drposhmoney

Why You Should Short Companies Doing Share Buybacks

Inflation devalues cash, so over a say 5 year timeframe, with inflation at say 3% and a marginal tax rate of 20%, your dilutive example is actually *not* dilutive at all! :-). Moreover, after 5 years, the EPS will have risen 1.038^5 = 20%, whereas if the buyback had not taken place, the cash would have devalued 1.03^5 = 16% and detracted from the 20% gain in EPS. It is nevertheless surprising that buybacks have a such a minor effect on EPS over a 5 year timeframe and perhaps explains why announced buybacks sometimes never happen. In fact, it would seem that they are more of a political statement, perhaps announced when management have no confidence in growth but are in need of something hopeful to say to investors.