway Like who are these mothers And

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were they Really for the children All right well we

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won't get into it The company has no debt and

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it has four bucks a share in cash and no

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big cap pecs needed like a new shmoop gigi smelting

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machine factory on the horizon Will the company doesn't need

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all the four dollars a share that they have and

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think about that that's four dollars a share on an

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eight dollars stock price Like a cat the stock prices

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just cash It generates about a dollar a year in

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cash cash flow So at the very least it decides

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to immediately by back twenty percent of its shares outstanding

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Happy to put toe work a few dollars a share

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of cash on its books if you think about that

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eight bucks a share Four bucks in cash and earns

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a dollar means that the equity cap trading it four

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times cash earnings like super cheap All right Well with

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one hundred million shares outstanding they had four hundred million

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dollars in cash and a market valuation of eight hundred

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million bucks Will the company files a special form called

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the ten b fiveone form which outlines how they will

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buy back Every share they can up to two hundred

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million dollars worth of stock for eight bucks a share

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or cheaper like stock goes down from eight dollars They'll

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buy more If goes up above eight dollars They'll just

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stop knucklehead mothers and angry dennis continued to negatively blawg

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about human g and a stock stays cheap but exactly

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eight bucks a share or less So the company is

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able to buy back two hundred million dollars worth of

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stock that's two hundred million dollars divided by eight bucks

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a share or twenty five million shares they've just bought

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back When finally the negative stories go away the sellers

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of their stock have completely sold out and the stock

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starts to go up again on lee Now things were

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a bit different instead of the company having four bucks

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a share in cash while the company now has two

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bucks a share in cash right they took two dollars

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a share or two hundred million dollars to buy back

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twenty five million shares of their own stock So now

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they have a bit less cash but the company is

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still producing a dollar a year in cash earnings and

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in two years it should have more than four dollars

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a share in cash again just through normal cash production

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way More importantly the company has shrunk it's capitalization from

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a market valuation of eight hundred million dollars Remembered how

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one hundred million shares It was eight dollars times one

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hundred Yeah only now the company has bought back twenty

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five million share so it went from having one hundred

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million out too Just seventy five million Will the new

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market value placed on the company at eight bucks Well

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it's eight times seventy five million or six hundred million

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dollars cheap So at the moment they stop buying back

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stock they had two hundred million dollars in cash or

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two bucks a share in cash An equity valuation was

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four hundred million dollars That were doing all the math

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here for you Very cheap for a company expecting to

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have earnings of over one hundred million dollars next year

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Right It's still trading it four times on this number

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Note Also what has dramatically changed here in orderto earn

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a dollar a share Before the share repurchase the company

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had to have one hundred million bucks and earnings right

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One hundred Million dollars divided by one hundred million shares

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of stock equal one dollars sharing earnings but now the

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company will still earn that hundred million dollars The naysayers

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have all gone away but now the company has only

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seventy five million shares outstanding So on the same hundred

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million dollars in earnings they now earn one hundred divided

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by seventy five equals a dollar thirty three a share

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instead of just a dollar Note also that when the

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company was a twenty five bucks a share before bushman

05:31

gigi thing hit the fan the equity value of the

05:34

company was twenty one times its earnings That is it

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was the twenty five dollars a share minus the four

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dollars in cash to get twenty one divided by the

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dollar a share in earnings there That was twenty one

05:44

times the earnings of the company in equity value but

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now the company's bought back a fourth of its shares

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Were it to return to that twenty one times earnings

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for the equity value Well that would be twenty one

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times that dollar thirty three Two equal twenty eight dollars

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a share It's a lot easier to earn better than

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a dollar A share when they have only seventy five

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million shares outstanding after this By back then it would've

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been with a hundred million And this is the dream

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scenario of share buybacks Cos time the bottom in their

06:13

own stock price And when their price gets quote stupidly

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cheap unquote they file a bunch Papers Teo give crystal

06:20

clarity and disclose the details of the proposed by back

06:23

And if they're lucky there ends up being a rosy 00:06:26.034 --> [endTime] shmoop g at the end of the rainbow

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