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According to the article being referred to:
https://hbr.org/2001/04/is-a-share-buyback-right-for-your-company
"Contrary to the common wisdom, buybacks don’t create value by increasing earnings per share. The company has, after all, spent cash to purchase those shares, and investors will adjust their valuations to reflect the reductions in both cash and shares, thereby canceling out any earnings-per-share effect. If increasing earnings per share were the only rationale for buybacks, they would have no impact on value"
Kev
''But Vodafone will have 4 billion less cash afterwards, so why should it translate to a price increase?''
oh dear
''If I have a company worth £10 million and it has 10 millions shares at a £1 each, using £5 million of the companies cash to buy back 5 million shares means I'm left with a company worth £5million with 5 million shares worth £1 each.''
oh dear
Business valuations are based on assets and profits that can be generated. If a Billion is made via a dividend payment then that loss in assets is reflected in the share price immediately on xd day. The following profitability should then plug that asset gap made from the dividend payment. Buybacks for cancellation are assets (cash) leaving the business very slowly each day over a prolonged period. Providing profitability remains at least the same, then the money spent will be replenished, meaning that providing the market does not give a lower valuation to the business, and because shares are fewer in number, that would mean the price per share would be greater.
Pokerchips, I don't unserstand your point.
My point is very simple.
If a company does a buyback, this does not change the net earnings of the company.
The buyback reduces the number of shares outstanding.
Therefore, earnings per share go up.
Everything else being equal, the price of the shares should go up.
Dividends are a different issue.
If the company pays a dividend, it can keep the same dividend per share, while lowering the total dividend expense. This is another advantage of buybacks.
" the stock price should go up to £2, "
The profit amount would be the same and the allocation of profit to dividends would no doubt stay the same..
.. what you go up would be the div/share and that would be what you would end up paying more to obtain..
March 19 (Reuters) - Vodafone Group PLC (VOD.L):
* VODAFONE : VOXI BY VODAFONE HAS LAUNCHED A NEW LARGE LANGUAGE MODEL (LLM) GENERATIVE AI CHATBOT IN COLLABORATION WITH ACCENTURE
Only improved earnings and BOD performance really improve the SP...along with sentiment etc
Buybacks merely improve the div per share allocation of the total div pool amount
...but the initial total amount still has to come from earnings..
The Investment bankers/Option traders/shorters etc dont care about MCAP ...they merely trade on the likely achievement or not of any BOD guidance and key targets using macro sentiment etc
KenRow, I think Gohanito has already answered.
Anyhow, I had already prepared this example, therefore I post it.
Let’s assume that the market value of a company is £10 million.
There are 10 million shares; each share is worth £1.
Let’ assume that the net profit of the company is £1 million.
Therefore, P/E=10
Now let’s buy back shares worth £5 million. For simplicity, assume that the stock price doesn’t change during the buyback period. At the end of the buyback period, as you correctly says, the company has zero cash and has bought 5 million shares; let’s cancel those shares. Apparently, the result is a company worth £5 million (because cash is now zero), with 5 million shares, each worth £1.
However, the net profit of the company is still £1 million (there is no reason why that should change). That would imply P/E=5. For P/E to remain unchanged, the stock price should go up to £2,
However, it is reasonable to expect a stock price between £1 and £2, for two reasons: 1) the stock price will probably start to go up when the company starts the buyback, therefore fewer shares can be bought; 2) the company has less cash and therefore it is riskier.
KenRow - hopefully the below will prove helpful in understanding buybacks. You can never tell if buybacks will result in share price appreciation as these depends on a host of other factors besides the buyback.
https://hbr.org/2001/04/is-a-share-buyback-right-for-your-company
KenRow, my post was partly wrong, but the correct answer lies in between.
I’ll try to explain it later because I’m out for a walk.
"If I have a company worth £10 million and it has 10 million shares at a £1 each, using £5 million of the company’s cash to buy back 5 million shares means I'm left with a company still worth £10million (in the balance sheet of the company cash is substituted by the 5 million shares). The residual outstanding 5 million shares are now worth £2 each. "
In the scenario above, it sounds like the shares haven't been cancelled. It should like there would still be 10 million shares but the company would just own half of them?
"If I have a company worth £10 million and it has 10 millions shares at a £1 each, using £5 million of the companies cash to buy back 5 million shares means I'm left with a company worth £5million with 5 million shares worth £1 each."
What about if I have a company with 60million assets and 50 million debt? I sell 5 million assets, use the cash to buy back shares. I now have company worth 55 milion with 50 million debt. Does that look better to potential investor?
Now the clever ones here will say "ahh but those assets were not paying their way". And this is where we disagree. Not everyone can run a Telco or Google or SpaceX. I can guarantee you in the right hands those "worthless" assets will pay their way. Zegona and Swisscom know how to make it successful, Vodafone doesn't. This is not my view, look at their share price in last 5 days and look at Vodafone. Don't be fooled by the "finance strategy", this remains a Telecom who doesn't know how to run a profitable business in Europe.
"KeRow,
The companies cash in the bank is only a very small factor in the calculation of the market capitalization, so your argument is flawed. You are confusing the companies cash position with market capitalization (worth).
Many companies are in net debt after assets and liabilities are factored in, and yet their market capitalization is positive, not negative, because revenues, profits and cash flow are bigger factors for the MC."
Thanks for the reply.
It is still selling off an asset and using the cash to buy back your own shares rather than, for example, using excess profits such as when an oil &gas company might buy back shares when the oil price has been higher than expected. So why would selling off an asset/using cash on your balance sheet boost the price rather than just cancel each other out?
It just seems like moving money around as the market cap will be less and the number of shares will be less. I'm oversimplifying but I'm not clear where the value that will translate into a share price increase will be unlocked. Is the belief that once the company is 4 billion lighter, it will be worth the same?
KevRow, I think there is a mistake.
You write:
If I have a company worth £10 million and it has 10 million shares at a £1 each, using £5 million of the company’s cash to buy back 5 million shares means I'm left with a company worth £5million with 5 million shares worth £1 each.
It should be:
If I have a company worth £10 million and it has 10 million shares at a £1 each, using £5 million of the company’s cash to buy back 5 million shares means I'm left with a company still worth £10million (in the balance sheet of the company cash is substituted by the 5 million shares). The residual outstanding 5 million shares are now worth £2 each.
Then there is a consequence for dividend payout. Assuming that the companies pays a dividend, every shareholder will continue to receive the same dividend, but the total dividend bill will be cut by half.
KeRow,
The companies cash in the bank is only a very small factor in the calculation of the market capitalization, so your argument is flawed. You are confusing the companies cash position with market capitalization (worth).
Many companies are in net debt after assets and liabilities are factored in, and yet their market capitalization is positive, not negative, because revenues, profits and cash flow are bigger factors for the MC.
"Rob
''i suspect it will be of no benefit whatsoever''
it is a 4 Billion euro benefit to shareholders."
But Vodafone will have 4 billion less cash afterwards, so why should it translate to a price increase?
If I have a company worth £10 million and it has 10 millions shares at a £1 each, using £5 million of the companies cash to buy back 5 million shares means I'm left with a company worth £5million with 5 million shares worth £1 each.
There is at least an important shareholder that certainly does not like the new strategy, and that is Xavier Niel. Probably he had bought puts to protect his investment in Vodafone and now he’s selling his stake.
This is good though right? Because the buybacks have more impact if the share price is at 40p than at 80p.
Rob
''i suspect it will be of no benefit whatsoever''
it is a 4 Billion euro benefit to shareholders.
Longtimeinvestor
how much do you think these buybacks would increase the share price
I suppose it depends how long you intend being invested here, in the short term probably zero
So for anyone like myself who just wants to see this rise as quickly as possible i suspect it will be of no benefit whatsoever, I suppose it depends on how rewarding you think this investment will be in the coming years or not, each to his own i suppose
Euro is planned to be spent on buybacks for cancellation. That equates to getting on for 20% of the current market cap, so that gives an indication of how much each share would rise in price if the market cap remained constant, over that long period with such a removal of shares from the market. Obviously that is unlikely Vodafone will more likely have a lower or higher market cap in a couple of years time.
Long
''Still, the div is reduced to 4.5c later this year regardless of how many shares. I am going to miss that income as an investor''
The first reduction will be the February 2025 payment. The reduced forward dividend yield based on the current share price will still be above the ftse 100 average. Billions are planned to be returned to shareholders via buybacks, which makes a great deal of sense whilst the valuation is very low, and it also gives more flexibility.
''Still have UK 3 to look forward to but that might be after the election.''
News to move the process along is due on Friday. A UK merger with 'three' will be a of good benefit.
Rob
''how much do you think these buybacks would increase the share price''
the sole purpose of a return to shareholders by way of buybacks for cancellation is to reduce share capital.
The value of each share will depend upon the value that the market places on the Vodafone business divided by the number of shares in issue. The market value fluctuates each day.
'I would rather that money was invested on reducing the share count, and therefore in the future having monies allocated to dividends being available to fewer shares than stuck in an asset making no returns. '
Still, the div is reduced to 4.5c later this year regardless of how many shares. I am going to miss that income as an investor
On a positive, what is left in europe after getting rid of italy and spain , is growing at 3% pa.
Still have UK 3 to look forward to but that might be after the election.
Holding for now
Longtimeinvestor, how much do you think these buybacks would increase the share price and how long would it take
Have they said when the buy back will start?