Sales are actually OK, and it's profitable, but the restaurateur's backers are obsessed with profits per table. They think raising that number would make the restaurant seem exclusive and attractive to new investors. But no matter how hard he tries, the restaurateur just can't get more people in the door. So he does something else: He takes away some tables. It costs money to move and store the tables, but that very month, the same number of people visit the restaurant, and profits per table go up.

Sales haven't changed, but now the investors are happy. If this bothers you, consider that it's exactly like something public companies in America do every day. Colloquially called buybacks, share repurchases — in which a company uses its own cash to buy its own stock — are all the rage these days.

It's not even directly being handed back to shareholders in a dividend that could be reinvested. But buybacks obviously have fans , like billionaire investor Carl Icahn, who wrote to Apple CEO Tim Cook in Buyback proponents say they reward these long-term shareholders by effectively increasing their ownership of the company, and they help boost the value of a stock by raising the company's earnings per share.

And when there's no other compelling use for a company's cash, this is a better alternative than risky spending on takeovers or other big investments. Carl Icahn, chairman of Icahn Enterprises. But the other view on buybacks is that — like the restaurant removing tables — their only impact is in making things look better than they seem.

Yes, earnings per share rise, but that's not because earnings are growing. Even their fiercest proponents — somewhat hypocritically — say they're overused.

I think that many companies are doing buybacks rather than put money into much-needed capital improvements. Icahn also said in the interview that he thinks one reason this is going on is that executives are paid with stock, and they think buybacks will boost the value of that stock.

But all the evidence shows that — in recent years — they've not actually helped boost stock values at all. For most of the stock market's history, buybacks were actually illegal — considered to be insider trading — the thought being that if you ran the company, you would have nonpublic information to know when to buy shares.

This changed in , when the Securities and Exchange Commission passed rule 10b , which, despite a few mechanical restrictions, opened the gates for companies to begin to repurchase shares en masse.

Buybacks then became a part of the corporate lexicon, and for a while they did well. Numerous studies found that in the s, companies that completed buybacks outperformed the broader market. And a growing number of companies are borrowing money to fund the repurchases. This use of debt also presents a few new issues for firms doing repurchases. On the basic level, as Jonathan Glionna at Barclays noted recently, if it becomes harder to borrow which appears to be happening , the spigot that allows the face-saving buybacks will be shut off.

Analysts have been concerned about the historic size of US companies' debt for some time, and buybacks are contributing to this burden — again without doing anything to grow a business or generate additional cash flow that could help make sure the debt is paid down.

Think of it in terms of the restaurant: If the restaurateur had taken a loan to remove the tables, he'd have debt to repay, but no additional income to pay it with. Companies don't want to just sit on money, much for the same reason that investors don't like holding piles of cash either: Inflation erodes the value of the cash, so putting it to work makes sense. During periods of economic growth, it is better to allocate profits to capital like a factory or labor.

This is an investment in the future of the firm, but it is also risky because the economy could worsen. So in periods of economic uncertainty — like right now — companies choose to give cash to shareholders instead. Theoretically that all sounds great, but practically speaking, a company engages in buybacks because its stock is cheap.

For instance, every time Berkshire Hathaway's share price falls under a certain level, Warren Buffett said that he automatically snaps up shares. Then if the value of the company goes back up, the company can always reissue the shares and use the gain to fund other projects.

Buyback financial definition of Buyback

And it simply makes them look good. This use of buybacks as an image booster has become one of the most divisive ideas about repurchases, with many analysts and market watchers calling it "financial engineering.

One of the most tracked measures of a company's performance is earnings per share. EPS numbers usually are the first thing investors and the media look for in a business's results — and whether the number beat expectations set by industry and sell-side research analysts at financial firms.

Critics of buybacks say they're the easiest way to game the system and come in above EPS forecasts, thus making a company look better.

Since EPS is generated by dividing profits by shares in the market, if you shrink the number of shares, the EPS will rise. One company that has faced scathing criticism over this issue is IBM , in particular from billionaire investor Stanley Druckenmiller. Here's what it has to show for its efforts: But actual net income in the same period? Sales have fallen, too. Instead they're cutting costs, they're buying back stock so their earnings look good," he told Bloomberg's Stephanie Ruhle in late When I look out on a couple of years I would think they've got issues.

And lately he has argued that this use of capital is a problem across corporate America. Whatever the reason companies are buying back their own stock, it is becoming on of the biggest trends of the post-financial-crisis stock market.

According to research by HSBC , buybacks have been the largest source of net demand for the stock market since The problem is that the buybacks may not be working. According to data from FactSet's Andrew Birstingl, the performance of companies engaging in buybacks has been disappointing.

On a three-year horizon, those companies buying back shares ended up with a Additionally, a study by Inmoo Lee of the KAIST College of Business, Yuen Jung Park of Hallym University, and Neil D. Pearson of the University of Illinois at Urbana-Champaign found that companies that completed buybacks outperformed the benchmark prior to Firms that completed share repurchases between and , however, have not generated any better returns since that time than those who did not.

Based on this research, for both the short- and long-term, buybacks aren't helping share prices. So why do them at all?

Balrampur Chini Mills to buyback shares worth Rs cr - husoxupowoj.web.fc2.com

According to Lee, Park, and Pearson , it may just be an image play. Here are the researchers emphasis ours:. If these non-fundamental related motivations drive buyback waves in recent up markets, we would expect poorer performance of these.

In other words, all those theoretical capital-allocation reasons mean nothing. For more, visit priceofprofits.

Get the latest IBM stock price here. Why big data can make HR more important. You are using an outdated version of Internet Explorer. For security reasons you should upgrade your browser. Please go to Windows Updates and install the latest version. Trending Tech Finance Politics Strategy Lifestyle Sports Video All. You have successfully emailed the post. Here's Icahn again, just this month, speaking on CNBC: They used to be illegal For most of the stock market's history, buybacks were actually illegal — considered to be insider trading — the thought being that if you ran the company, you would have nonpublic information to know when to buy shares.

There are a two answers to this question — one theoretical, one practical. Here are the researchers emphasis ours: Price of Profits Buybacks Stocks Carl Icahn IBM BI Graphics.

Share buyback: Should you accept a buyback offer for your shares? Here's how to evaluate

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