Question

Do stock buybacks create shareholder value? Explain from a residual operating earnings (ReOI) perspective? Please see below prompt.

Surboard inc. recently announced a share repurchase program. In the release, the President and CEO state that ‘”This repurchase program … reflects an efficient way to enhance long-term shareholder value.”

"Surfbboard inc. today announce that its Board of Directors have authorized a stock repurchase program. Under the program, LKQ Corporation may purchase up to $100 Million of its common stock from time to time through September 21, 2021. The timing and the amount   of any repurchases of common stock will be determined by Surfboard inc management and based on its evaluation of market conditions and other factors. At July 30, 2018 the company had 320 million shares of common stock outstanding.

Bill Nye, president and CEO stated, “this repurchase program demonstrates the boards confidence in our future and reflects an efficient way to enhance long-term stockholder value. Out main priorities are to continue to both invest in the growth of our global business and deleverage the balance sheet. Our strong balance sheet and healthy cash flow position affords us the opportunity to continue investing in our strategic growth drivers while simultaneously utilizing a share repurchase program to maintain a balanced capital allocation strategy."

Answer 1

Stock buyback means buying back shares from existing shareholder at a market price which will eventually explains upcoming profit is going to be shared by new existing shareholder - (i.e) which will have higher EPS for existing new shareholder.

From residual operating earnings perspective - Once buyback is done - Cost of Capital will be reduced such as Dividend.This will lead to increase in higher economic benefits for existing shareholder. This scenario will happen only when organisation has excess capital & their long term debt are Nil. Otherwise company can repay their debt instead of buying back their shares.