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American Capital Agency Corp. Message Board

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  • reits_r_us reits_r_us Oct 30, 2012 2:44 PM Flag

    Buyback Program

    Jr,

    """The company takes $10 and buys back 4 shares at 2.50 each.

    The company now has $40 in cash, $40 in book value and 6 shares outstanding. The book value per share is now $6.66 each"""

    When the company buys back those 4 shares, those 4 shares are usually cancelled or become resident in AGNC's Treasury and therefore are not counted as "outstanding". So, you see, the idea of the company owning the shares and the shares becoming an "asset" is wrong. Most times they(the bought back shares) are cancelled, destroyed, kaput, vaporized or whatever expletive you choose, but you get the idea.

    BV, therefore goes down. Here is a blurb re. PM from a recent article:

    """We know the basic equation for the balance sheet.

    asset=liability+equity

    Now, let us see what happens when a company buys back shares. Let us suppose that the company bought back $100 million worth of shares. This money goes out of the assets of the company. How do we account for this on the right side of the equation ? Well, this money goes out of the equity. And we get lower equity and lower book value. Not surprisingly if we look at the book value per share of PM we have the following data

    Year 2010 / 2009/ 2008
    Book value per share 2.18/ 3.26/ 3.94

    So, here are the lessons to learn:

    Share buyback reduces the book value per share and reduces equity hence increasing the debt-to-equity ratio. For companies doing share repurchases the decrease in book value per share is not a warning sign, the same goes for large debt-to-equity ratio. One needs to be careful when rejecting such companies using a screener or a black box method of not choosing companies with large debt-to-equity ratio and decreasing book value per share."""

    Make sense?

    DocReits

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    • Doc wrote: "When the company buys back those 4 shares, those 4 shares are usually cancelled or become resident in AGNC's Treasury and therefore are not counted as "outstanding". So, you see, the idea of the company owning the shares and the shares becoming an "asset" is wrong. Most times they(the bought back shares) are cancelled, destroyed, kaput, vaporized or whatever expletive you choose, but you get the idea.

      Yes, so if you were following my example, that is how the company went from 10 shares outstanding down to 6 shares outstanding by buying back 4 shares. I'm not saying these shares go on their balance sheet as an asset. I agree, the four shares are no longer outstanding.

      If you write my example down in a balance sheet format you'll see your Assets = Liabilities + Equity format works in my example. Here they are:

      Balance sheet before the buy back

      Assets 50
      Liabilities 0
      Equity 50

      Shares outstanding 10, book value per share = 5.

      Balance sheet after the buy back

      Assets 40
      Liabilities 0
      Equity 40

      Shares outstanding 6, book value per share = 6.66

      As for your PM example, I didn't look up the specific numbers but you have other variables at play there -- there are any number of things that can reduce book value per share over the course of three years. Just stick with a simple example and only change one variable like I did in my example and you'll be able to see it clearer.

      You can also read the press release from AGNC itself which states: "When AGNC purchases its stock at a discount to book value, it increases the per share book value of the remaining shares."

      • 1 Reply to jtrader64
      • Hey Jr,

        As I said at the outset I am not an expert on BV. I just read a lot and have found interesting gleanings on both sides of this issue. I think the main point I would ask about your example is, "Where are the liabilities in your calculations?"

        Using your example:

        I am assuming that liabilities remain unchanged before and after repurchase of shares. Lets use an arbitrary number of 30 for your example.

        BV = Assets - liabilities = 50 - 30 = 20 (divide by 10 shares) = 2 = BV/share

        After repurchase:

        BV = Assets - liabilities = 40 - 30 = 10 (divide by 6 shares) = 1.66 = BV/share

        I think the magic BE on BV/share is probably at current BV, before repurchase, and that is why the press release from AGNC issuing that statement, "When AGNC purchases its stock at a discount to book value, it increases the per share book value of the remaining shares."

        I assume, by that statement, that their hope is to repurchase below current BV. Should be interesting to see if they get that chance, since they have only given themselves until the end of the year to make that happen.

        Regards,

        DocReits

    • No. Why did AGNC management say in the buy-back announcement that they intend to buy back shares when the current market price is below book value, thus INCREASING BV? Did they lie to us? OR, are they stupid, not "knowing" what you "know"?

      Sentiment: Buy

      • 1 Reply to alw59saw
      • You are late to the party AL....;-)

        That question has already been asked and answered. I'd tell you to look through my discussion to discover the answer yourself, but knowing you were the kid in school, who looked to the back of the book for the answers, rather than reading the chapters, I'll help you out.

        When the company does a repurchase below current BV, it increases BV. When they repurchase above current BV, it decreases BV. That coincides with their statement and also the fact that the PPS is above current BV. Therefore any buy back at current prices will decrease BV.

        There.... your MO is safe AL. You don't have to do any DD as usual....you can just blurt out stupid statements and keep your reputation intact...;-)

        DocReits

    • Credit Cash (-)
      Debit Treasury Stock (+)

      a debit to Treasury Stock has the effect of lowering Shareholder's Equity

 
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