Stock buybacks and their effects upon the broader economy are a useful subject of study. Near all commentators do manage to get it wrong of course. All money is one of two things, either consumed or invested. This is true whether money goes to the workers or capitalists, whether this is done inside the company that made the original profit or outside it. And yes, both investment and consumption grow the economy.
But that’s, you know, a subtle argument. At which point The New Republic might care to consider hiring someone who can count:
Apple beat Amazon and Google in the race to become the first trillion-dollar company in the U.S. on Thursday afternoon, when its stock hit $207.0425 a share……The road to a trillion was paved with iPods, iPads, and iPhones—and, crucially, with the rollout of stores that NYU Stern School of Business professor Scott Galloway has described as “temples to the brand.” But Apple’s recent success on Wall Street isn’t due to its technological innovations or its sleek products. Instead, its stock has been juiced by a record-breaking number of buybacks, in which the company buys shares of its own stock, causing the supply to drop and the price to rise.
Yes, supply drops, price rises, what does that do to the overall valuation of the company? Well, nothing, not in the first iteration at least, for we’ve now got fewer and more valuable stocks. Number x price before the buyback is going to equal number x price after it. That’s why it’s done, after all. Some stockholders get cashed out with the surplus cash and those who remain now own a slightly larger percentage of the less cash but equally productive company. The stock price rises. Indeed, it’s one of the standard little questions in the Kiddie level financial analyst exams how much would the stock price rise as a result of a buyback of this size? The method of working it out being to assume that number x price as a total is the same before and after.
That is, Apple makes buybacks, each stock becomes more valuable, but there are fewer of them. We do not expect this to change the overall valuation of the company, indeed we generally assume that it won’t as we do our sums. Buybacks will raise the price of each individual Apple share as there are fewer of them – not change Apple’s overall market valuation.