Stock Buybacks — the good and the bad
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Stock Buybacks — the good and the bad |
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This Video Uploaded At 28-03-2021 17:08:18 |
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Stock buybacks explained! Learn why companies buyback stock (AKA repurchase shares). Stock buybacks can seriously accelerate returns. Learn the good and the bad!
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TIMESTAMPS
00:00 Intro
00:36 The power of stock buybacks
In the book The Outsiders the author details the success and performance of 8 CEOs who did things very unconventionally. One of the things they all had in common was heavy share repurchasing.
02:30 2 Criteria for stock buybacks to make sense
Warren Buffett has commented in the past multiple times on his criteria that must be met for stock buybacks to make sense: (1) that there is available cash, and (2) that the stock is trading below its intrinsic value.
03:16 Shares outstanding re-cap
To understand why companies buy back stock it’s important to understand the what it means to own shares of stock. Shares represent ownership in a company and there is a direct relationship: if you own 1% of the shares outstanding = you own 1% of the company.
03:37 What happens when a company buys back stock
When the shares are repurchased from the existing shareholders the shares are considered retired and the total number of shares that the company’s ownership is divided amongst is reduced. Each share represents more ownership of the company.
04:23 Stock buybacks vs dividends
The CEO can decide to distribute earnings as a dividend or retain the earnings and put them to better use - one potential use is stock buy backs.
04:49 Stock buyback example
Here is a stock buyback example where we cover what would happen if the earnings were used to buyback stock instead of distributing it as a dividend.
06:24 When stock buybacks are a bad thing
Stock buybacks (aka share repurchasing) can be a bad thing if Warren Buffett’s 2 criteria are not met.
09:18 CEOs have two jobs
CEOs need to manage the operations and they also need to allocate the cash the company generates efficiently and in a way that maximizes per share intrinsic value.. however, most CEOs aren’t so great with that capital allocation job.
09:59 What the Outsider CEOs had in common
10:34 How to tell if the CEO “gets it”
A great trick to tell if the CEO is good at capital allocation is by looking at a graph that shows shares outstanding plotted with historical PE ratio (or another valuation metric like EV/EBIT). This allows you to visually see if they are repurchasing shares and issuing new shares at good time, or not.
Special thanks to my incredibly beautiful, smart, and creative girlfriend, Stephanie, for her editing wizardry and creative insights and ideas.
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