Wednesday, November 10, 2010

What do investors really care about? (in edit)

Here is a message that was sent by a Kapitall user. I can answer the share buyback portion, but I would like to have a discussion about the rest of his message. Thanks!

"Thanks for replying.

My point of view is best described in the wiki article you sent:
"Another reason why executives, in particular, may prefer share buybacks is that executive compensation is often tied to executives' ability to meet earnings per share targets."

My point is - I, as a stock holder, am basicaly not interested in the EPS number itself. Nor the ROI ROE P/E and so on. Im interested in the market reacton, the price. The yield. The luck?

So, in bear times, when the whole market does down, I do not get anything from buybacks - just numbers, financial ratios. While I`m sure those are great times for the company to buy its stock, an induvidual not-hedged investor receiving the dividends in this situation is better positioned.

Of course the dividends may be cut and I ignore the buyback`s tax bonuses (because I can ignore them thank to Russian broken laws).

I also have one more question on this topic that is not covered anywhere I saw: can the company reissue those bought stocks? Does it counts in the long-term investment portion of balance? If true it`s just an other speculative player, which does in fact work against me - because in this case the company will benefit more from the lowest possible stock prices.
Am i missing something?"

In response to the share buybacks, yes that is true. Buying back shares would decrease the float, which would cause the EPS to rise. The same earnings would be divided by fewer shares, and the executives get a bigger bonus. In bear times, I would use the fundamental information to make sure the company isn't going down the tubes. Usually, a share buyback program is a good indication that the company is doing well. A lot of investors look for them, then perform fundamental analysis on the company to make sure it is a good investment. Bear times is usually just market fluctuation, which should be used as a buying opportunity. Also, a buyback might help to resist a strong downturn of the stock price during bear times.