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Comment by hollerith | Hacker News Reader

>The shares surged as much as 5.6 percent to a record $60.45. The last time Microsoft was trading near that level was in 1999.

Using share price is suboptimal because the number of shares outstanding has decreased significantly since 1999. Better to use market cap (which is share price times the number of shares outstanding).

(According to wikipedia) Microsoft reached a market cap of $618.9 billion in December 1999, which is $879 billion in 2015 dollars. In contrast, Microsoft's market cap today is significantly less, namely, $447.5 billion.

BTW, in Feb 2015, Apple reached a market cap of $775 billion. Since the computing industry's share of the economy was significantly lower in 1999 than it was in 2015, the data on market caps suggests that the 1999 version of Microsoft was significantly more dominant over the industry than the 2015 version of Apple was.

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Consider that Microsoft started paying dividends after 2000, a yield of about 2.5%. A rough calculation of that compounding for 16 years is 150%.

2.5% compounded over 16 years is exactly 48.5%, nowhere near 150.

You're right, my mistake.

But you're compounding the 2.5% only with itself. If you had reinvested the dividend back into the stock (common), the return is higher than 48.5%.

No. 1.025^16=1.48 - that's the reinvestment scenario. What you describe, no reinvestment, is just 2.5%*16=40%.

You understand though that if MSFT had 100B USD in cash and spent it all in stock repurchase, then, in theory, its stock price wouldn't move but its market cap would go down by 100B. The market cap is not a perfect indicator of the value of a business either.

If we start to nitpick, why not calculate share price in real dollar terms (take inflation into account), adjust for the average P/E ratio of US stocks, adjust for dividends etc...

That quote is just trivia.

> if MSFT had 100B USD in cash and spent it all in stock repurchase, then, in theory, its stock price wouldn't move but its market cap would go down by 100B

? In the process of buying shares back, the market capitalization would increase due to the increase in share price. The share price would absolutely move. This is why companies have stock buy-backs, in order to pump up the share price.

The 'buyback ratio' is the amount spent on buybacks in the past 12 months as a percentage of the company’s market capitalization, and is often used as a means to flag companies that are acting in a manner such as this.

The market capitalization is just share$ * # of shares. Did you mean book value? The book value of a company would reduce if you burned 100B in share repurchases, but even then I don't think it would be so simple, as that 100B in shares would now be listed as assets to the company and could be used as remuneration for the employees, among other things.

If the company ends up with less cash, then its market cap should be lower, not higher.

When a share is bought back by a company, accountants handle it by either cancelling the stock or turning it into treasury stock, which has negative equity value to cancel out its positive nominal value. In either case, the repurchased stock does not add value to the company.

To illustrate the point, consider creating a company that consists of three $1 bills. You create three shares of the company and sell them to three investors. Assume that the market is efficient and that each share is valued at $1. Let's imagine the company's balance sheet. It has $3 of assets (cash) balanced by $3 of equity (stock). Now the company decides to spend $2 on share buybacks. It spends $2 of its cash pile buying two shares from two investors. Let's look at the balance sheet now. It has $1 of assets left (cash) balanced by $1 of equity (the remaining outstanding share). If you like, you can optionally record the two shares the company bought as treasury stock, so that the equity is $3 of stock and -$2 of treasury stock, for the same total of $1 outstanding stock.

As you can see, the value of the company falls when it executes a share buyback. This makes sense, because after the buyback, the company is poorer.

That was a pretty good ELI5, thanks.

> ? In the process of buying shares back, the market capitalization would increase due to the increase in share price. The share price would absolutely move. This is why companies have stock buy-backs, in order to pump up the share price.

Market cap is the multiple of shares outstanding vs share value. The number of shares would go down, but the market cap would also go down. You just spent a lot of money.

Also, the value of the company would go down because its cash equivalents would go down by the amount it spent on the buyback.

The buyback is the equivalent of a dividend. Every time a company gives a dividend, the stock price goes down by the amount of dividend it gives out.

> but even then I don't think it would be so simple, as that 100B in shares would now be listed as assets to the company and could be used as remuneration for the employees, among other things.

Incorrect. From: http://www.investopedia.com/articles/02/041702.asp

The idea is simple: because a company can't act as its own shareholder, repurchased shares are absorbed by the company, and the number of outstanding shares on the market is reduced

> This is why companies have stock buy-backs, in order to pump up the share price.

Why does this matter to them?

Stocks are very strange to me.. when I think of owning a business, I'd hope to get some share of the profits, which as I understand it, is dividends for stocks. This being the case, I always thought stock buybacks were a long term investment in the sense that the company would pay more upfront so they'd have to pay less dividends.

This makes sense except that companies seem to barely pay dividends now, I'm guessing because it's unfavorable due to tax reasons. This makes it seem like there's a strange disconnect between owning a business and deriving income from it, because now most people only buy hoping to sell at a higher price to others. But why do other people buy it at a higher price if the company doesn't pay more dividends? I find it all very strange..

Why does a company care about its stock price? Is it just to please shareholders? Prevent buyouts? Make it easier to compensate employees?

About the last question, all of the reasons you mention are valid (also management compensation is sometimes linked to share price).

Dividends and buybacks are essentially interchangeable as far as the shareholders are concerned. Simplifying a bit (ignoring taxes, transaction costs, discount on cash on the balance sheet, etc.), if you own 10% of a company valued at $100mn (i.e. you have $10mn in shares) and the company has $10mn in cash that it wants to return to shareholders it can either distribute dividends (so you get $1mn in cash and your shares are now worth 10% of $90mn) or it can buy back 10% of the outstanding shares. You could sell all your shares (you get $10mn in cash), keep all your shares (now they are worth 11.11% of $90mn, i.e. $10mn) or sell part of your holdings (and hopefully you'll believe me if I tell you that the stocks you keep plus the cash you get will make $10mn in total).

> Dividend and buybacks are essentially interchangeable as far as the shareholders are concerned.

But they are taxed differently, which is a huge deal for long term investors. Long term gains are taxed at lower rates and compound pre-tax, while dividends incur annual taxes at ordinary income tax rates.

Correct. This is another reason why buybacks are popular. On the other hand, some people might prefer to get steady income by default without having to liquidate periodically parts of their portfolio. And long term investors might not be happy when a company spends money buying back its shares at high valuations (of course they could sell if they think the shares are overvalued, but we are talking about long term investors).

There are other reasons than steady income that investors sometimes prefer dividends: 0. dividends force companies to be regimented about consistently creating income and not just sway with the overall market. 1. the shares are held in tax-deferred/tax-free accounts, so they taxable events don't matter to them. they prefer the tangible (dividend) to intangible (share increase from buyback)

Frankly, this is opinion is so uniformed I'm not sure where to start... so welcome to Finance 101.

> In the process of buying shares back, the market capitalization would increase due to the increase in share price.

Wrong. If that was true, you'd have a company spending money and having a market cap that increases. See the problem? Generating money out of nothing...

> The share price would absolutely move.

Wrong. If this was true, you would just buy stocks of companies that do buybacks and make some alpha doing that. In fact there is an etf that tracks just such companies and it underperforms the S&P 500: https://www.google.com/finance?q=NYSEARCA%3ASPYB&ei=TXkKWJjO...

> This is why companies have stock buy-backs, in order to pump up the share price.

Wrong. They buy back shares to return money to investors. If you have a pile of cash sitting in your books, you can either return it to investors by paying back dividends or buying back shares. Only way it would increase the stock price is by signaling that the company doesn't need money and can return it.

> Only way it would increase the stock price is by signaling that the company doesn't need money and can return it.

That's not completely true. If a company has $10bn of excess cash and a market capitalisation of $50bn you cannot simply assume that the business is worth $40bn. The market might be assigning a value to this cash lower than the nominal value (for example because there is a risk that the management will just do some stupid acquisition with the money). And beyond valuation considerations, stock prices are affected by supply and demand: buybacks create some artificial demand.

Sometimes people has some difficulty to understand than spending money in buybacks does reduce the market cap of a company, but I think is the first time I see someone argue that spending money in buybacks increases the market cap.

Well said. How do you think it should be valued?

You should also subtract cash from mkt cap, as both are huge for 2000s MSFT an current aapl

Why would you subtract the cash to evaluate a company? Cash can easily be turned into something with actual value, so IMO it should be included.

Exactly for the reason you say :

Market cap - what a company "owes" it's investors. Definitely on the liabilities side. The value of the company.

Cash - what a company definitely owns (and could, for instance, pay to it's investors)

So there is this measure of company's worth called "enterprise value" which is Market cap + debt - cash - assets. It sort-of is what you'd get if you acquired the company and immediately sold everything off. To put it another way : it's everything Microsoft has, other than the business it's involved in.

It can indicate that there are deals to be had. For instance if you pay $50 million for a company that has running accounts with $40 million on them, have you really paid $50 million for it ? You had control (through a company) over $50 million, and now you have control over $40 million and a company, so there is an argument to be made that you "only paid" $10 million.

So "enterprise value" is what you would really have to pay for a company, and for a lot of people considered a more useful metric than market cap.

What if you want to buy this company? His cash is your debt. The more he has, the more you need to borrow. The actual you get is the selling price minus the cash you get from this buying.

Yeah, but 1999 was a mother-of-a-bubble.

Do you know why share count decreased? I was under the impression that new shares have been continuously issued.

They buy back stock all the time.

Just a few weeks ago they announced a $40B stock buy back program.

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