Welcome to Investing for Beginners podcast this is episode 67. tonight Andrew and I are going to talk about share buybacks, this has been a hot topic on Wall Street lately and Andrew and I wanted to do a little deep dive into share buybacks and talk a little 101 about how they work what they are and how they can benefit the company and you.
Without any further ado I’m going to turn over to my friend Andrew and he’s going to start us off.
Andrew: yeah love it. I feel like it was meant to be right well media talking all about buybacks obviously a big impact from the tax cuts that Trump did. So it’s very timely and it’s also good segue from last week’s topic. so if you remember last week we talked about owners earnings and how that can be a better way to kind of calculate how a company is using not only what’s the company earning from the core business whether its profits.
But also how is it allocating those profits once it has once the company has that earnings so owners earnings is a way to do that and one way that companies allocate cash once they receive those profits is through share buybacks and so that’s what we’re going to cover today.
You’ll hear called several different things share repurchases stock buybacks share buybacks it’s all referring to the same thing. So if we really get down to like the base route of what share buybacks is it’s simply the company taking cash and buying back shares.
What that means is they’re reducing the shares outstanding what that does for investors who already own the stock is it pushes everything up so it will push the market cap up because the company is buying these shares it’s going to push the price up right so I’m sorry the market cap stays the same the price goes up because the shares go down and then you also get anything that’s valued on the per share basis will go up so earnings per share arguably Wall Street’s biggest focus that goes up because now you have less shares and book value per share goes up cash per share goes up all those things go up.
And so Wall Street tends to like share buybacks and it’s kind of debatable whether it’s good or not for a company it’s very contextual but before we get too deep into like the concepts between whether it’s good or bad or whether it’s optimal I want to share a couple of articles that I’ve seen that are recent about share buybacks and so one of them here is talking about this is July 10th recording this end of July.
Tax cut triggers 437 billion dollar explosion of stock buybacks so there’s I feel like a general misunderstanding in the public of share buybacks and how they impact a company. Because a lot of I don’t want to get political but a lot of the critics of the tax cuts they will argue that the tax cuts are only tax cuts for the wealthy and they will also say that workers are not being benefited by it.
I think we do need to address those things because there’s no doubt that once you understand how the stock market works how stocks work that share buybacks are almost all the time great for investors great for the people involved in the company and it’s great for the economy overall.
If we can understand some of the more intricate details of share buybacks then we can understand exactly why that is the case so you have to think first off when we’re talking about the wealthy it is true they say the top and this is coming from the this article from CNN. The top 10% of households owned 84% of the stocks in 2016.
What you have to understand is that’s more of a byproduct of a capitalist society if you want to have small business owners what’s the draw for a small business owner to open the business? If they let’s say open the pizza shop and they have to hire ten employees in order to run the pizza s...