Subject: Re: back to topic (was Re: a stocks and dividends question)
From: "Stephen J. Turnbull" <>
Date: Sat, 11 Jan 2003 02:20:43 +0900

>>>>> "Larry" == Larry M Augustin <> writes:

    Larry> Dividends are guaranteed to return money to shareholders.
    Larry> Share buybacks are not.

I was assuming purchase at a premium.  If that's not the way it works,
forgive me for being an expatriate theorist (Japanese companies don't
do buybacks at all ;-).

If what Zimran meant was that the buyback would cause share
appreciation in the future, so the shareholders would benefit, I think
the theory behind this is extremely shaky.  Smoke and mirrors.  If
it's just purchase on the open market, a buyback does nothing except
increase leverage somewhat as the company's cash position
deteriorates.  This should not change the company's value ex buyback,
however (Modigliani-Miller theorem), and so the net effect should be
constant share price as the value of the company is decreased by
precisely the amount of the buyback.

In other words, a shareholder who sells exactly the proportion of his
shares as the company buys of shares outstanding should see no change
in his financial situation whatsoever.[1]  The decreased risk of
cash-in-hand is offset by the increased leverage (risk) of the stock.

    Larry> In fact, it generally has not in the last four years.  If
    Larry> the money spent on share buyback programs by companies in
    Larry> the past four years had instead been distributed to
    Larry> shareholders as dividends, shareholders would have been
    Larry> better off.  See, for example, stock buyback programs by
    Larry> IBM and Dell.

Are you assuming that share prices would have been the same if payment
of dividends replaced the buyback program?  This hardly seems likely,
as if the cash were distributed it decreases the value of the company,
just as it does for the buyback.  _However_, with number of shares
unchanged, share price should drop.

[1]  To the extent that CAPM is correct.

Institute of Policy and Planning Sciences
University of Tsukuba                    Tennodai 1-1-1 Tsukuba 305-8573 JAPAN
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