We are going to have to change the law because before stock buy-backs (late 70's early 80's), corporate raiders would eat up companies that had too much cash. Buy the company, steal the cash, load it up with debt and then head for the next target. I think someone tried this against TWA. So stock buy backs are bad (I agree) but holding cash just opens you up to a raider. Don't shoot the messenger but maybe we need to bring back the CAB. Treat airlines like Utilities.
Somebody should start that thread - "Time to bring back the CAB?"
Please explain why stock buybacks are bad. And if stock buybacks are bad, then are cash dividends also bad? They are fundamentally the same transaction. I'm interested in how you can take a position against distributing cash to shareholders and then say airlines should be treated like utilities - a sector notable for how much cash they distribute to shareholders.
I am not going to answer your question here, but trying to explain the good and the bad about buy back. So relax.
First, there was a study few years ago about buy back, the conclusion is buy back does not support share prices. In fact, most company have buy back programme have their share price undervalued.
Second, buy backs happens when the management and boardroom believes that the share price is too low for its performance. So let us say, company AIRX has 500 millions shares outstanding, AIRX is making $2 per share profit this quarter, so $1 billion. The share price is $20. And AIRX is paying a dividend of $0.10 this quarter. So here is the issues. Issue one, AIRX is not going to pay more dividend. Once the dividend is raised, shareholder would expect higher dividend quarter after quarter. If the business failed to deliver, share price tumbles and the management would be under pressure to quit.
Issue two, should AIRX is making the same profit quarter after quarter, pretty soon the total profit will be more than the total market cap. ($4 billion annual profit VS $10 billion market cap, so 2 and half year).
Under this background, the stock price is not moving higher, the P/E is so low and the management think there is fundamental it could not change. So the best way to move the share price is to buy back shares. The math is simple, when you buy back more shares, the less shares in circulation and higher earning per share it would become.
The share price got boosted, and it traded at 50 at one stage. But share holder does not really benefit in this situation unless he/she decides to sell the shares. Once the buy back paired down, the share price went back to $20 range again. Even though now there is only 300 million shares left. The market cap is even smaller.
So I am not answering your question and points. But I would say cash dividend is fundamentally different from share buybacks. Cash dividend directly benefit shareholders, share buy backs only benefit insiders. Yes there are share holders benefited if they have sold their share at high. But once they sell, they no longer the shareholder of the company, or less a shareholder with less shares. The long term shareholder suffers.
The example I used is AIRX, you can find it among the big US3, of which I am not going to disclose. But I have to admit I changed few numbers for simplicity of illustration. And the CEO of this company said it will never loose money again. Trading around $10 currently, I would not say the share buyback is helping the shareholders at all. At present the shareholder would rather have more cash dividend!