Stock buybacks mostly ruin value in the long-term, and if you wish to be the one gaining from those, you require to offer to the business doing them!
Market Inelastic Theory
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I have always thought the same way as your thesis here. Management has such ST mindsets. It’s very difficult to find a company that does good capital allocation.
Suggestion: FMC, which provides crop protection products, has collapsed in 2023 as a result of global inventory destocking following last year’s inventory build-ups.
At around $50 the company trades around its intrinsic value – 5% growth over 5 years, 10% margin (low end marginover the past decade), 40% profit distribution as dividends, 1% average buybacks, 15x terminal multiple and 10% discount.
That is a 4% dividend yield, plus a 1% buyback yield plus 5% growth for 12x earnings, when the company generally trades around 20x.
After cutting full-year guidance on Oct 31, the company raised FY24 guidance on their investor day: for 2026, it is aiming for revenues of $5.5-6b and adjusted EBITDA of $1.3-1.5b, which represent a 6-9% and 9-14% respetive CAGRs with respect to FY23 guidance midp-points.
will check, thanks for the nice suggestion!
will check, thanks for the nice suggestion
Dear Sven, a question regarding personal finance. I want to buy a new house in 5 to 10 years and am allowed to bring the current mortgage (2% 30 year) for part of the new mortgage. I invest all my savings apart from a 12 month emergency fund. I keep hearing this is not a good idea to invest for such a short term. But I can wait if a crash happens, no need for a new house, just a nice to have. Do you think it’s responsible to keep being invested 100% and buy more stocks every month?
Greetings from Holland
If you can bear a several year crash and have the cash to invest during it you’ll be fine. Especially if there is no need of a new home but it’s just something you want and in the case it can wait.
well, you are the holder of your option, and it is free, you already have a house… at the end, investing is personal:-) If you are investing in the right things, those investments should bring you the better house!
Thanks Sven. My platform subscription is about to renew and wanted to write that I made 2xsubscrition price using your AMR buyback story info. 🙂
Fantastic!
so simple and so true. i think it’s not CEOs buying high, but prices getting high because CEOs do buybacks.
yep, thus the buybacks distort the market…
What a legend Sven, I wish managers/ceos would watch your videos or at least not have the incentives to do buybacks when they aren’t meant to
🙂
This is probably one of the most important messages. So simple, yet so hard to master.
Because those CEOs may not be watching Svens videos, but they for sure read Warrens letters, and it has made little impact on their doings.
their doing is for their pocket but also for the goal of the vocal short term investor…
Probably, Mark Leonard should be the type of CEO that every company should have in terms of capital allocation
Hi Sven. Any thoughts on the Sahm rule and where we are currently in terms of rate cuts?
Thank you very much for another great video. Happy holidays 🙂
That makes me think, how Buffett might be justifying APPLE’s massive buybacks at its current valuation – and the same has been true for last few years.
I know this wasn’t the point of this video, but what should Apple be doing with all the cash they’re generating?
They have no debt. They already spend a lot on R&D and spending more without a goal in mind might be like burning cash. Unlike Berkshire having a cash pile to deploy when needed is not part of the business. Acquisitions can be deworsification.
Dividends?
Wouldn’t dividends be better than buying an overvalued stock?
I think they problem is that in the current business environment where buybacks are more common, increasing dividends is seen like a vote of no confidence in your stock, where as buybacks are seen as the opposite.
Same. Apple can’t reinvest at the scale and ROI needed. And its shareholders won’t let the cash pile up. So Apple is forced to distribute, and buybacks are better than dividends for tax reasons.
I’d prefer dividends over buybacks, personally. Do they get to decide whose stock they will buy back? If so… I smell a rat. I think I smell a rat anyway.
Wait a minute… it cost 14.5 billion to buy 15% and the value of the remaining 85% is 27 billion now??
Sven you said that Berkshire is set up to be around 50 years from now.
How is it set up that way? Would you explain it in a video?
Maybe there other companies that are set up like that, so we would invest in those kind of companies..
Thanks for the video. Note, this video overlooks that buybacks are a better form of distributing profits because of tax reasons. Would you want Apple to pay more dividends? Warren would not. Apple has no place to reinvest with a ROI that would move the needle or be intelligent at the scale needed. But to add, you are right that buybacks done badly are a recipe for disaster. Like dividends, buybacks require profits to sustain them.
It’s a non issue for me. Because if I’m buying it means that I think it’s undervalued. And I sell when I no longer think it’s cheap. That’s a benefit of having a more fluid portfolio, rather than buying and holding for years even after it long passes your buying price.
Maybe a video about great buyback companies would be nice for your audience? Greetings from Germany 🙂
great educational video!
Makes absolute sense and some Asian tech firms do just that issuing shares and diluting their shareholders during the bubble (at the time it really annoyed me), but hopefully rewarding the shareholders that kept their shares by buying back now the bubble burst. 🤞🏻