Chuz, I think there is something your analysis has overlooked. If a firm uses $100mil. cash to make a stock repurchase, this will remove $100mil. in assets from its balance sheet, and will reduce the firm's income accordingly. The $100mil. cash could instead have been invested in interest-bearing assets to produce income. By giving up an income generating asset, a stock repurchase reduces the firm's stream of future cash flows. Therefore, the firm's market cap must be revised downward accordingly.
Using your figures, the removal of $100mil. in assets should give the firm a market cap $49.9bil. This, when divided by 998mil. shares, gives the same share price as before - $50. Therefore, I fail to see how a stock repurchase alone could create a capital gain for investors. When the buyback is completed, there will be fewer shares which are owed the firm's earnings, but there will also be diminished earnings (i.e., income).
Regarding the advisability of stock buybacks, I believe shareholders benefit though not for the reason you stated.
Geoff |
