Some Words On Share Buybacks

If the stock price is cheap and debt issuance is at record lows buying shares with debt is a wise decision. I would not like to see this done if the stock was overvalued or debt was expensive. Value would be destroyed in such a case.

Take the case of Intel, who just issued apparently cheap debt in part to buy its stocks. If the market is perfectly valuing the stock price and the bond interest rates then an asset conversion does not change the value of Intel. You are free to believe that.

On the other hand you can believe that the stock is undervalued and debt is cheap. Treasury bonds are near multi-decade historical record lows, and arguably yielding less than inflation. So if you chose to believe that the market is wrongly valuing interest rates and Intel’s stock then swapping debt by stocks is wise.

Anyone is free to think whatever they like. At the end only with time we will know who were the smartest investors.

I agree with what thrivecap wrote as a comment to a recent Intel article on the buyback subject. To reinforce it here is what Martin Whitman wrote about share repurchases on the Agressive Conservative Investor. That is an excellent book recommended by Seth Klarman, also referenced on my list of favorite books:

On an overall basis, buy-ins have relative advantages for stockholders: in the usual case, such receipts of cash are taxed only on a capital-gains basis; on the part of the stockholder, the receipt of the cash usually is optional, rather than mandatory (as is the case with dividend receipts); weak shareholders sell out, with possible favorable implications for future market prices; and if, as is frequently the case, buy-ins are at a price below the value based on corporate reality, the per-share corporate-reality value of the shares not bought in is enhanced.

There are advantages to corporations as well. Insofar as the common stock is dividend-paying and, as is usual, the company desires to maintain a dividend rate, cash requirements for future dividend payments are reduced; earnings per share, book value per share and corporate-reality value per share may be enhanced; and a program can result in the elimination of all, or virtually all, public shareholders. Furthermore, where the price of the stock can be a tool to be used by the company in, say, future acquisitions, buy-ins can result in a more favorable price for shares that remain outstanding than would otherwise be the case.


PD: I continued on the same subject here: Some Words On Share Buybacks II

About jrv

I was born in Spain and lived in Belgium, Chile, France, USA, Argentina among other places. Currently I am trying to settle down in a wild place. I am "retired", even though now I dedicate more hours "working" for my investments than I ever worked in the real labor market where I used to work in IT and Banking. I am a family man, I have a lovely wife, several sons and one step daughter. I have humble tastes, I like to stay home and read about companies and investments. I started investing at 25 before the internet bubble exploded. I did not know much about investing and liked technical analysis so my results were pretty bad. Fortunately I did not have much to lose. Some years later in 2006 bored of doing only real state investments and with quite a lot of money saved I opened an account in a cheap and excellent online broker and started again. This time I did not want to commit the same mistake, so I decided to follow a model. I heard that Warren Buffett was the best at making money via stocks so I started by reading a lot about him, all of his shareholders letters and several of the books that he recommended. I learned a lot, started applying his investing principles and reading a lot of 10K's. Digested news from lots of different sources. Basically I started buying very good and cheap companies and holding them for ever if possible and if nothing changed fundamentally. When the housing crisis started I was more than 75% cash. At that time I identified good companies at incredibly cheap prices so I invested most of my savings in stocks. In less than I year I doubled. By the second semester of 2009 I turned my software company into an investment vehicle and dedicated myself full time to it. My wife and I decided to change our lifestyle and moved from Belgium to the beach in a wild country. The goal was to keep fixed costs low in order to be able to live with a minimum 6-8% yearly return but specially to move away from the inhuman life of civilization and to have finally some peace and sunny weather to concentrate better on investing. Now I can think and study about companies 60 hours a week and I am doing great. I can finally do what I want full time and can proudly say that I have never been so happy, specially also with my just born 4th son, my other great kids and my sweet wife who supports me fully while I study most of the day and patiently wait for the opportunity to make a swing ! You can learn a bit more about my portfolio by viewing it at or you may learn more about me and my family by following the link "Author's site" from the menu above.
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