Share buybacks are great if management buys them below intrinsic value, but when the stock is overvalued it's actually destroying value for shareholders even if EPS is going up.Keep that up with a business that isn't growing, ROIC goes down and the house comes crashing. Honeywell is developing a quantum computer which might end up boosting the business. But I would like to see it make money first. They probably shouldn't pay out such a large percentage of earnings to go along with share buybacks if they want to succeed in becoming a market leader in the quantum computing industry. Thank you for another great analysis, Trey!
My view is that if you own the stock you should want buybacks. If it’s overvalued and you own the stock, why would you oppose buybacks? Doesn’t that mean you can just sell yourself? If management is making a mistake buying the stock how is it also not a mistake for you to buy the stock?
@@DIYInvesting The problem with buybacks in the case when the stock is overvalued, is that the primary beneficiaries of those buybacks are the exiting shareholders. If you have a short-term holding period, that's all good, but if you like to hold your shares indefinitely, it's a negative event. Consider for a moment that your investments have a ROIC, based on what you paid for a stock. Likewise, investments made by businesses into their own stock has a ROIC. If you are massively overpaying, as some businesses do without regard to valuation, the return on their invested capital decreases in comparison to the underlying business. That money possibly could have been better spent expanding the business in one way or another.
I think if the company is *massively* overpaying, you should probably sell and buy something else. If they're only slightly overpaying, it may be worth a hold, and it likely won't matter that much. Would you sell if a company paid dividends while their stock was massively overvalued? Dividends and Buybacks are very similar from a math perspective, but often buybacks are better.
@@DIYInvesting "I think if the company is massively overpaying, you should probably sell and buy something else. " This is exactly what happens. Overvalued share buybacks incentivizes share turnover, which can lead to volatility. I would rather own a great company that trades at a fair price most of the time, and below intrinsic value some of the time, rather than a company that trades above intrinsic value most of the time, and at fair price some of the time. In only one of those situations do I get to add to my position at a price that will give me higher than market-average returns. I don't want to be put in a situation where not owning an excellent business A, and looking for a more fairly valued company B is the smarter thing to do than to just hold. The higher returns that it would give me also costs me the effort of looking for another company or waiting for A to become farily valued/undervalued again. I might not have the liquidity to rebuy my shares when the opportunity presents itself. Whether or not a company should pay dividends or buy back shares depends on a few things. Firstly, if the company has a high return on capital employed, it should seek ways to exploit that capability before considering either dividends or buybacks. If no means of employment was found, it should then be assessed whether the stock is at an attractive price to execute share buybacks. If the answer is no, only then should it be paid out as a dividend. So ideally, dividends should be paid when there is no better alternative. That is not to say that dividend payments are in and of itself something objectionable, but it's crucial to view it in context. If a company has an extremely high ROC, but they are paying out most of their earnings as a matter of principle to prioritize dividends, where is all the capital to employ?
Share buybacks are great if management buys them below intrinsic value, but when the stock is overvalued it's actually destroying value for shareholders even if EPS is going up.Keep that up with a business that isn't growing, ROIC goes down and the house comes crashing.
Honeywell is developing a quantum computer which might end up boosting the business. But I would like to see it make money first.
They probably shouldn't pay out such a large percentage of earnings to go along with share buybacks if they want to succeed in becoming a market leader in the quantum computing industry.
Thank you for another great analysis, Trey!
My view is that if you own the stock you should want buybacks.
If it’s overvalued and you own the stock, why would you oppose buybacks? Doesn’t that mean you can just sell yourself? If management is making a mistake buying the stock how is it also not a mistake for you to buy the stock?
@@DIYInvesting The problem with buybacks in the case when the stock is overvalued, is that the primary beneficiaries of those buybacks are the exiting shareholders. If you have a short-term holding period, that's all good, but if you like to hold your shares indefinitely, it's a negative event. Consider for a moment that your investments have a ROIC, based on what you paid for a stock. Likewise, investments made by businesses into their own stock has a ROIC. If you are massively overpaying, as some businesses do without regard to valuation, the return on their invested capital decreases in comparison to the underlying business. That money possibly could have been better spent expanding the business in one way or another.
I think if the company is *massively* overpaying, you should probably sell and buy something else.
If they're only slightly overpaying, it may be worth a hold, and it likely won't matter that much.
Would you sell if a company paid dividends while their stock was massively overvalued? Dividends and Buybacks are very similar from a math perspective, but often buybacks are better.
@@DIYInvesting "I think if the company is massively overpaying, you should probably sell and buy something else. " This is exactly what happens. Overvalued share buybacks incentivizes share turnover, which can lead to volatility. I would rather own a great company that trades at a fair price most of the time, and below intrinsic value some of the time, rather than a company that trades above intrinsic value most of the time, and at fair price some of the time. In only one of those situations do I get to add to my position at a price that will give me higher than market-average returns. I don't want to be put in a situation where not owning an excellent business A, and looking for a more fairly valued company B is the smarter thing to do than to just hold. The higher returns that it would give me also costs me the effort of looking for another company or waiting for A to become farily valued/undervalued again. I might not have the liquidity to rebuy my shares when the opportunity presents itself.
Whether or not a company should pay dividends or buy back shares depends on a few things. Firstly, if the company has a high return on capital employed, it should seek ways to exploit that capability before considering either dividends or buybacks. If no means of employment was found, it should then be assessed whether the stock is at an attractive price to execute share buybacks. If the answer is no, only then should it be paid out as a dividend. So ideally, dividends should be paid when there is no better alternative. That is not to say that dividend payments are in and of itself something objectionable, but it's crucial to view it in context. If a company has an extremely high ROC, but they are paying out most of their earnings as a matter of principle to prioritize dividends, where is all the capital to employ?
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