A company gets extra earnings of $20m in a special year. It is considering repurchasing its stocks instead of paying it out as a Special Cash Dividend. Will its Stock Price increase after the Repurchase?
Of course it does WHEN mgnt ANNOUNCES. Just check IBM share prices last decade. Share buyback is seen similar to dividend. Not from a FCFE, FCFF point of view, which says it is irrelevant, but from market psychology point of view. Mgnt signaling own share undervalued or showing confidence in its cash situation. Depending how mgnt implements the share purchases, share price can temporarily perks up due to imbalance of demand/supply in trading if it buys shares within a short period.
The price of the stock will increase. From the investor’s point of view, it does not matter since they will be receiving the same amount of return on their investment.
Well, actually, you CAN have higher return if investors have higher confidence in the firm because of this signaling effect. Your risk premium goes down, your P/E up, like dividend theory.
Doesn’t the book talk of the initial price first decreasing - just like in a cash dividend? The ex-dividend price would be slightly lower - then the price goes up, but this is later, once the effect of the dividend has been priced in. whether the stock on the book (bvps) increases also would depend on whether the market price of repurchase is above or below the bvps. If above - bvps would come down, if below - bvps would go up.
The book says a repurchase has the same impact on the stock price as a dividend payment. The immediate consequence of such an action will be a fall in the stock price by the amount of the dividend (repurchase).
thanks for confirming that intelo… matches what I said just above.
cpk123 Wrote: ------------------------------------------------------- > Doesn’t the book talk of the initial price first > decreasing - just like in a cash dividend? can’t recall where it says that, but my memory is notoriously leaky so. In theory, intrinsic share price should not be affected/changed (but as I mentioned earlier, the share price may increase because of the signaling effect) > The ex-dividend price would be slightly lower - then > the price goes up, It applies for dividend payment only. Share price on the ex-date should go down to take into account the dividend paid. > whether the stock on the book (bvps) increases > also would depend on whether the market price of > repurchase is above or below the bvps. If above - > bvps would come down, if below - bvps would go up. agree, but we’re here talking about bvps, not market price.
Actually correction: The total wealth is unchanged whether u use a dividend or a share repurchase. (see example 1 P 156 R29). BUT under the dividend, the stock price falls whilst it remains the same under a share repurchase. So the similarity here comes from the fact that total wealth remains unchanged provided that the tax treatment is the same for both methods (P 155 paragraph 3 under section 2.6)
Thank you elcfa, budulog, cp and intelo. Sorry, my timings are different, so could not take part in the interactive discussion yesterday. Initially, I thought book was making 2 contradictory statements. But now it is clear after your feedbacks. Anyways, the Contradictions I thought were: 1. Share repurchase and Cash Dividends have the same affect on Shareholders’ Total Value. 2. After Share repurchase, Market Price of share does NOT change. For the 2nd one, I was thinking, Market Price should go UP after the repurchase, to keep 1st statement true. Now I have understood, it should remain the same as stated in the book. And the logic is: Cash Dividend per share + New reduced ex-div Market Price = Old cum-div Market Price Should also = Market Price after Share Repurchase, to keep the Total Shareholders’ Value the same. So, all others equal, New Market Price after Share Repurchase should remain same as before Before Repurchase Price. Thanks again guys.
intelo Wrote: ------------------------------------------------------- > The book says a repurchase has the same impact on > the stock price as a dividend payment. The > immediate consequence of such an action will be a > fall in the stock price by the amount of the > dividend (repurchase). correct because BVE falls by delta cash which should be reflected in the stock price based on the P/BV multiple…if it holds exact after the announcement