Author Topic: Should Repurchases be counted in FCF/yield per share?  (Read 17395 times)

ERICOPOLY

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Re: Should Repurchases be counted in FCF/yield per share?
« Reply #10 on: October 08, 2013, 04:34:42 PM »
as they do not flow to stockholders and are reinvested in the firm

I think you've got it backwards.  Return of capital by definition flows to shareholders, it's not a reinvestment in the firm.

It doesn't flow to shareholders. When a firm produces cash from operations it goes to the firm's equity, if it's used to buyback, it is an outflow that continuing shareholders do not see.

Then you admit, it is an outflow.  To shareholders. 

Continuing shareholders, if they wish to "see" it, merely need to sell a few shares -- bringing their % ownership back to the prior level.

EDIT: Their choice of not selling any shares, thus not witnessing any cash, is similar to a shareholder who gets a dividend while enrolled in a DRIP plan.  He never sees a bump up in cash balance in his account, but he does see his % ownership of company earnings increase.  Same as with the buyback.

Both are merely return of capital to shareholders. 
« Last Edit: October 08, 2013, 04:40:54 PM by ERICOPOLY »


BTShine

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Re: Should Repurchases be counted in FCF/yield per share?
« Reply #11 on: October 08, 2013, 04:38:58 PM »
as they do not flow to stockholders and are reinvested in the firm

I think you've got it backwards.  Return of capital by definition flows to shareholders, it's not a reinvestment in the firm.

It doesn't flow to shareholders. When a firm produces cash from operations it goes to the firm's equity, if it's used to buyback, it is an outflow that continuing shareholders do not see.

Then you admit, it is an outflow.  To shareholders. 

Continuing shareholders, if they wish to "see" it, merely need to sell a few shares -- bringing their % ownership back to the prior level.

It's value given to shareholders (essentially identical to a dividend).  IF you think the shares are overvalued, and the repurchase is a bad capital allocation decision, then the shares are too expensive and you shouldn't own them anyways.  If you already own the shares, then they're overvalued and it's time to sell.

ERICOPOLY

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Re: Should Repurchases be counted in FCF/yield per share?
« Reply #12 on: October 08, 2013, 04:42:35 PM »
as they do not flow to stockholders and are reinvested in the firm

I think you've got it backwards.  Return of capital by definition flows to shareholders, it's not a reinvestment in the firm.

It doesn't flow to shareholders. When a firm produces cash from operations it goes to the firm's equity, if it's used to buyback, it is an outflow that continuing shareholders do not see.

Then you admit, it is an outflow.  To shareholders. 

Continuing shareholders, if they wish to "see" it, merely need to sell a few shares -- bringing their % ownership back to the prior level.

It's value given to shareholders (essentially identical to a dividend).  IF you think the shares are overvalued, and the repurchase is a bad capital allocation decision, then the shares are too expensive and you shouldn't own them anyways.  If you already own the shares, then they're overvalued and it's time to sell.

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Palantir

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Re: Should Repurchases be counted in FCF/yield per share?
« Reply #13 on: October 08, 2013, 04:44:34 PM »
Then you admit, it is an outflow.  To shareholders. 

Continuing shareholders, if they wish to "see" it, merely need to sell a few shares -- bringing their % ownership back to the prior level.

EDIT: Their choice of not selling any shares, thus not witnessing any cash, is similar to a shareholder who gets a dividend while enrolled in a DRIP plan.  He never sees a bump up in cash balance in his account, but he does see his % ownership of company earnings increase.  Same as with the buyback.

Both are merely return of capital to shareholders.

No, we are discussing continuing shareholders, not those that chose to sell back to the company. If you are a continuing shareholder, then you will never see the cash, and hence it is an outflow.

When the firm buys back stock, you will see an increase in CF down the line due to increased ownership, but that's because you are forgoing current flows in exchange for higher future cash flows. Since you're forgoing current flows, it would be incorrect to count them as yours.
« Last Edit: October 08, 2013, 04:48:11 PM by Palantir »
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Palantir

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Re: Should Repurchases be counted in FCF/yield per share?
« Reply #14 on: October 08, 2013, 04:46:09 PM »

It's value given to shareholders (essentially identical to a dividend).  IF you think the shares are overvalued, and the repurchase is a bad capital allocation decision, then the shares are too expensive and you shouldn't own them anyways.  If you already own the shares, then they're overvalued and it's time to sell.

I'm not talking about whether it is value, but how to account for it during valuation.
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ERICOPOLY

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Re: Should Repurchases be counted in FCF/yield per share?
« Reply #15 on: October 08, 2013, 04:52:01 PM »
Then you admit, it is an outflow.  To shareholders. 

Continuing shareholders, if they wish to "see" it, merely need to sell a few shares -- bringing their % ownership back to the prior level.

EDIT: Their choice of not selling any shares, thus not witnessing any cash, is similar to a shareholder who gets a dividend while enrolled in a DRIP plan.  He never sees a bump up in cash balance in his account, but he does see his % ownership of company earnings increase.  Same as with the buyback.

Both are merely return of capital to shareholders.

No, we are discussing continuing shareholders, not those that chose to sell back to the company. If you are a continuing shareholder, then you will never see the cash, and hence it is an outflow.

You see the cash when you sell off the incremental % ownership.

I could ship you a set of knives packaged in a box.  You could tell me that you didn't get any knives, all you see is a box.  I tell you to open the box.

Palantir

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Re: Should Repurchases be counted in FCF/yield per share?
« Reply #16 on: October 08, 2013, 04:53:18 PM »
You see the cash later, but that's because you are forgoing current cash. Otherwise you're counting cash twice.
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ERICOPOLY

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Re: Should Repurchases be counted in FCF/yield per share?
« Reply #17 on: October 08, 2013, 05:04:10 PM »
Palantir,

1)  Company buys back shares (packaging the payload of cash into the pool of existing shares)
2)  shareholders who want to access their share of this cash then sell offsetting share(s)  -- now they have cash.  They have taken the knives out of the box.
3)  Shareholders arguing that they didn't get any cash are just refusing to open the box of knives.  But hey, it fools the tax officials so all the best!

This is smarter than a regular dividend -- it achieves the same thing for the shareholders who are willing, and it launders the dividend as a capital gain.  Those shareholders who are holding their shares at perhaps a capital loss are able to get their tax laundered "dividend" as cash while at the same time writing off a capital loss on their tax return.

Otherwise, if you merely got a cash dividend, you would be owing dividend tax even if you held the investment for a total return loss!  Boy that really sucks don't it!!

And most of the time, even if you hold your shares for a gain, your cost basis isn't as low as absolute zero, so you certainly pay less in tax.

ERICOPOLY

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Re: Should Repurchases be counted in FCF/yield per share?
« Reply #18 on: October 08, 2013, 05:07:57 PM »
You see the cash later, but that's because you are forgoing current cash. Otherwise you're counting cash twice.

You can see the cash as soon as you sell the incremental % share ownership.  I suppose "later" can asymptotically approach zero and still be defined as "later".

Similar to a person who reinvests his cash dividends automatically on a DRIP plan.  He too doesn't get the cash until "later".  Does that not qualify as cash returned to shareholders?
« Last Edit: October 08, 2013, 05:09:51 PM by ERICOPOLY »

Palantir

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Re: Should Repurchases be counted in FCF/yield per share?
« Reply #19 on: October 08, 2013, 05:13:01 PM »
I'm not suggesting that share buybacks do not add value, but rather how to account for those buybacks?

Let Adjusted Free Cash Flow = Free Cash Flow - Buybacks

Say you're investing in a company that makes 1M in FCF yearly, with 1M shares, and zero growth. As a shareholder, you have a claim on $1.00 every year, and this is your "Adjusted FCF/share". However, if the firm allocates 30% of that to buybacks every year, then you are exchanging current flows for higher flows in the future, and as a result, it would be double counting to consider initial Adjusted FCF/s to equal $1.00, rather it should be $0.70, and in exchange for that you can build FCF/s growth into your model.
« Last Edit: October 08, 2013, 08:57:44 PM by Palantir »
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