1

I have read many financial analysis articles that seem to calculate a company's payouts to its shareholders like this:

total payout = cash dividends + share repurchases

I can easily see why a cash dividend is a payout — I receive cash from the company. But how are share repurchases considered payouts? When a company repurchases shares, I do not seem to receive anything, so why is it a payout?

2 Answers 2

0

If the company buys shares back, the remaining shares own more of the company. For example you have X shares of a company, each representing 1/X ownership stake. Now the company went and bought back 10% of shares, so now you only have 0.9X shares outstanding, each representing 1/(0.9X) ownership stake. In essence every remaining shareholder now owns 11% more (1/0.9=1.11...) of the company than before the buyout. Hence - payout to shareholders.

2
  • Don't they just own a higher % of shares outstanding which means an increase in things like EPS which generally correlate to a higher stock price? They do not actually get more of the company itself because the company is buying itself back, no? If the company buys back every share but 1, the last guy holding a share does not become the full owner of the company; rather, he just becomes the lone shareholder with the company owning the rest of itself. Please correct me if I'm wrong. Sep 22 at 3:36
  • 3
    @GeroldAstor yes, the last guy becomes the sole shareholder. Company cannot own itself, someone has to own it. Usually, when companies go private it's because a large shareholder decides to take them private. For example, when Musk suggested to take Tesla private - he would buy out all the rest of the shareholders (with whatever partners he thought he found), but he wouldn't sell his own shares.
    – littleadv
    Sep 22 at 3:39
0

A buyback is a payout to some shareholders, namely those who sell their shares as part of the buyback (this is totally opaque, though, as one does not ever know who they are selling to). If there was little demand at the buyback price, the company would have to buy at a higher price to meet demand, hence the price would rise to meet demand, affecting all shareholders indirectly. In other words, it increases demand, which increases the stock price relative to the price if they did not do a buyback,

So from the individual investor's standpoint a buyback is not a clear benefit, but from the company's standpoint it is cash out the door that goes to (some) shareholders, hence a payout.

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.