value
Buybacks When Cheap
The rule
Buybacks made at low prices shrink the share count and speed up every owner's return. Buybacks at high prices quietly destroy value.
Where it flips
Buybacks are not automatically good news. Managers often buy heavily near the top to flatter earnings per share, or to cancel out their own stock options. The fix: judge buybacks by the price paid and whether the share count is truly falling, not by the announcement alone.
When a company buys back its own shares, the same profit is later split among fewer shares. So each share you hold stands for a bigger slice of the business. Done when the stock is cheap, this is a strong, tax-friendly way for management to make you richer per share. But done when the stock is costly, the company overpays and gives value away. So it matters not just that a company buys back stock, but at what price it chooses to.
A worked example
Vikram holds a firm that spends ₹200 crore buying back shares while the stock trades at a modest 8 times earnings. The share count drops 6%, so his slice of every future rupee of profit grows. A rival buying back at 40 times just burns cash to prop up its price. [illustrative]
How to spot it
- ·Buybacks made when the stock is cheap
- ·Share count actually shrinking
- ·Not just cancelling out new option grants
Christopher Mayer · 100 Baggers