AAPL - Apple Inc.

[given2invest]

Are you comparing BRK to AAPL?   Or saying Buffett is against dividends/buybacks in companies they invest in?

[Bronco]

Would you have argued that it would have been wise for MSFT and DELL to buy back stock in 2000 at $50 and $40, respectively?

[given2invest]

Would you have argued that it would have been wise for MSFT and DELL to buy back stock in 2000 at $50 and $40, respectively?

Friend, I'm not even arguing that Apple should anymore.  I'm just debating with you corporate finance. 

[ERICOPOLY]

Would you have argued that it would have been wise for MSFT and DELL to buy back stock in 2000 at $50 and $40, respectively?

The math lays it out pretty damn clear:   a buyback at any price is equal to a dividend at any price -- as long as the shareholders sell an offsetting amount of their holdings.  In other words, it's a tax efficient pass-through of the cash.  The shareholders are the seller, the corporation is the buyer.  No value is destroyed, only returned to shareholders.  Run the math.

If you ever find yourself bitching at management for directing the corporation to buy back stock at an "inefficient" price, ask yourself why you aren't selling to them. 

[given2invest]

Would you have argued that it would have been wise for MSFT and DELL to buy back stock in 2000 at $50 and $40, respectively?

The math lays it out pretty damn clear:   a buyback at any price is equal to a dividend at any price -- as long as the shareholders sell an offsetting amount of their holdings.  In other words, it's a tax efficient pass-through of the cash.  The shareholders are the seller, the corporation is the buyer.  No value is destroyed, only returned to shareholders.  Run the math.

Absolutely true.  Not debatable.  It's math.  

We can debate whether a stock is cheap or not, whether a stock is overcapitalized or undercapitalized, etc.  But you can't argue with math.  

Simply put, if you own a stock (I don't own Apple by the way) and you can sell it (not subject to liquidity issues), then you think the stock is undervalued.  You then need to ask yourself if the balance sheet is overcapitalized.   Many balance sheets are not!  But if it is, what is the best way to return/invest that overcapitalized balance sheet?

Suppose Apple won a $500 Billion lawsuit from the U.S. Government.  Let us also assume that the market cap went up $500 Billion as a result.  They now had $580 Billion on their balance sheet vs. a market cap of $800 Billion.  Do you think it makes sense for them to sit on $580 Billion or return some of that to shareholders?  Further, how should they do it?  Again, of you are long the stock - and could sell it at anytime - you would clearly prefer a buyback to a dividend, for tax purposes.  But regardless, you would just be happy with getting some of the cash returned to you.  

[Bronco]

How can you run the math?  Companies don't tell you when and how much they buy back until after the fact.

I'm not looking to change anyone's opinions, and I obviously won't change yours.  But what you truly can't debate is why companies really do buybacks.  Quite simply, it is easy for CFO's and BOD's to do.  Low risk for them.  And I have been at enough big companies to know that.

And I completely don't buy into the theory that buybacks at any price are good.  Again, to me it smells of short-term thinking.  Q to Q management. 

Not for me.

[given2invest]

Where did anyone say buybacks at any price are good?

It might help if you actually read what I've written and answer the questions. 

[ERICOPOLY]

How can you run the math?  Companies don't tell you when and how much they buy back until after the fact.

I'll just lay out an example.  Let's say the company is a serial re-purchaser of it's own shares, irrespective of price or value.  Let's say that every quarter they buy back 1% of their outstanding shares, and you (as a shareholder) read about this every quarter.  So after getting the quarterly, you sell an offsetting amount of shares to bring your holdings back into balance and realize the cash distributed.  Some quarters you'll sell near or above the price the company paid, some quarters you'll sell at a lower price.  And you were the one telling me not to think on a short term basis?  Harumph!

Now, since you mentioned MSFT and DELL back in 2000, let's take a swing at that.  Back in 2000, the dividends were taxed as regular income.  So, for somebody with a cost basis of $50 in the 35% tax bracket, every $1 returned to shareholders via repurchase would be recovered on a tax-equivalent basis at a selling price of $32.50.

Yes, so while you might not necessary sell at the same price the corporation paid, you have a lot of room to go down -- potentially all the way to $32.50.  Other people with a higher cost basis would the added advantage of getting a tax loss, and some would be looking at a capital gain... but the capital gains rate was lower back then (relative to the dividend tax rate).

So it depends on a few factors... dividend tax rates vs capital gains tax rates, and cost basis being an important one.  But the serial repurchaser of shares will give their shareholders roughly equal chances to sell at lower or higher valuations over time.  Like you said, don't think short-term about this.

And I completely don't buy into the theory that buybacks at any price are good.

I'm not saying they are good either.  I'm just saying it's not really much different from paying a dividend, provided you sell some of your shares to offset your increased ownership.

I'll be the last one to bitch and moan if the company is willing to buy my shares for a high price.  Like... that's probably the least of my complaints about management!!!  Would somebody (anybody) please pay me at least full value?  I really don't mind who it is.

[given2invest]

"I'll be the last one to bitch and moan if the company is willing to buy my shares for a high price.  Like... that's probably the least of my complaints about management!!!  Would somebody (anybody) please pay me at least full value?  I really don't mind who it is."

This. 

[ragnarisapirate]

Would you have argued that it would have been wise for MSFT and DELL to buy back stock in 2000 at $50 and $40, respectively?

The math lays it out pretty damn clear:   a buyback at any price is equal to a dividend at any price -- as long as the shareholders sell an offsetting amount of their holdings.  In other words, it's a tax efficient pass-through of the cash.  The shareholders are the seller, the corporation is the buyer.  No value is destroyed, only returned to shareholders.  Run the math.

Absolutely true.  Not debatable.  It's math.  

We can debate whether a stock is cheap or not, whether a stock is overcapitalized or undercapitalized, etc.  But you can't argue with math.  

Simply put, if you own a stock (I don't own Apple by the way) and you can sell it (not subject to liquidity issues), then you think the stock is undervalued.  You then need to ask yourself if the balance sheet is overcapitalized.   Many balance sheets are not!  But if it is, what is the best way to return/invest that overcapitalized balance sheet?

Suppose Apple won a $500 Billion lawsuit from the U.S. Government.  Let us also assume that the market cap went up $500 Billion as a result.  They now had $580 Billion on their balance sheet vs. a market cap of $800 Billion.  Do you think it makes sense for them to sit on $580 Billion or return some of that to shareholders?  Further, how should they do it?  Again, of you are long the stock - and could sell it at anytime - you would clearly prefer a buyback to a dividend, for tax purposes.  But regardless, you would just be happy with getting some of the cash returned to you.  

Well, the preference would actually depend on how a person holds the shares. If they were in a ROTH, that would have different implications than if it was in a personal taxable account. Additionally, tax rates would have some influence on the preference of shareholders.

I realize that this is getting pretty particular, but, they are real issues.