“Apple needs more buybacks!” I’m quoting Carl
Icahn here, who said this for years, but why would actually a company would buy back it’s
own shares? Hi it’s Martin from Real Stock Value, and today i want to talk about stock
buybacks, why companies want to buy back they own shares? Now one of the reasons, and the
best reason is when a company considers, that is’t stock is grossly undervalued. Now the
best example for this was when Warren Buffet decided, that Berkshire Hathaway is grossly
undervalued, and instead of buying some new businesses acquiring some new companies it
decided that the best use of they money is to buy back it’s own shares. This usually
happened when the price to book value ration of Berkshire Hathaway went below 1.3 . Another
reason why usually companies decide to buy back they own shares is taxes. In ideal tax
conditions companies should return the money to investors in form of dividends. However
in almost every country capital gain tax are much lower than dividend tax and also you
need to pay your taxes on your capital gains only when you sell your shares. Compare that
to dividends where you need to pay every year the taxes. Now there is also a bad reason
to buy back shares, and this is related to executive compensations. In most companies
the executives receive a significant part of they income in some kind of bonuses and
in most cases this bonuses are in for of options on the stock. This means if the price of the
stock goes up, than also the value of those options goes up, and the executives CEO and
so on make a lot of money. This means that executives have a vested interest to push
up stock prices, even if the stock is already overpriced. Now some companies bring this
to a higher level. When the company is buying back it’s own shares, and at the same time
the insiders are selling. Now usually we don’t want to invest in the long run in companies
where this is happening. Now some companies bring this to an even higher level, and this
is when they actually borrow money or issue bonds and buy back shares with that money.
Now in normal interest rates conditions this would not make any sense. Why would a company
borrow money, to buy back it’s own shares? However in today’s environment where we have
artificially low interest rates some companies can issue bonds at such low rates, that probably
they have negative real interest rates. In that situation, it makes all the sense to
borrow money and buy back your own shares. Now in the case off Apple, what Apple is doing
would not make any sense in normal market conditions, so if we would have ideal taxes
this means that capital gains tax would be taxed at the same way as dividends are taxed,
and we would normal interest rates. It would not make any sense for Apple to buy back it’s
own shares and at the same time issuing bonds. However in today’s market environment it does
make sense. What Apple is doing is that is borrowing money, he can finance his expenditures
in the US with that money and with the foreign profits he can buy back some shares and he
does not need to pay US taxes on that money, because its not repatriating that money, and
he also can deliver higher value to shareholders because instead of paying out dividends and
let the investors decide what to do with dividends. Reinvest in Apple by buying more shares, or
buying something else, they buy back shares themselves and in this way instead of dividends
shareholders receive they profits in capital gains, and they don’t need to pay such high
taxes on capital gains. So as I mentioned in ideal market conditions what Apple is doing
would not make any sense however in today’s environment it makes perfect sense.
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out our other videos as well, check out our webpage, and see you in the next video. Bye!