How do companies execute buybacks?

[Guest valueInv]

Is there a team that watches the the liquidity everyday and buys as much as possible?

Do they try not to move the daily price too much during the buyback?

Are there regulations governing buybacks? From SEC, for example?

[Hielko]

Google Rule 10b-18

[Guest valueInv]

Thanks!

[LC]

I would like to know your guys thoughts on debt financed buybacks. A lot of large caps I'm looking at have been financing buybacks with debt. What are the implications of this?

[ItsAValueTrap]

In some cases it's about leverage / being more aggressive about taking risk and getting returns.

 

2- Sometimes there is a tax component to it.  If a multinational US company has cash overseas, it has to pay repatriation tax if it brings that money back to buy back shares.  If they don't bring it back right away, they can re-invest the money and basically enjoy an interest-free loan from the US government.

 

If they borrow money domestically, they can use that money to buy back shares while deducting the interest payments against their US taxes.  Their loan is backed up by their overseas assets.  The overall strategy keeps their interest-free loans from the IRS intact.

 

On the surface, this strategy might look silly.  If you buy back shares, you are returning capital (to shareholders).  You are unraising capital.

If you take on debt, you are raising capital.

Raising capital while unraising capital seems silly.

But there are reasons to do this related to taxes.  This is why Apple may borrow money even though it has a huge cash hoard.

[Phaceliacapital]

LC, fyi: http://appleinsider.com/articles/13/05/03/apples-bond-offering-will-allow-it-to-avoid-92b-in-us-taxes

[Phaceliacapital]

Also, classic textbook finance dictates that if a company does share buybacks and their earnings yield is higher than the

cost of debt used to finance the buyback the operation will be EPS accretive. So I guess some companies might also resort to this kind of operation to please our "all mighty" Street .

 

edit: http://www.guardian.co.uk/technology/2013/apr/30/apple-bond-buying-programme

 

Kastner said it was part of a larger trend as corporations seek to take advantage of historically low interest rates. "Companies are borrowing cheap and buying back shares and in the process improving their earnings per share. We saw this in the last low interest rate cycle, but never to this degree," he said.

 

Theoretical POV: http://www.capatcolumbia.com/MM%20LMCM%20reports/Clear%20Thinking%20about%20Share%20Repurchase.pdf

 

The EPS management motivation has no sound financial basis. Whether a buyback program

increases or decreases earnings per share is a function of the price/earnings multiple and either

the company’s forgone after-tax interest income or the after-tax cost of new debt the company

uses to finance the buyback. More concretely, when the inverse of the price/earnings multiple—

often called the earnings yield—is higher than the after-tax interest rate, a buyback adds to

earnings per share. When the earnings yield is less than the after-tax interest rate, a buyback

reduces earnings per share. The relationship between the earnings yield and the after-tax interest

rate has little or nothing to say about value.

 

[LC]

Phaceliacapital,

 

Thanks for reminding me about the tax issue, in that case I am more comfortable.

 

I also understand from a theoretical perspective that if the earnings yield is greater than the interest rate on the debt, it will benefit shareholders.

 

What I am troubled about, or I should say what I do not understand, is the thinking behind the type,s of firms I am seeing partake in this practice.

 

I see a lot of firms with recurring revenues taking out debt to finance buybacks. It is a page out of John Malone's book, but I am curious what happens if these recurring revenues dry up? There seems to be almost no room for error when I see a company like ADT, which was just spun off, taking out another billion in debt over the Q1 to buyback shares at an earnings yield of 20.

 

Have you seen this before in previous market cycles? How have you seen this play out in 5 years time?

 

LC

[Guest deepValue]

I would like to know your guys thoughts on debt financed buybacks. A lot of large caps I'm looking at have been financing buybacks with debt. What are the implications of this?

 

In many cases companies are just overcapitalized and want to add more debt. If Company A has a long history of stable profitability and no/low debt, it is probably being over-conservative at the expense of shareholder value. It's sort of like having a large cash pile on the balance sheet, except it is 'spare debt capacity' instead of 'cash.' Borrowing money and distributing it to shareholders is a good way to correct this situation.

 

As mentioned by others, taxes can be a factor as well.

 

I don't know anything about ADT, but on quick glance it has about 3x debt to free cash flow, which is not astronomically high for most companies. But sustainable debt is different for each company -- and it's usually best to stay on the conservative side.

[Palantir]

Plz forward this thread to tcook@apple.com.

[LC]

I'm curious....is it possible for a company (Apple) to take out a line of credit from an international bank in the US, use that money to buyback shares/issue dividends, then pay that bank's division in Luxembourg back on the LOC? This seems too simple to me so it's probably not feasible, but I'm no expert on international tax legalities.