TCB, the argument that there is some sort of equivalency between a stock buy back program and paying dividends goes right over my head! Maybe I'm in a minority on this issue, but my dictionary defines a dividend as a sum or quantity, usually money, to be divided among shareholders. In a stock buy back program there is no such division of money going to general shareholders. The money only goes to the handful of shareholders who sell. Therefore, I can't accept the analogy you're making.
I would also have to disagree that a buy back program necessarily raises EPS. While it's true a stock buy back reduces the shares outstanding, it also reduces the firm's total earnings. Why? Because the cash that is spent to repurchase shares has an opportunity cost. That cash could have been invested to earn interest. Spending the cash to repurchase shares means foregoing interest income that would have boosted overall earnings. Bottom line: there is no free lunch in a stock buy back. After the dust clears, the number of shares is fewer but total earnings is also lower. EPS may rise or fall, depending on how the rate of interest compares to the firm's e/p ratio (reciprocal of the p/e ratio). If e/p < r, then EPS will fall as a result of the buy back. If e/p > r, then EPS will rise. In Dell's case a stock repurchase probably has the effect of reducing EPS - for a while at least. I would grant you, however, that in the long run Dell's EPS can be expected to grow faster as a result of the buy back, since cash is a drag on the firm's future earnings growth.
Geoff |
