To: Baggins who wrote (5415 ) 6/30/1999 12:49:00 PM From: Chuzzlewit Read Replies (1) | Respond to
Baggins, this is what I think you are missing. Repurchasing stock simply to boost earnings per share is pointless. Consider the company as a whole - forget about shares for the moment. Under these theoretical circumstances, a dividend (which is all that a stock repurchase really is) makes sense only if the company has surplus cash and no good place to put the cash. In essence, it is a return of capital. The only reason for such returns is that there is no alternate use of the cash that will provide the company a return at least equal to the weighted average cost of capital (WACC). But the value of the company (again, forget about shares) is determined by the expected free cash flow generated from operations. This has not changed by the dividend. Thus, the capitalized value of the company ought to decrease by the amount of the "dividend". You would simply divide the capitalized value of the company by the number of shares to arrive at the value per share. The increase in eps is a result of this transaction, and when you consider the result on shareholder wealth you will see that it is a wash. I can provide the mathematics to demonstrate this if you wish.
