"People are worried about stock buybacks" is a long-standing, tongue-in-cheek header on Money Stuff.
As an individual investor, striving to achieve some alpha, I am usually not worried at all.
On a micro level, as long as executed under intrinsic value, buybacks are obviously accretive to continuing shareholders. From famous Washington Post buyback up until most recent Apple, Google and Facebook ones, I believe quite often they makes perfect sense. I am not worried that the investments go down, because neither of the above-mentioned companies were constrained by capital resources. Another aspect is that often "R&D is the new CapEx" and therefore the regular measures of total investment are underestimating actual investments.
On a macro level, the capital returned to shareholders can be reinvested in new firms with more capital needs (and opportunity). I could simply stop here, but I will not, as I see another reassuring trend.
We are more and more moving to value being created based on intangible assets.
In the past, unless company had pricing power through brand or other moat, it could expect moderate but relatively reliable returns on investments. Therefore 100 companies (or even a single company for that matter) building one hundred $1M factories could expect, say, 10% ROI with relatively little variability. In the world of intangible assets driving increasing share of value creation and all-or-nothing successes, the picture is quite different. We can have one hundred startups with $1M "sunk" in each, with few of them being big successes and surfacing the created value by IPO, being acquired or "just" becoming an unicorn. The rest will simply disappear from the picture, with "investment" put into them not being as visible to the official statistica. Especially, that large portion of the 'lost' investment comes from capable employees foregoing steady salary to the (unrealized) equity upside.
Enough philosophy, though, back to buybacks.
Buybacks at elevated prices are of course not great for continuing shareholders and companies in general are not great market timers when doing buybacks. That's why I love Berkshire's approach of buying back below certain percentage of book value (120% currently, but perhaps will be slowly increased over time).
One reason I like Apple, Gilead, GM, Alleghany, Fairfax, etc. is that they apparently are striving to create shareholder value when executing buybacks.
I usually get my investment ideas from Seeking Alpha, but I played with Yahoo stock screener lately and after skimming through several unappealing ideas I noticed KORS. I don't know much about Michael Kors brand, but I am increasingly aware of the power of brands in general and noticed this brand worn even by people who I wouldn't assume are big on having branded clothes.
But it was a different thing that kept my attention to KORS. By looking at cash flows and balance sheet, it is quite apparent that this company since ~1.5 years ago is 'eating itself alive'. They are repurchasing ~$300M worth of stock every quarter, with <$8B market cap. This rate seems quite sustainable, given their earnings and cash flow. At such rate and with constant stock price, they would buy back themselves within less than 7 years. I will try to open a moderate position.
As an individual investor, striving to achieve some alpha, I am usually not worried at all.
On a micro level, as long as executed under intrinsic value, buybacks are obviously accretive to continuing shareholders. From famous Washington Post buyback up until most recent Apple, Google and Facebook ones, I believe quite often they makes perfect sense. I am not worried that the investments go down, because neither of the above-mentioned companies were constrained by capital resources. Another aspect is that often "R&D is the new CapEx" and therefore the regular measures of total investment are underestimating actual investments.
On a macro level, the capital returned to shareholders can be reinvested in new firms with more capital needs (and opportunity). I could simply stop here, but I will not, as I see another reassuring trend.
We are more and more moving to value being created based on intangible assets.
In the past, unless company had pricing power through brand or other moat, it could expect moderate but relatively reliable returns on investments. Therefore 100 companies (or even a single company for that matter) building one hundred $1M factories could expect, say, 10% ROI with relatively little variability. In the world of intangible assets driving increasing share of value creation and all-or-nothing successes, the picture is quite different. We can have one hundred startups with $1M "sunk" in each, with few of them being big successes and surfacing the created value by IPO, being acquired or "just" becoming an unicorn. The rest will simply disappear from the picture, with "investment" put into them not being as visible to the official statistica. Especially, that large portion of the 'lost' investment comes from capable employees foregoing steady salary to the (unrealized) equity upside.
Enough philosophy, though, back to buybacks.
Buybacks at elevated prices are of course not great for continuing shareholders and companies in general are not great market timers when doing buybacks. That's why I love Berkshire's approach of buying back below certain percentage of book value (120% currently, but perhaps will be slowly increased over time).
One reason I like Apple, Gilead, GM, Alleghany, Fairfax, etc. is that they apparently are striving to create shareholder value when executing buybacks.
I usually get my investment ideas from Seeking Alpha, but I played with Yahoo stock screener lately and after skimming through several unappealing ideas I noticed KORS. I don't know much about Michael Kors brand, but I am increasingly aware of the power of brands in general and noticed this brand worn even by people who I wouldn't assume are big on having branded clothes.
But it was a different thing that kept my attention to KORS. By looking at cash flows and balance sheet, it is quite apparent that this company since ~1.5 years ago is 'eating itself alive'. They are repurchasing ~$300M worth of stock every quarter, with <$8B market cap. This rate seems quite sustainable, given their earnings and cash flow. At such rate and with constant stock price, they would buy back themselves within less than 7 years. I will try to open a moderate position.
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