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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: Bob Rudd who wrote (6496)	3/31/1999 10:14:00 AM
From: Freedom Fighter	Respond to of 78512

More on book value. (not sure if clear yet) I'm not so sure it is clear yet. I still think there is a slight misunderstanding (but I could be wrong). First I think we need to clarify what we are talking about. There are two ways of thinking about this and I think based on the posts we are all not talking about the same thing. First: If you are talking about the snapshot in time act of buying back shares, this will reduce book value per share if done at above book value and increase book value if repurchased below book. Second: If you are talking about the act of buying back shares with the income that the company is generating (this is what usually happens in practice) and comparing book value per share at the start of year, to book value per share at the end of the year, book value per share will increase at year end even if you buy back those shares at way above book value. It will just increase LESS than it would have if you just let the income pile up on the balance sheet. If I start with $10 in book and earn $1 and use the entire $1 to buy back shares, the ending book value per share will be higher than 10$ no matter what price the shares were repurchased at. If they were repurchased at below $10 then book value will be above $11. (10 + 1 + a portion of the discount) If they are repurchased at above $10 final book value per share will be above $10 but less than $11. (10 + 1 - a portion of the premium) If the company accumulates the money, final book would be $11. (10 +1) Coke rarely buys in shares with money that is in excess of the free cash flow the company generates from operations. That being the case, even though they are buying in shares at way above book value, book value per share will increase each year. Just less than if they let the cash pile up on the balance sheet. Wayne