That’s Now How It Works

In this morning’s Wall Street Journal, Kevin Kingsbury makes the case that Apple could already have a market value of $1 trillion, if not for dividends and share buybacks.

The article begins:

All else being equal, every dollar a company spends on shareholder dividends or stock buybacks cuts a firm’s market cap by a buck.

That’s incorrect. A dividend payment would reduce the market value of a firm. It’s effectively spinning off some of its bank account. But a share buyback should make no difference in a firm’s market value.

Think of it this way. What would happen if you were to undo the share buyback? The firm would just sell shares on the open market for cash. The nature of the firm’s assets change, but the value doesn’t change.

Posted by Eddy Elfenbein on July 31st, 2018 at 10:37 am

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