Share buy backs are not a waste of money if they are done at the right time. If a share price is very low then buying back a large number of shares can be significantly better for long term holders than a dividend would be, as it increases the dividend per share they will get in future years.
Let me give you an example. Assume P/E of 10 is fair value, 1 million shares on offer and growth rate is 0. The company generates $100k a year that it can return to shareholders in a way of its choosing.
If the current P/E is 5, ie it is half of fair value, share price is $1 and the company has 100,000 either to pay a dividend or buy back shares with, which option should it choose to benefit long term holders the most?
If it buys back 100,000 shares then there are now only 900k shares. This makes the fair value price $2.22 at p/e of 10, and also makes your future dividend $0.11/share.
Assuming it takes one year to reach fair value at which point you decide to sell, the NPV of your return for each option given a 10% required return is significantly higher under the buy back scenario than under the dividend scenario. If you have 100,000 shares and recieve the dividend in year 0, you get 10,000 now, plus 10,000 in a year, plus 100,000 in capital gain on the share price rebounding. This gives you a NPV of 200,909 for your investment. If they do the share buy back, you forego the return in year 0 but you get a .1111 dividend and a 122200 capital gain the next year, giving you an NPV of 212,120.
The equation works out even more in favor of the buy back if you hold for longer than that 1 year and keep receiving dividends.
I know there are a lot of assumptions in there, but my point is merely that buy backs can deliver a much better result for long term holders than a dividend in the right circumstances.
Myself, I prefer a well timed buy back to a dividend, obviously traders would prefer the dividend.
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