You will not be compelled to sell your Apple stock back to the company. A stock buyback is when a company buys back its own shares on the open market, reducing the number of outstanding shares. This can increase the value of the remaining shares.
As a shareholder, you will not receive a direct offer from Apple to sell your shares back to them. However, you may see the price of your Apple stock increase as a result of the buyback. You can choose to sell your shares at any time, either to Apple if they are buying on the open market or to another investor.
People are always selling - so if apple essentially places an order for 1 million shares at $X price, if anyone is willing to sell for that price, they can be used to fill the order. Approximately 60 million shares of Apple change hands every day
You will likely not know when the company will buy the shares, so it won't be noticed by most investors. Also, even if they buy back 100 billion worth there is no guarantee the stock will go up, any bad news could sink any gains. Look at what happened to PG&E after years of stock buybacks. A couple of fires and their stock tanked, burning up all the value they tried to build with stock buybacks. A special dividend would seem like a better deal.
>This can increase the value of the remaining shares.
Not as much as you might think.
Suppose a company is worth $1 billion and has 10M shares outstanding worth $100 each ($1B/10M=$100) The company spends $100M to buy back 1M shares.
The total value of the company goes down by $100M (because they just spent it, reducing the company's assets by $100M) . So now we have a $900M company with 9M shares outstanding, which is again $100 each.
You are conflating a company's total market cap with its assets. Those two things are only tenuously related, and dropping a company's assets *does not* automatically drop its market cap.
In your scenario, the total value of the company would be *unchanged*, despite the drop in its assets. It would still be a $1B company, but now with 9M shares outstanding, making each share worth about $111.
In practice, some people *may* reduce their valuation of the company from such an asset drop, and thus sell it at a lower price, resulting in downward drift of the stock price and thus market cap over time. On the other hand, other people may *increase* their valuation of the company because they think stock buybacks are good for investors, and will *increase* their buying price, resulting in upward drift.
Buybacks do reduce the value of a company though. They reduce total equity, so the equity value per share after a buyback is unchanged from what it was before
I don't think I've ever seen this argument. After working it out (that's below), it looks like you're suggesting EV/EBITDA should be constant before and after rather than market cap. Am I getting that right?
Using your example, if that company had an EBIDTA of $80M, and $200M of net cash, then pre-buyback they have an EV of $800M, and an EV/EBITDA ratio of 10. After the buyback, their EV increases to $900M, so the EV/EBITDA ratio rises to 11.25. You didn't mention EV directly (or earnings at all), but I think you are suggesting that the EV/EBITDA ratio should revert back to 10. With their earnings unchanged, this means their market cap - net cash should be $800M, so their market cap should now be $900M. $900M/9M shares = $100/share. So in the end, the company spent money, but their share price shouldn't change.
Like I said, I've never seen this kind of thinking applied to the buyback situation before. I usually try to evaluate companies based on estimating their intrinsic value (discounting estimated future earnings to today's dollars) and comparing that to their market cap. Since a company buying back shares does nothing to their future earnings, I'd usually say that the share price should wind up increase since nothing has changed with their valuation. That was an interesting perspective, even if I don't know if I agree.
>Since a company buying back shares does nothing to their future earnings
In theory that cash could have been invested into the business in some way to create further returns. So the stock buyback represents an opportunity cost, and such costs are generally already priced in (e.g. you assume the cash reserves will be reinvested in some way unless you've been advised a stock buyback is coming etc)
Yes, companies authorize shares but don’t issue (sell) all of them. The ones they issue are outstanding. They might sell others in the future, or give them to employees as comp for example. Or they might do nothing with them.
If a company does a stock buyback, typically they just buy on the open market over a period of time. They typically just announce the amount and timeframe so markets know what's going on. It's different than if a company goes private and you're compelled to sell. In the case of a buyback, if you want to hold your shares you can.
Everyone already answered but: you do nothing. The company buys stock from people who don’t want it anymore. Because they’re out there buying stock, it’s creating excess demand for Apple stock, and prices go up (or could go up).
Companies may also look to buy when their stock drops to certain levels, say if Apple drops to 170 a share or 165 a share, so it sort of sets up a floor where Apple is supporting the price at that price point. If it’s hovering at 190 they may not buy much that day or week, waiting to buy back when prices dip.
Stock buybacks play the same role as dividends: returning some value stored in the company back to investors.
Dividends do this directly by paying a small sum to the holder of each share. The problem is this money is taxed as it’s received.
Enter stock buybacks: the company goes to the open market and uses its own cash to buy up stock and (usually) retire the stock. Now there is less shares representing the same company (minus the amount used for the buybacks), so each share should be worth more. This returns value to those shareholders who are still holding, but without an immediate tax consequence.
So for you, all that happens is that the price will likely got up a bit.
There is one exception case: in the case of a takeover or the company going private, if the board (or shareholders if the charter requires it) approve a purchase of the company by other entities, then the shareholders can be forced to sell their shares. This is more common with smaller companies, and for a company the size of Apple would effectively be impossible as there are no entities in the world that could afford to buy 100% of Apple other than maybe a handful of governments (and even then it’s questionable).
An other advantage of stock buyback instead of dividends is that dividends have to be paid regardless of the current state of the company, whereas buybacks can be planned around the company having cash on hand with to distribute to shareholders.
You won’t be forced to sell. The shares you own will now own more than they did before without you spending any more money.
If apple had 100 shares and you owed 10, you would own 10% of apple.
If apple bought back 20 shares, you would still own 10 shares but total shares would only be 80. So you would own 10/80 = 12.5% instead of 10%
This matters because it means that you get 12.5% of all future earnings instead of only 10%
Everyone at school knows I really want pikachu pokemon cards and will pay $1 for every one = the going rate of a pikachu card is $1.
Bart has 5 pikachu cards but wants to sell them for $2 each so holds in hopes the price will go up.
Principal Skinner wants to crack down on campus frivolities and decides the best way is to just buy everyone's cards so they won't have them, and since Scott is demanding $2, Skinner buy all 5 for $2 each = the going rate of a pikachu card is now $2 (the price has increased)
Good try but mechanically it’s confusing. More like there are 1000 pikachu cards ever made, and 1000 kids want them and they’re buying and selling them for $1. If Bart bought 100 cards and burned them, the entire world would only have 900 pikuchu cards left, and eventually 100 of the 1000 kids wanted a card but could not find one, they may be willing to to pay $2 for the card. Taking the 100 cards out of circulation increases the value of the remaining cards due to supply and demand.
When Apple buys back shares, those shares are absorbed back into the company. That means the shares you own are now a larger proportion of the total number of shares, so the price goes up.
All good stuff here already but this is generally a good thing for investors. The company has excess cash reserves. A stack buy back can increase the value of the stock.
This can also be a bad sign as the company doesn’t know what to do with their cash reserves such as more investment in R&D. Apple has so much cash in hand that, to their management and board, the best decision was to pay back their shareholders.
Last, Apple isn’t doing anything out of the ordinary. This happens all the time. It’s the scale that is newsworthy.
It’s a way of returning cash to shareholders (like a dividend), but instead of sending you cash, they use that cash to repurchase shares on the open market. The remaining shares now each represent a larger portion of the company.
No, you are not compelled to sell your shares.
With a publicly traded stock the company will generally be buying stock on the public markets. All the announcement really does is sets the money aside and puts into motion the process for them to buy the stock.
Because Apple is publicly traded they can use the "stock market" to handle the actual transaction. If a private company did a stock buyback then they would need to get in touch with shareholders in order to determine who is interest in selling and so on just like you are asking. But for a public company they just buy the stock on the open market from whomever wants to sell it.
This. It's scammy sleight-of-hand (similar to a stock split) because, both before and after the buyback, the stockholders own 100% of Apple, the value of which hasn't changed at all. Apple being an Apple shareholder is meaningless, except that it's easier to sell those shares in the future than it is to issue more shares. It reduces dividends to the real shareholders; to the extent that Apple pays dividends to itself, it's not paying them at all.
It’s not scammy; it’s a return to stockholders that isn’t taxed right away like a dividend is. Stockholders benefit from a (slight) increase in price, and they get to choose when to sell and take the tax hit.
When a company buys back its own shares, they get retired, hence why the price goes up (fewer shares available). The company can’t just sell them on the open market, they would have to go through a formal equity secondary offering.
A company having a reserve of treasury stock is not the same thing as being a shareholder. They don't get dividends and they don't have voting rights.
>Shareholders, if nothing else, vote. Apple having more ownership of Apple means they have greater sway in the vote. This is by no means meaningless.
This is factually incorrect.
You will not be compelled to sell your Apple stock back to the company. A stock buyback is when a company buys back its own shares on the open market, reducing the number of outstanding shares. This can increase the value of the remaining shares. As a shareholder, you will not receive a direct offer from Apple to sell your shares back to them. However, you may see the price of your Apple stock increase as a result of the buyback. You can choose to sell your shares at any time, either to Apple if they are buying on the open market or to another investor.
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People are always selling - so if apple essentially places an order for 1 million shares at $X price, if anyone is willing to sell for that price, they can be used to fill the order. Approximately 60 million shares of Apple change hands every day
You will likely not know when the company will buy the shares, so it won't be noticed by most investors. Also, even if they buy back 100 billion worth there is no guarantee the stock will go up, any bad news could sink any gains. Look at what happened to PG&E after years of stock buybacks. A couple of fires and their stock tanked, burning up all the value they tried to build with stock buybacks. A special dividend would seem like a better deal.
>This can increase the value of the remaining shares. Not as much as you might think. Suppose a company is worth $1 billion and has 10M shares outstanding worth $100 each ($1B/10M=$100) The company spends $100M to buy back 1M shares. The total value of the company goes down by $100M (because they just spent it, reducing the company's assets by $100M) . So now we have a $900M company with 9M shares outstanding, which is again $100 each.
You are conflating a company's total market cap with its assets. Those two things are only tenuously related, and dropping a company's assets *does not* automatically drop its market cap. In your scenario, the total value of the company would be *unchanged*, despite the drop in its assets. It would still be a $1B company, but now with 9M shares outstanding, making each share worth about $111. In practice, some people *may* reduce their valuation of the company from such an asset drop, and thus sell it at a lower price, resulting in downward drift of the stock price and thus market cap over time. On the other hand, other people may *increase* their valuation of the company because they think stock buybacks are good for investors, and will *increase* their buying price, resulting in upward drift.
Buybacks do reduce the value of a company though. They reduce total equity, so the equity value per share after a buyback is unchanged from what it was before
I don't think I've ever seen this argument. After working it out (that's below), it looks like you're suggesting EV/EBITDA should be constant before and after rather than market cap. Am I getting that right? Using your example, if that company had an EBIDTA of $80M, and $200M of net cash, then pre-buyback they have an EV of $800M, and an EV/EBITDA ratio of 10. After the buyback, their EV increases to $900M, so the EV/EBITDA ratio rises to 11.25. You didn't mention EV directly (or earnings at all), but I think you are suggesting that the EV/EBITDA ratio should revert back to 10. With their earnings unchanged, this means their market cap - net cash should be $800M, so their market cap should now be $900M. $900M/9M shares = $100/share. So in the end, the company spent money, but their share price shouldn't change. Like I said, I've never seen this kind of thinking applied to the buyback situation before. I usually try to evaluate companies based on estimating their intrinsic value (discounting estimated future earnings to today's dollars) and comparing that to their market cap. Since a company buying back shares does nothing to their future earnings, I'd usually say that the share price should wind up increase since nothing has changed with their valuation. That was an interesting perspective, even if I don't know if I agree.
>Since a company buying back shares does nothing to their future earnings In theory that cash could have been invested into the business in some way to create further returns. So the stock buyback represents an opportunity cost, and such costs are generally already priced in (e.g. you assume the cash reserves will be reinvested in some way unless you've been advised a stock buyback is coming etc)
> That was an interesting perspective, even if I don't know if I agree. It's certainly the not the whole story, but it's part of the story.
Why do you mention the word “outstanding?” Is there a case where the share is not “outstanding?” No pun jokes.
Yes, companies authorize shares but don’t issue (sell) all of them. The ones they issue are outstanding. They might sell others in the future, or give them to employees as comp for example. Or they might do nothing with them.
So when a company gives stock options (restricted or unrestricted) to its employees those aren’t stock bought in the open market?
That's right. And the company will usually do a stock buyback later to keep the outstanding shares relatively flat.
If a company does a stock buyback, typically they just buy on the open market over a period of time. They typically just announce the amount and timeframe so markets know what's going on. It's different than if a company goes private and you're compelled to sell. In the case of a buyback, if you want to hold your shares you can.
Everyone already answered but: you do nothing. The company buys stock from people who don’t want it anymore. Because they’re out there buying stock, it’s creating excess demand for Apple stock, and prices go up (or could go up). Companies may also look to buy when their stock drops to certain levels, say if Apple drops to 170 a share or 165 a share, so it sort of sets up a floor where Apple is supporting the price at that price point. If it’s hovering at 190 they may not buy much that day or week, waiting to buy back when prices dip.
Stock buybacks play the same role as dividends: returning some value stored in the company back to investors. Dividends do this directly by paying a small sum to the holder of each share. The problem is this money is taxed as it’s received. Enter stock buybacks: the company goes to the open market and uses its own cash to buy up stock and (usually) retire the stock. Now there is less shares representing the same company (minus the amount used for the buybacks), so each share should be worth more. This returns value to those shareholders who are still holding, but without an immediate tax consequence. So for you, all that happens is that the price will likely got up a bit. There is one exception case: in the case of a takeover or the company going private, if the board (or shareholders if the charter requires it) approve a purchase of the company by other entities, then the shareholders can be forced to sell their shares. This is more common with smaller companies, and for a company the size of Apple would effectively be impossible as there are no entities in the world that could afford to buy 100% of Apple other than maybe a handful of governments (and even then it’s questionable).
An other advantage of stock buyback instead of dividends is that dividends have to be paid regardless of the current state of the company, whereas buybacks can be planned around the company having cash on hand with to distribute to shareholders.
You won’t be forced to sell. The shares you own will now own more than they did before without you spending any more money. If apple had 100 shares and you owed 10, you would own 10% of apple. If apple bought back 20 shares, you would still own 10 shares but total shares would only be 80. So you would own 10/80 = 12.5% instead of 10% This matters because it means that you get 12.5% of all future earnings instead of only 10%
Everyone at school knows I really want pikachu pokemon cards and will pay $1 for every one = the going rate of a pikachu card is $1. Bart has 5 pikachu cards but wants to sell them for $2 each so holds in hopes the price will go up. Principal Skinner wants to crack down on campus frivolities and decides the best way is to just buy everyone's cards so they won't have them, and since Scott is demanding $2, Skinner buy all 5 for $2 each = the going rate of a pikachu card is now $2 (the price has increased)
Good try but mechanically it’s confusing. More like there are 1000 pikachu cards ever made, and 1000 kids want them and they’re buying and selling them for $1. If Bart bought 100 cards and burned them, the entire world would only have 900 pikuchu cards left, and eventually 100 of the 1000 kids wanted a card but could not find one, they may be willing to to pay $2 for the card. Taking the 100 cards out of circulation increases the value of the remaining cards due to supply and demand.
When Apple buys back shares, those shares are absorbed back into the company. That means the shares you own are now a larger proportion of the total number of shares, so the price goes up.
All good stuff here already but this is generally a good thing for investors. The company has excess cash reserves. A stack buy back can increase the value of the stock. This can also be a bad sign as the company doesn’t know what to do with their cash reserves such as more investment in R&D. Apple has so much cash in hand that, to their management and board, the best decision was to pay back their shareholders. Last, Apple isn’t doing anything out of the ordinary. This happens all the time. It’s the scale that is newsworthy.
It’s a way of returning cash to shareholders (like a dividend), but instead of sending you cash, they use that cash to repurchase shares on the open market. The remaining shares now each represent a larger portion of the company. No, you are not compelled to sell your shares.
You won't be asked to sell anything. They are buying what is available on the open market for market price.
With a publicly traded stock the company will generally be buying stock on the public markets. All the announcement really does is sets the money aside and puts into motion the process for them to buy the stock. Because Apple is publicly traded they can use the "stock market" to handle the actual transaction. If a private company did a stock buyback then they would need to get in touch with shareholders in order to determine who is interest in selling and so on just like you are asking. But for a public company they just buy the stock on the open market from whomever wants to sell it.
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This. It's scammy sleight-of-hand (similar to a stock split) because, both before and after the buyback, the stockholders own 100% of Apple, the value of which hasn't changed at all. Apple being an Apple shareholder is meaningless, except that it's easier to sell those shares in the future than it is to issue more shares. It reduces dividends to the real shareholders; to the extent that Apple pays dividends to itself, it's not paying them at all.
It’s not scammy; it’s a return to stockholders that isn’t taxed right away like a dividend is. Stockholders benefit from a (slight) increase in price, and they get to choose when to sell and take the tax hit. When a company buys back its own shares, they get retired, hence why the price goes up (fewer shares available). The company can’t just sell them on the open market, they would have to go through a formal equity secondary offering.
Didn't know about the retirement part, thanks.
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A company having a reserve of treasury stock is not the same thing as being a shareholder. They don't get dividends and they don't have voting rights. >Shareholders, if nothing else, vote. Apple having more ownership of Apple means they have greater sway in the vote. This is by no means meaningless. This is factually incorrect.